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CA Final · Financial Reporting · Ind AS 16 Property, Plant and Equipment

Konark Steels Ltd was testing a new rolling mill before it became capable of operating as intended. During testing it produced saleable steel bars, sold for ₹6,40,000 net of selling costs. The cost of producing those bars (materials and testing labour) was ₹4,90,000. Other directly attributable costs of the mill: purchase price ₹80,00,000 and installation ₹5,00,000. Following Ind AS 16 as notified in India, what is the cost of the mill?

The cost is ₹83,50,000. Ind AS 16 as notified in India deducts the excess of net sale proceeds of test output over the testing cost, here ₹1,50,000, from directly attributable costs of ₹85,00,000, instead of recognising it in profit or loss.

  1. A₹85,00,000
  2. B₹83,50,000Correct
  3. C₹84,90,000
  4. D₹89,90,000

Explanation

Under Ind AS 16 (para 17(e) as amended), the excess of net sale proceeds of items produced over the cost of testing is deducted from the directly attributable costs and not recognised in profit or loss. Excess = 6,40,000 − 4,90,000 = 1,50,000. Cost = 80,00,000 + 5,00,000 − 1,50,000 = ₹83,50,000. Crediting the full ₹6,40,000 to profit or loss (the IAS 16 approach) would give ₹85,00,000 plus the testing cost, which Ind AS does not permit.

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