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

Malabar Foods Ltd bought a packaging machine for ₹10,00,000. At the end of its life the company must dismantle it and restore the site; the present value of this obligation at initial recognition is ₹1,20,000 and it meets the recognition criteria of Ind AS 37. Under Ind AS 16, how should the ₹1,20,000 be treated at initial recognition?

The ₹1,20,000 is added to the cost of the machine, making it ₹11,20,000, with a corresponding provision. Ind AS 16 includes the initial estimate of dismantling and site restoration costs in the cost of the item when the obligation arises on acquisition.

  1. AExpensed immediately in profit or loss
  2. BIncluded in the cost of the machine, making cost ₹11,20,000Correct
  3. CDisclosed only as a contingent liability
  4. DDeducted from the cost of the machine, making cost ₹8,80,000

Explanation

The cost of an item of PPE includes the initial estimate of the costs of dismantling and removing the item and restoring the site, where the obligation is incurred on acquiring the item. The ₹1,20,000 is therefore added to the purchase price, giving ₹11,20,000, with a matching provision. Expensing it or deducting it is not the treatment.

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