Property, Plant and Equipment (Ind AS 16): formula sheet

Key formulas

Definition of PPE (paragraph 6)

PPE = tangible item + held for production/supply of goods or services, rental to others or administrative purposes + expected use for more than one period

Both the purpose test and the more-than-one-period test must be met.

Recognition criteria

Recognise if: probable future economic benefits AND cost measurable reliably

This is the recognition principle in paragraph 7. It is not reproduced in the supplied text, so confirm wording from your study material.

Initial measurement (paragraph 15)

Qualifying item is measured at its cost

Cost is the cash price equivalent at the recognition date (paragraph 23). Deferred payment beyond normal credit terms: the difference is interest, unless capitalised under Ind AS 23.

Spare parts, stand-by and servicing equipment (paragraph 8)

Meets PPE definition → PPE; otherwise → inventory

Test each item on its own use, not on its name.

Major inspection (paragraph 14)

Capitalise cost of new inspection if criteria met; derecognise remaining carrying amount of previous inspection

Done whether or not parts are replaced. The estimated cost of a future similar inspection may indicate the cost of the existing inspection component.

Replacement of parts (paragraph 13)

Capitalise cost of replacement part if criteria met; derecognise carrying amount of the part replaced

Examples: furnace relining, aircraft seats and galleys.

Cost of PPE (para 16)

Cost = Purchase price (incl. import duties and non-refundable taxes, less trade discounts and rebates) + Directly attributable costs + Initial estimate of dismantling and restoration costs

Add borrowing costs only if Ind AS 23 criteria for a qualifying asset are met.

Testing proceeds (para 17(e))

Capitalised testing cost = Testing cost − Net proceeds from selling items produced during testing

If net proceeds exceed the testing cost, the excess is not recognised in profit or loss. It is deducted from the other directly attributable costs.

Self-constructed asset (para 22)

Cost = Same elements as an acquired asset − Internal profits − Abnormal wastage

Abnormal amounts of wasted material, labour or other resources are not part of cost.

Deferred payment (para 23)

Cost = Cash price equivalent at recognition date; Interest = Total payment − Cash price equivalent

Interest is recognised over the credit period unless capitalised under Ind AS 23.

Exchange of assets (para 24)

Cost = Fair value, unless the exchange lacks commercial substance or neither fair value is reliably measurable; then Cost = Carrying amount of the asset given up

Commercial substance depends on whether the entity's future cash flows are expected to change significantly (para 25).

Day-to-day servicing

Labour + consumables + small parts → Profit or loss as incurred

Not added to the carrying amount of PPE. Usually called repairs and maintenance.

Replacement of a part

Cost of replacement → add to carrying amount, if recognition criteria are met; carrying amount of replaced part → derecognise

Derecognise whether or not the replaced part was depreciated separately.

Carrying amount of replaced part when not known

Estimated cost of replaced part ≈ cost of the replacement

Use only if it is not practicable to determine the carrying amount. The replacement cost is an indication of the original cost; you then depreciate it to date to find the carrying amount.

Major inspection

New inspection cost → capitalise; remaining carrying amount of previous inspection → derecognise

Applies even if the previous inspection was not identified when the asset was acquired.

Loss on derecognition of replaced part

Loss = Carrying amount of replaced part − any sale proceeds

Recognise in profit or loss. Compute carrying amount as original cost less depreciation up to the replacement date.

Revaluation increase

Increase = Fair value − Carrying amount. Credit OCI (revaluation surplus), except up to the earlier loss of the same asset charged to profit or loss, which is credited to profit or loss

Para 39. Apply asset by asset.

Revaluation decrease

Decrease = Carrying amount − Fair value. Debit revaluation surplus up to its credit balance for that asset; excess to profit or loss

Para 40. The OCI part reduces the surplus in equity.

Annual transfer of surplus (if the entity chooses)

Transfer = Depreciation on revalued carrying amount − Depreciation on original cost

Para 41. From revaluation surplus to retained earnings, not through profit or loss.

Depreciation after revaluation

Depreciation = Revalued carrying amount ÷ Remaining useful life (straight line, no residual value)

Revalued amount is the new depreciable base.

Frequency

Revalue again when fair value differs materially from carrying amount

Para 34. Volatile assets: often annually. Stable assets: every three or five years.

Depreciable amount

Depreciable amount = Cost (or substituted amount) − Residual value

Land is not depreciated. If residual value ≥ carrying amount, the charge is zero.

Straight-line method

Annual depreciation = (Cost − Residual value) ÷ Useful life in years

Constant charge while residual value and life do not change.

Diminishing balance method

Depreciation for the year = Opening carrying amount × Rate %

Charge falls each year. The rate is applied to the carrying amount, not to original cost.

Units of production method

Depreciation = (Cost − Residual value) × Units produced in the year ÷ Total expected units

Use when benefits are consumed by output or use.

Part-year charge

Depreciation for the period = Annual charge × Months in use ÷ 12

Starts when the asset is available for use, even if not yet used. Stops at the earlier of classification as held for sale or derecognition. It does not stop merely because the asset is idle.

Revision of estimates (prospective)

Revised annual charge = (Carrying amount at review date − Revised residual value) ÷ Remaining useful life

Change in estimate under Ind AS 8. No restatement of earlier years. A method change is also treated as a change in estimate.

Review frequency

Residual value and useful life: review at least at each financial year-end

Disclose the nature and effect of a change that affects the current or later periods.

Gain or loss on derecognition

Gain or (loss) = Net disposal proceeds − Carrying amount

Carrying amount = cost (or revalued amount) − accumulated depreciation − accumulated impairment, up to the disposal date. Charge depreciation up to the date of disposal first.

Recoverable amount

Recoverable amount = Higher of (Fair value less costs of disposal, Value in use)

Used under Ind AS 36. If carrying amount exceeds recoverable amount, the excess is the impairment loss.

When to derecognise

Derecognise on (a) disposal, or (b) when no future economic benefits are expected from use or disposal

Disposal includes sale, finance lease or donation. Date of disposal is when the recipient obtains control.

Compensation from third parties

Include in profit or loss when it becomes receivable

Applies to items impaired, lost or given up. Account for it separately from the impairment, derecognition and replacement cost.

Rental assets held for sale

Transfer to inventories at carrying amount; sale proceeds = revenue (Ind AS 115)

Only for entities that routinely sell PPE held for rental in the ordinary course. Ind AS 105 does not apply to these.

Class-wise disclosures (para 73(a)-(d))

Measurement bases + depreciation methods + useful lives or rates + gross carrying amount and accumulated depreciation (with impairment losses) at start and end

Given for each class of PPE.

Carrying amount

Carrying amount = Gross amount − Accumulated depreciation − Accumulated impairment losses

Definition in para 6.

Reconciliation (para 73(e))

Opening carrying amount + additions − disposals and assets held for sale + business combinations ± revaluation and OCI impairment changes − impairment in P&L + impairment reversals in P&L − depreciation ± exchange differences ± other changes = Closing carrying amount

The standard lists nine items (i) to (ix). Show only those that apply.

Other required disclosures (para 74)

(a) restrictions on title and pledges; (b) construction expenditure; (c) contractual commitments; (d) third-party compensation in profit or loss if not shown separately

Required for the entity as a whole.

Revalued assets (para 77)

Effective date; whether independent valuer involved; cost-model carrying amount for each revalued class; revaluation surplus with change for period and distribution restrictions

Add the Ind AS 113 disclosures.

Encouraged disclosures (para 79)

Idle PPE carrying amount; gross amount of fully depreciated PPE still in use; retired PPE not held for sale; fair value if materially different (cost model)

Encouraged, not mandatory.

Quick revision

• PPE: tangible items held for production, supply, rental to others or administration, expected to be used for more than one period.
• Cost is cash or cash equivalents paid, or the fair value of other consideration given, at acquisition or construction.
• Government grants may reduce the carrying amount of PPE, in line with Ind AS 20.
• After recognition, choose the cost model or the revaluation model as an accounting policy.
• The chosen policy applies to an entire class of PPE, not to single items.
• Cost model: cost less accumulated depreciation and accumulated impairment losses.
• Revaluation model: fair value at revaluation date less later depreciation and impairment; fair value must be reliably measurable.
• Revalue with enough regularity that carrying amount does not differ materially from fair value at the reporting date.
• Impairment follows Ind AS 36; recoverable amount is the higher of fair value less costs of disposal and value in use.
• Compensation from third parties for impaired, lost or given up items goes to profit or loss when it becomes receivable.
• Changes in residual value, useful life or depreciation method are changes in estimates under Ind AS 8.
• Owned investment property under Ind AS 40 uses the cost model of Ind AS 16.

Common mistakes

• Treating all spare parts as inventory, or all as PPE. Fix: Apply the paragraph 6 definition to each spare. Those that meet it are PPE; the rest are inventory (paragraph 8).
• Applying only the 'more than one period' test and ignoring the purpose test. Fix: Check both conditions. A long-lived item held for sale is inventory, not PPE.
• Capitalising recoverable GST or other taxes Fix: Only non-refundable purchase taxes are included. If input tax credit is available, exclude the tax from cost.
• Taking test-run sale proceeds to profit or loss Fix: Under para 17(e), deduct net proceeds from the testing cost. If proceeds exceed the cost, deduct the excess from the other directly attributable costs. It never goes to profit or loss.
• Capitalising every repair because it benefits the asset Fix: Servicing costs, mainly labour and consumables, go to profit or loss. Capitalise only when the cost replaces a part or is a major inspection and the recognition criteria are met.
• Adding the new part but not derecognising the old one Fix: Always remove the carrying amount of the replaced part. Otherwise the asset is overstated and depreciation is charged twice.
• Crediting every revaluation gain to profit or loss Fix: Credit OCI and revaluation surplus, unless the gain reverses an earlier loss of the same asset charged to profit or loss.
• Netting gains and losses across different assets Fix: Apply paras 39 and 40 asset by asset. The surplus of one asset cannot absorb the loss of another.
• Depreciating land along with the building Fix: Split the price between land and building. Depreciate only the building. An increase in land value does not change the building's depreciable amount.
• Restating past depreciation when useful life or residual value changes Fix: Treat it as a change in accounting estimate. Spread the carrying amount less new residual value over the remaining life. Past years stay as they were.

Exam tips

• In MCQs, read the purpose of holding the item first. 'Held for sale' almost always points to inventory, not PPE.
• Write the definition's two parts as separate points. Examiners give marks for each condition tested.
• Quote paragraph numbers you are sure of: 6 for definition, 8 for spares, 13 and 14 for replacements and inspections, 15 for cost, 71 for derecognition.
• In inspection and replacement problems, always show both entries: capitalise the new cost and derecognise the old carrying amount.
• End with a clear classification and amount. Case-based questions reward a decision, not a list of rules.
• For MCQs, scan for traps: recoverable taxes, abnormal wastage, training, and costs after the asset is ready for use. These usually decide the right option.
• Always show the working for present value of dismantling cost, and name the Ind AS 37 link. Markers award marks for the provision entry as well as the cost.
• In exchange questions, state the commercial substance test first, then pick fair value or carrying amount. Quote para 24 and 25 in your reasoning.