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Recognition and Initial Measurement of Property, Plant and Equipment (PPE) as pe

Tangible fixed asset is a key resource for any business and generally represents a significant portion of the net worth captured on the balance sheet. These fixed assets help businesses to run its operating activities and thereby generating revenue. Apart from generating future economic benefits, amount of such tangible assets is also used in various vital ratios which are regularly analysed by the users of financial statements. IAS 16 -u201cProperty, Plant, and Equipmentu201d (PPE),

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Recognition and Initial Measurement of Property, Plant and Equipment (PPE) as pe

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  1. Recognition and Initial Measurement of Property, Plant and Equipment (PPE) as per IAS 16 Tangiblefixedassetisakeyresourceforanybusinessandgenerallyrepresentsasignificantportionofthenetworthcapturedonthebalancesheet.Thesefixedassetshelpbusinessestorunitsoperatingactivitiesandtherebygeneratingrevenue.Apartfromgeneratingfutureeconomicbenefits,amountofsuchtangibleassetsisalsousedinvariousvitalratioswhichareregularlyanalysedbytheusersoffinancialstatements.IAS16-“Property,Plant,andEquipment” (PPE),isabasicandvitalInternationalFinancialReportingStandard(IFRS)thatprovidesguidelinesontheaccountingoftangiblefixedassets.IAS16providestheaccountingprinciplesforrecognition,initialandsubsequentmeasurement,presentation,derecognitionanddisclosureforthePPEinthefinancialstatements. Inessence,IAS16providesindepthguidanceonthetopicslikewhentorecognisePPEinthefinancialstatements,howtomeasureassetinitiallyi.e.measurementbasis(viz.cost),whichexpensesincurredwillformpartofthecostofanasset(fore.g.borrowingcosts,dismantlingandrestorationexpenses,directlyattributablecostsetc.),howtomeasureassetsonsubsequentreportingdate,i.e.measurementbasis(costorrevaluationmodel),howtodeterminetheasset’susefullife,depreciationmethods,impairmentofassetsetc.,wheretopresentsuchassetsinfinancialstatements,whentoderecogniseandwhichdisclosuresarerequiredinthefinancialstatements. ForstudentspursuingaDiplomainIFRS,havingindepthknowledgeonIAS16isfundamental.Thisstandardformsthebackboneforaccountingoftangibleassetinthefinancialreportingandhelpsinbetteranalysingthefinancialstatementsofanyentity.Itisvitalforensuringaccurateandreliablefinancialreporting,whichinturnenhancesthecredibilityofanentity’sfinancialstatements. Consideringthefactthatthetopicisvast,inthisblog,wewilldiscussaboutrecognitionandinitialmeasurementprincipleofPPEasperIAS16. DefinitionofPPE: – IndAS16definesproperty,plantandequipmentas:

  2. *Land or building or part of land or building held for rental or for capital appreciation or for both will be classified as investment property under Ind AS 40. Bearer plants also are considered as PPE as per IAS 16. Bear plants are the plants which bear produce and plant itself will not be harvested as produce. For. e.g. mango trees bear mangoes for more than one year and tree itself will not be harvested as produce and thus mango tree can be classified as PPE. RecognitionPrinciple To recognise Property, Plant & Equipment, all the below conditions must be satisfied: Recognise PPE – Generally this coincides with physical delivery

  3. Initial Measurement of Property, Plant and Equipment All PPE shall be measured initially at ‘COST’. Which expenses will form part of costs will depend on the mode of its acquisition i.e. Separate acquisition, Internally generated In exchange of another non-monetary asset In business combination Government grant (covered separately in IAS 20) Leases (covered separately in IFRS 16) Following is the summary of expenses that will form part of the cost of PPE based on its mode of acquisition. 01. Externalacquisition Purchaseprice Importdutiesandnon-refundabletaxes

  4. Deductionsfromcosts: Discountsandrebates Imputedcostofinterestincaseofdeferredcreditarrangement • 02 • Self-constructed • Directmaterial+non-refundabletaxes • Directlabour(ignoreabnormallosses) • DirectOverheads(ignoreindirectoverheads) • Alldirectlyattributableexpenditure • Borrowingcosts(asperIndAS23) • Dismantlingandrestorationcosts • Deductionsfromcosts: • Discountsrebates • Imputedcostofinterestincaseofdeferredcreditarrangement • Examplesofcoststhatarenotdirectlyattributable:trainingcosts,costsofopeninganewfacility,costsofconductingbusinessfromnewterritory,administrationandgeneraloverheads. • 03 • Businesscombination • COST=AcquisitiondateFairValue • Recognitionispossiblesince: • “Probability” criteriaisassumedtobesatisfiedand • “Reliablemeasurementofcost” criteriaissatisfiediffairvaluecanbemeasuredreliably. • IdentifiableIA,evenifnotrecognisedinthebooksofacquiree,arerecognisedseparatelyfromgoodwill. • Ifnotidentifiable,amountissubsumedingoodwill.

  5. 04 • Assetexchange • COST=FairValue(ofanassetwhichismorereliablymeasurable), • Transactionshallnotlackcommercialsubstance • Sequencetodeterminecost: • Fairvalueofanoutgoingasset(ifFVofboththeassetsaremeasurablewithequalreliability) • Fairvalueofanincomingasset(iffairvalueofoutgoingassetcannotbemeasuredreliably) • Carryingvalueofanoutgoingasset(iffairvalueofboththeassetsisnotmeasurablereliablyortransactionlackscommercialsubstance) • AtFinProConsulting,wefocusonprovidingtraining,GAAPconversionservices,andotherconsultingsupportforfinancialreportingunderIFRS,IndAS,andUSGAAP.WearealsoaRegisteredLearningPartner(RLP)withACCA,UK,andhavesuccessfullyconductedover30retailtrainingsessionsfortheOnlineDipIFRcourse.

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