Practical Insights on Ind AS and SAs Transition Accounting with Adjustment Entries for Property Plant and Equipment Part –I
CA Prajwal Jha
CA Bhawna Grover
Assistant Manager Research and Advisory, Taxmann
Manager - Research and Advisory, Taxmann
Practical Insights on Ind AS and SAs Transition Accounting with Adjustment Entries for Property Plant and Equipment Part –I
CA Prajwal Jha
CA Bhawna Grover
Assistant Manager Research and Advisory, Taxmann
Manager - Research and Advisory, Taxmann
Contents 1.
Introduction
5
2. Relevant accounting requirements
5
3. Practical case study: Applying fair value as deemed cost
7
4. Key practical considerations for finance teams and auditors
10
5. Conclusion
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1.
Introduction
The transition from Indian Generally Accepted Accounting Principles (previous GAAP) to Indian Accounting Standards (Ind AS) can significantly affect the measurement and presentation of property, plant and equipment (PPE). Although both AS 10, Property, Plant and Equipment, and Ind AS 16, Property, Plant and Equipment, establish requirements for recognising and measuring tangible assets, differences in accounting requirements and the transition choices available under Ind AS 101, First-time Adoption of Indian Accounting Standards, can affect the carrying amount of PPE reported in the opening Ind AS Balance Sheet. One of the most practically significant transition provisions concerns the deemed cost exemption. An entity transitioning to Ind AS may elect to measure an item of PPE at its fair value at the date of transition and use that fair value as its deemed cost. Alternatively, , it may use a previous-GAAP carrying amount or a previous-GAAP revaluation as deemed cost. This election can simplify the reconstruction of historical cost and accumulated depreciation, particularly for long-held assets for which reliable historical records may be difficult to obtain. The deemed cost exemption is an optional transition relief, not a general requirement to revalue all existing PPE. The accounting consequences depend on the option selected, the assets covered by the election and the relevant transition-date carrying amounts. The article uses a numerical case study to explain transition accounting in which an entity elects to use fair value as deemed cost for an existing item of machinery.
2. Relevant accounting requirements Let us understand the relevant accounting requirements for the accounting of property, plant and equipment under AS 10 and Ind AS 16.
2.1
Accounting under AS 10 - Property, Plant and Equipment
Under the previous GAAP framework, AS 10 prescribed the accounting treatment for property, plant and equipment, including the determination of cost, recognition of subsequent expenditure, depreciation and derecognition. Under the cost model, an item of PPE was generally carried at its cost less accumulated depreciation and accumulated impairment losses, where applicable. Cost included the purchase price and directly attributable costs necessary to bring the asset to the location and condition required for its intended use. AS 10 also permitted an entity to adopt a revaluation approach for an entire class of assets, subject to the applicable requirements. Consequently, an entity’s previous-GAAP carrying amount might reflect historical cost or a revalued amount, depending on the accounting policy adopted and the transactions undertaken. For transition purposes, an important point is that an entity does not automatically need to reconstruct every asset’s original cost and accumulated depreciation merely because it is adopting Ind AS. Ind AS 101 provides specific reliefs that may be elected. Practical Insights on Ind AS and SAs Transition Accounting with Adjustment Entries for Property Plant and Equipment Part –I
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2.2
Accounting under Ind AS 16 – Property, Plant and Equipment
Ind AS 16 establishes the principles for recognising PPE, determining its carrying amount and recognising depreciation and impairment losses. An item of PPE is recognised as an asset when it is probable that future economic benefits associated with the item will flow to the entity and the cost of the item can be measured reliably. At initial recognition, an item of PPE that qualifies for recognition is measured at cost. After initial recognition, Ind AS 16 permits an entity to select either the cost model or the revaluation model as its accounting policy for an entire class of PPE, subject to consistent application and the requirements of the relevant model. Under the cost model, an asset is carried at cost less accumulated depreciation and accumulated impairment losses. Under the revaluation model, an asset whose fair value can be measured reliably is carried at its revalued amount, being fair value at the date of revaluation less subsequent accumulated depreciation and impairment losses. The distinction between the revaluation model and the deemed cost exemption is important. The revaluation model is a subsequent-measurement accounting policy under Ind AS 16, whereas deemed cost is a measurement basis available under Ind AS 101 at the date of transition. An entity can elect fair value as deemed cost at transition and subsequently apply the cost model under Ind AS 16.
2.3
Deemed cost exemption under Ind AS 101
Ind AS 101 ordinarily requires a first-time adopter to prepare an opening Ind AS Balance Sheet at the date of transition and apply Ind AS recognition and measurement requirements retrospectively, subject to the exemptions and exceptions specified in the standard. Paragraphs D5–D8 of Ind AS 101 contain the relevant deemed cost provisions for PPE and certain other assets. As per paragraph D5, a first-time adopter may elect to measure an item of PPE at its fair value at the date of transition to Ind AS and use that fair value as its deemed cost at that date. This election can be made item by item, subject to the applicable requirements. Paragraph D6 also permits a first-time adopter to use a previous-GAAP revaluation of an item of PPE at or before the date of transition as deemed cost, provided the revaluation was, at the date of revaluation, broadly comparable to: a.
fair value or
b.
cost or depreciated cost under Ind AS, adjusted to reflect, for example, changes in a general or specific price index.
Accordingly, a qualifying previous GAAP revaluation may be retained as deemed cost rather than requiring the entity to determine a new fair value at the transition date. The deemed cost election is optional. If an entity does not elect the exemption for an item, it generally applies the relevant Ind AS 16 requirements retrospectively in accordance with Ind AS 101, subject to other applicable exemptions and mandatory exceptions.
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Practical Insights on Ind AS and SAs Transition Accounting with Adjustment Entries for Property Plant and Equipment Part –I
2.4 What happens when fair value is elected as deemed cost? When an entity elects fair value as deemed cost for an item of PPE, the fair value at the transition date becomes the asset’s deemed cost from that date. The entity does not simply add the difference between fair value and previous-GAAP carrying amount to the asset while continuing to treat the previous-GAAP accumulated depreciation as if nothing changed. Instead, the deemed-cost election establishes a new measurement basis for the asset in the opening Ind AS Balance Sheet. The practical implications are as follows: a.
The asset is recognised in the opening Ind AS Balance Sheet at its elected fair value.
b.
The difference between that fair value and the previous-GAAP carrying amount is reflected in the transition adjustments, generally through opening retained earnings or another appropriate component of equity, as required by the circumstances.
c.
Depreciation after the transition date is calculated using the deemed cost, residual value and remaining useful life determined under Ind AS 16.
d.
The entity must assess other relevant Ind AS requirements, including impairment under Ind AS 36 and deferred tax under Ind AS 12.
A deemed-cost election does not exempt the entity from applying all other relevant Ind AS requirements. For example, the entity must still consider whether the asset contains significant components with different useful lives and whether its depreciation method, residual value and useful life comply with Ind AS 16.
3. Practical case study: Applying fair value as deemed cost Let us understand the transition accounting of property plant and equipment with the help of case study.
3.1
Facts:
Aster Limited (hereinafter referred to as “the company”) is an Indian manufacturing entity that has historically prepared its financial statements in accordance with Indian GAAP, including AS 10. The company is required to prepare its first Ind AS financial statements for the year ending 31st March 2026. The date of transition to Ind AS is 1st April 2024. Accordingly, the company must prepare its opening Ind AS Balance Sheet as at that date in accordance with Ind AS 101. The company owns a specialised manufacturing machine that was purchased and installed on 1st April 2019. The machine was available for use from that date and has been depreciated under the company’s previous-GAAP accounting policy. At the date of transition, the company decides to elect the exemption under Ind AS 101 and measure the machine at its fair value on 1st April 2024. The following information is available:
Practical Insights on Ind AS and SAs Transition Accounting with Adjustment Entries for Property Plant and Equipment Part –I
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Particulars
Amount
Original cost of machine on 1 April 2019
₹10,00,000
Accumulated depreciation under previous GAAP as at 31 March 2024
₹5,00,000
Previous-GAAP carrying amount as at 31 March 2024
₹5,00,000
Fair value of machine as at 1st April 2024
₹6,50,000
Remaining useful life at transition date
5 years
Estimated residual value at transition date
Nil
For this illustration, assume that the fair value of ₹6,50,000 is reliably determined at 1st April 2024 and that the company elects to use it as deemed cost for this machine. The company intends to apply the cost model under Ind AS 16 after transition. For simplicity, the numerical workings below exclude income-tax effects. In an actual transition, the company must separately determine the tax base of the machine and recognise any resulting deferred tax asset or liability in accordance with Ind AS 12. The key issue is how the company should account for the machine in its opening Ind AS Balance Sheet as at 1st April 2024 when its previous-GAAP carrying amount is ₹5,00,000 but its elected fair value as deemed cost is ₹6,50,000.
3.2
Analysis
Accounting under AS 10 Under the previous-GAAP framework, the machine was initially recognised at its cost of ₹10,00,000. Assuming straight-line depreciation over its original useful life of 10 years, with no residual value, annual depreciation was ₹1,00,000. The machine was purchased on 1st April 2019 and was available for use from that date. Accordingly, five years of depreciation had been recognised by 31st March 2024. The carrying amount under previous GAAP is calculated as follows: Particulars
Amount
Original cost of machine on 1 April 2019
₹10,00,000
Less. Accumulated depreciation (₹1,00,000 * 5 years)
(₹5,00,000)
Carrying amount as at 31st March 2024
₹5,00,000
Accounting treatment under Ind AS 101 and Ind AS 16 On transition, the company the optional exemption of Ind AS 101 to the machine. Consequently, the fair value of ₹6,50,000 at 1st April 2024 is used as the deemed cost of the machine in the opening Ind AS Balance Sheet. The transition adjustment is the difference between the deemed cost and the previous-GAAP carrying amount.
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Practical Insights on Ind AS and SAs Transition Accounting with Adjustment Entries for Property Plant and Equipment Part –I
Particulars
Amount
Fair value elected as deemed cost under Ind AS 101
₹6,50,000
Less. Previous GAAP carrying amount
(₹5,00,000)
Increase in carrying amount on transition
₹1,50,000
The carrying amount of PPE therefore increases by ₹1,50,000 on transition. This increase is not recognised as revaluation income in the statement of profit and loss for the year ending 31st March 2025. It is an adjustment arising from the preparation of the opening Ind AS Balance Sheet under Ind AS 101 and is generally reflected in opening retained earnings, subject to any other applicable accounting requirements, including deferred tax.
3.3
Journal entry on 1st April 2024
Assuming no related deferred tax adjustment and no other relevant transition considerations, the transition entry is: Particulars Property, plant and equipment A/c
Debit (₹)
Credit (₹)
₹1,50,000
To Opening retained earnings A/c
₹1,50,000
(Being increase in the carrying amount of machinery arising from the election to use fair value as deemed cost under)
The entry illustrates the transition adjustment in substance. In practice, the company should prepare its opening Ind AS Balance Sheet using the deemed cost as the measurement basis and ensure that the asset’s gross carrying amount and accumulated depreciation presentation are consistent with the chosen transition accounting and reporting system.
3.4 Presentation in the opening Ind AS Balance Sheet The impact of the deemed-cost election on the opening Ind AS Balance Sheet as at 1st April 2024 is set out below. Particulars
Previous-GAAP carrying amount (₹)
Property, plant and ₹5,00,000 equipment
Transition Adjustment (₹) ₹1,50,000
Opening Ind AS amount (₹) ₹6,50,000
The table shows the impact of this individual adjustment only. The company’s complete opening Ind AS Balance Sheet would also include all other adjustments arising from the application of Ind AS, including any related deferred tax consequences.
Practical Insights on Ind AS and SAs Transition Accounting with Adjustment Entries for Property Plant and Equipment Part –I
9
3.5
Depreciation after transition under Ind AS 16
Once the company has elected fair value as deemed cost, the depreciation charge after transition is determined using the deemed cost, residual value and remaining useful life in accordance with Ind AS 16. Based on the case facts: Deemed cost: ₹6,50,000 Residual value: Nil Remaining useful life: 5 years Assuming the straight-line method remains appropriate, annual depreciation after transition is calculated as follows: Annual Depreciation = (Deemed Cost – Residual Value)/ Remaining Useful Life = (₹6,50,000-0)/5 = ₹1,30,000 Accordingly, the company recognises depreciation of ₹1,30,000 per year for the remaining five-year useful life, subject to reassessment of useful life, residual value and depreciation method when required by Ind AS 16. The transition adjustment therefore affects not only the opening carrying amount of PPE but also the depreciation expense recognised in subsequent reporting periods.
4. Key practical considerations for finance teams and auditors The deemed-cost election is often useful for entities holding long-lived assets, especially where reconstructing original cost, historical depreciation or past capitalisation records would be difficult or costly. However, the election should not be treated as a substitute for a proper transition exercise. Finance teams should consider the following matters: a.
Document the election
Identify the PPE items covered by the deemed-cost election and retain evidence of the decision made under Ind AS 101. b.
Support the fair value
Maintain appropriate valuation workings and supporting evidence for the fair value determined at the transition date. c.
Review depreciation estimates
Determine the remaining useful life, residual value and depreciation method under Ind AS 16.
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Practical Insights on Ind AS and SAs Transition Accounting with Adjustment Entries for Property Plant and Equipment Part –I
d.
Assess component accounting Where significant parts of an item of PPE have different useful lives, assess the requirements for separate depreciation of significant components.
e.
Consider impairment The deemed-cost election does not remove the need to assess impairment under Ind AS 36.
f.
Evaluate deferred tax Determine the tax base and assess the deferred tax implications of the transition adjustment under Ind AS 12.
g.
Ensure appropriate disclosures Explain the transition elections and their effect on the opening Ind AS Balance Sheet and financial position, as required by Ind AS 101 and other applicable standards.
5. Conclusion The transition from AS 10 to Ind AS 16 requires an entity to apply the recognition and measurement requirements of Ind AS, subject to the specific exemptions and exceptions available under Ind AS 101. The deemed-cost exemption under paragraph D5 is an optional relief that allows a first-time adopter to use the fair value of an item of PPE at the date of transition as its deemed cost. In the case of Aster Limited, the election increases the machine’s carrying amount from ₹5,00,000 under previous GAAP to ₹6,50,000 in the opening Ind AS Balance Sheet. The resulting increase of ₹1,50,000 is reflected as a transition adjustment rather than as current-period revaluation income. Subsequent depreciation is calculated using the deemed cost and the remaining useful life in accordance with Ind AS 16. The key practical lesson is that the deemed-cost election is a transition mechanism, not a blanket requirement to revalue PPE. Entities should carefully document their elections, support fair value measurements, evaluate the resulting impact on equity and deferred tax, and apply Ind AS 16 consistently to depreciation and subsequent measurement.
Practical Insights on Ind AS and SAs Transition Accounting with Adjustment Entries for Property Plant and Equipment Part –I
11
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