INDIAN ACCOUNTING STANDARD 16 7.

73

is such an indication, the entity shall test the asset for impairment by estimating its
recoverable amount, and shall account for any impairment loss, in accordance with Ind
AS 36.
 If the asset is measured using the revaluation model:
(a) Any increase in liability arising out of changes in decommissioning liabilities is
adjusted against revaluation surplus to the extent credit balance is available
relating to that particular asset through 'other comprehensive income'. Any excess
is, however, recognized in the statement of profit and loss.
(b) Any decrease in liability arising out of changes in decommissioning liabilities, is
recognised in the revaluation reserve ie equity through 'other comprehensive
income'. However, if there was any revaluation deficit previously charged to profit or
loss, to that extent it can be recognised as income in the statement of profit and loss.
(c) If there is decrease in decommissioning liability in excess of the carrying amount of
the asset, such excess is treated as 'deemed revaluation' and is recognised
immediately in the statement of profit and loss.
(d) Any change in liability would require the asset to be tested for impairment to ascertain
if there is any change in fair value.
(e) Change in the revaluation surplus arising from a change in the decommissioning
liability shall be presented as a separate line item in the Statement of Other
Comprehensive Income, as required under Ind AS 1.
 The adjusted depreciable amount of the asset is depreciated over its useful life. Therefore,
once the related asset has reached the end of its useful life, all subsequent changes in the
liability shall be recognised in profit or loss as they occur. This applies under both the cost
model and the revaluation model.
 The periodic unwinding of the discount shall be recognised in profit or loss as a finance
cost, as it occurs. Capitalisation under Ind AS 23 is not permitted.
Illustration 14
H Limited purchased an item of PPE costing ` 100 million which has useful life of 10 years. The
entity has a contractual decommissioning and site restoration obligation, estimated at ` 5 million
to be incurred at the end of 10th year. The current market based discount rate is 8%.
The company follows SLM method of depreciation. H Limited follows the Cost Model for
accounting of PPE.
Determine the carrying value of an item of PPE and decommissioning liability at each year end
when

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 7.74 FINANCIAL REPORTING

(a) There is no change in the expected decommissioning expenses, expected timing of incurring
the decommissioning expense and / or the discount rate
(b) At the end of Year 4, the entity expects that the estimated cash outflow on account of
decommissioning and site restoration to be incurred at the end of the useful life of the asset
will be ` 8 million (in place of ` 5 million, estimated in the past).
Determine in case (b), how H Limited need to account for the changes in the decommissioning
liability?
Solution
The present value of such decommissioning and site restoration obligation at the end of 10th year
is ` 2.32 million [being 5 / (1.08)10 ]. H Limited will recognise the present value of
decommissioning liability of ` 2.32 million as an addition to cost of PPE and will also recognize
a corresponding decommissioning liability. Further, the entity will recognise the unwinding of
discount as finance charge.
(a) The following table shows the relevant computations, if there is no change in the
expected decommissioning expenses, expected timing of incurring the decommissioning expense
and / or the discount rate: (` in million)
Year Opening Depreciation Carrying Opening Unwindin Closing
Amount Charge (on Amount of PPE Decommissionin g of Decommissioni
of PPE SLM) for 10 at the end of g Liability Interest ng Liability
Years the year @ 8%
1 102.32 10.23 92.08 2.32 0.19 2.50
2 92.08 10.23 81.85 2.50 0.20 2.70
3 81.85 10.23 71.62 2.70 0.22 2.92
4 71.62 10.23 61.39 2.92 0.23 3.15
5 61.39 10.23 51.16 3.15 0.25 3.40
6 51.16 10.23 40.93 3.40 0.27 3.68
7 40.93 10.23 30.69 3.68 0.29 3.97
8 30.69 10.23 20.46 3.97 0.32 4.29
9 20.46 10.23 10.23 4.29 0.34 4.63
10 10.23 10.23 - 4.63 0.37 5.00
Total 102.32 2.68

(b) The changes to the estimate of expected decommissioning obligation:

o The present value of the decommissioning liability at the end of Year 4 works out to be
` 5.04 million [being 8 / (1.08)6].

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 INDIAN ACCOUNTING STANDARD 16 7.75

o As against this, the carrying amount of decommissioning liability at the end of Year 4 is
` 3.15 million (as computed above).
o The changes in the decommissioning liability of ` 1.89 million (being ` 5.04 million less
` 3.15 million) shall be added to the cost of the asset in the current period and the
related provision for decommissioning liability is also adjusted.
The journal entry will be:
PPE Dr. ` 1.89 million
To Provision for decommissioning liability ` 1.89 million
o The following table shows the calculations for years 5 - 10:
Year Opening Depreciation Carrying Opening Unwinding Closing
Amount of Charge Amount of Decommi of Interest Decommissio
PPE SLM – 10 Years PPE at end ssioning @8% ning Liability
of the year Liability
5 63.28 10.55 52.73 5.04 0.40 5.44
6 52.73 10.55 42.19 5.44 0.44 5.88
7 42.19 10.55 31.64 5.88 0.47 6.35
8 31.64 10.55 21.09 6.35 0.51 6.86
9 21.09 10.55 10.55 6.86 0.55 7.41
10 10.55 10.55 - 7.41 0.59 8.00
Total 63.28 2.96

Note that in the above table:

 Opening amount of PPE at the beginning of Year 5 is computed as ` 63.28 million (being
carrying amount of ` 61.39 million at the end of Year 4 plus increase of ` 1.89 million arising
due to increase in the present value of the decommissioning liability at the end of Year 4).
 The revised carrying amount of PPE (at ` 63.28 million) at the beginning of Year 5 will be
depreciated over the balance 6 years of the useful life).
 Opening decommissioning liability at the beginning of Year 5 is computed as ` 5.04 million
(being carrying amount of ` 3.15 million at the end of Year 4 plus increase of ` 1.89 million).
Since the entity has adjusted the increase in the decommissioning liability against the carrying
amount of PPE, it needs to evaluate whether the new carrying amount (in this case,
` 63.28 million) is recoverable. If not, it will give rise to impairment loss, to be accounted for
under Ind AS 36.
*****

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 7.78 FINANCIAL REPORTING

was ` 1,20,000 which included an amount for decommissioning costs of ` 10,000, which
represented ` 70,400 in estimated cash flows payable in 40 years discounted at a risk-adjusted
rate of 5 per cent. The entity’s financial year ends on 31st March. On March, 2X11, the net
present value of the decommissioning liability has decreased by ` 8,000. The discount rate
has not yet changed.
How the entity will account for the above changes in decommissioning liability in the year 2X11,
if it adopts cost model?
6. An entity has a nuclear power plant and a related decommissioning liability. The nuclear
power plant started operating on 1st April, 20X1. The plant has a useful life of 40 years. Its
initial cost was ` 1,20,000. This included an amount for decommissioning costs of ` 10,000,
which represented ` 70,400 in estimated cash flows payable in 40 years discounted at a risk-
adjusted rate of 5 per cent. The entity’s financial year ends on 31st March. Assume that a
market-based discounted cash flow valuation of ` 1,15,000 is obtained at 31st March, 20X4.
This valuation is after deduction of an allowance of ` 11,600 for decommissioning costs,
which represents no change to the original estimate, after the unwinding of three years’
discount. On 31st March, 20X5, the entity estimates that, as a result of technological
advances, the present value of the decommissioning liability has decreased by ` 5,000. The
entity decides that a full valuation of the asset is needed at 31st March, 20X5, in order to
ensure that the carrying amount does not differ materially from fair value. The asset is now
valued at ` 1,07,000, which is net of an allowance for the reduced decommissioning
obligation.
How the entity will account for the above changes in decommissioning liability if it adopts
revaluation model?
7. A Ltd. purchased some Property, Plant and Equipment on 1st April, 20X1, and estimated
their useful lives for the purpose of financial statements prepared on the basis of Ind AS:
Following were the original cost, and useful life of the various components of property, plant,
and equipment assessed on 1st April, 20X1:
Property, Plant and Equipment Original Cost Estimated useful life
Buildings ` 15,000,000 15 years
Plant and machinery ` 10,000,000 10 years
Furniture and fixtures ` 3,500,000 7 years
A Ltd. uses the straight-line method of depreciation. On 1st April, 20X4, the entity reviewed the
following useful lives of the property, plant, and equipment through an external valuation expert:
Buildings 10 years
Plant and machinery 7 years
Furniture and fixtures 5 years

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 INDIAN ACCOUNTING STANDARD 16 7.79

There were no salvage values for the three components of the property, plant, and equipment
either initially or at the time the useful lives were revised.
Compute the impact of revaluation of useful life on the Statement of Profit and Loss for the year
ending 31st March, 20X4.
8. Mr. X, is the financial controller of ABC Ltd., a listed entity which prepares consolidated financial
statements in accordance with Ind AS. Mr. X has recently produced the final draft of the
financial statements of ABC Ltd. for the year ended 31st March, 2018 to the managing director
Mr. Y for approval. Mr. Y, who is not an accountant, had raised following query from Mr. X
after going through the draft financial statements:-
The notes to the financial statements state that plant and equipment is held under the ‘cost
model’. However, property which is owner occupied is revalued annually to fair value. Changes
in fair value are sometimes reported in profit or loss but usually in ‘other comprehensive
income’. Also, the amount of depreciation charged on plant and equipment as a percentage of
its carrying amount is much higher than for owner occupied property. Another note states that
property owned by ABC Ltd. but rent out to others is depreciated annually and not fair valued.
Mr. Y is of the opinion that there is no consistent treatment of PPE items in the accounts. How
should the finance controller respond to the query from the managing director?
Answers
1. According to Ind AS 16, these costs can be capitalized:
1. Cost of the plant ` 25,00,000
2. Initial delivery and handling costs ` 2,00,000
3. Cost of site preparation ` 6,00,000
4. Consultants’ fees ` 7,00,000
5. Net present value of estimated dismantling costs to be incurred
after 7 years ` 3,00,000
` 43,00,000

Note: Interest charges paid on “Deferred credit terms” to the supplier of the plant (not a
qualifying asset) of ` 2,00,000 and operating losses before commercial production amounting
to ` 4,00,000 are not regarded as directly attributable costs and thus cannot be capitalized.
They should be written off to the Statement of Profit and Loss in the period they are incurred.
2. The entries to be passed would be:

` `
Accumulated depreciation Dr. 55,000
To Asset A/c 55,000
(Being elimination of accumulated depreciation
against the cost of the asset)

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 INDIAN ACCOUNTING STANDARD 16 7.83

Following this valuation, the amounts included in the balance sheet are:
Asset at valuation 1,14,200
Accumulated depreciation Nil
Decommissioning liability (7,200)
Net assets 1,07,000
Retained earnings (1) (14,620)
Revaluation surplus (2) 11,620

Notes:
(1) ` 10,600 at 31st March, 20X4, plus depreciation expense of ` 3,420 and discount
expense of ` 600 = ` 14,620.
(2) ` 15,600 at 31st March, 20X4, plus ` 5,000 arising on the decrease in the liability, less
` 8,980 deficit on revaluation = ` 11,620.
7. The annual depreciation charges prior to the change in useful life were
Buildings ` 1,50,00,000/15 = ` 10,00,000
Plant and machinery ` 1,00,00,000/10 = ` 10,00,000
Furniture and fixtures ` 35,00,000/7 = ` 5,00,000
Total = ` 25,00,000 (A)
The revised annual depreciation for the year ending 31st March, 20X4, would be
Buildings [`1,50,00,000 – (` 10,00,000 × 3)] / 10 ` 12,00,000
Plant and machinery [` 1,00,00,000 – (` 10,00,000 × 3)] / 7 ` 10,00,000
Furniture and fixtures [` 35,00,000 – (` 5,00,000 × 3)] / 5 ` 4,00,000
Total ` 26,00,000 (B)
The impact on Statement of Profit and Loss for the year ending 31st March, 20X4
= ` 26,00,000 – ` 25,00,000 = ` 1,00,000
This is a change in accounting estimate which is adjusted prospectively in the period in which
the estimate is amended and, if relevant, to future periods if they are also affected. Accordingly,
from 20X4-20X5 onward, excess of ` 1,00,000 will be charged in the Statement of Profit and
Loss every year till the time there is any further revision.
8. Ongoing through the query raised by the Managing Director Mr. Y, the financial controller
Mr. X explained the notes and reasons for their disclosures as follows:
The accounting treatment of the majority of tangible non-current assets is governed by
Ind AS 16 ‘Property, Plant and Equipment’. Ind AS 16 states that the accounting treatment of
PPE is determined on a class by class basis. For this purpose, property and plant would be

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 7.84 FINANCIAL REPORTING

regarded as separate classes. Ind AS 16 requires that PPE is measured using either the cost
model or the revaluation model. This model is applied on a class by class basis and must be
applied consistently within a class. Ind AS 16 states that when the revaluation model applies,
surpluses are recorded in other comprehensive income, unless they are cancelling out a deficit
which has previously been reported in profit or loss, in which case it is reported in profit or loss.
Where the revaluation results in a deficit, then such deficits are reported in profit or loss, unless
they are cancelling out a surplus which has previously been reported in other comprehensive
income, in which case they are reported in other comprehensive income.
According to Ind AS 16, all assets having a finite useful life should be depreciated over that
life. Where property is concerned, the only depreciable element of the property is the buildings
element, since land normally has an indefinite life. The estimated useful life of a building tends
to be much longer than for plant. These two reasons together explain why the depreciation
charge of a property as a percentage of its carrying amount tends to be much lower than for
plant.
Properties which are held for investment purposes are not accounted for under Ind AS 16, but
under Ind AS 40 ‘Investment Property’. As per Ind AS 40, investment properties should be
accounted for under a cost model. ABC Ltd. had applied the cost model and thus our
investment properties are treated differently from the owner occupied property.

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