Practical Insights on Ind AS and SAs Understanding the Transition of Property, Plant and Equipment from Previous GAAP to Ind AS through Case Studies
CA Bhawna Grover
CA Prajwal Jha
Manager - Research and Advisory, Taxmann
Associate - Research and Advisory, Taxmann
Practical Insights on Ind AS and SAs Understanding the Transition of Property, Plant and Equipment from Previous GAAP to Ind AS through Case Studies
CA Bhawna Grover
CA Prajwal Jha
Manager - Research and Advisory, Taxmann
Associate - Research and Advisory, Taxmann
Contents 1.
Background
5
2.
Introduction
5
3.
Recognition of Capital Spares on Transition to Ind AS
6
4.
Treatment of Revaluation Reserve after Adopting the Cost Model
7
5.
Can Previously Recognised Impairment Losses be Reversed?
8
6.
Assets Previously Classified as Held for Sale
8
7.
Conclusion
9
Taxmann presents Practical Insights on Ind AS and SAs, a weekly series exclusively for Accounts and Audit Module subscribers of Taxmann.com, focusing on the practical application of Ind AS and Standards on Auditing through structured, issue-based analysis.
1.
Background
Applicability of Ind AS 101 has been the central theme of this article series, with each edition examining a specific transition provision available to first-time adopters. Our earlier articles in this series have examined various transition provisions under Ind AS 101, including mandatory exceptions, optional exemptions, deemed cost, financial instruments, share-based payments, cumulative translation differences, long-term foreign currency monetary items, leases, investments in subsidiaries, associates and joint ventures, and the transition from proportionate consolidation to the equity method. Building upon those transition principles, the following editions under this series shall focus on the transition of individual balance sheet items. This article examines the practical issues that arise while transitioning Property, Plant and Equipment (PPE), highlighting common adjustments, recognition issues and accounting implications that entities may encounter during first-time adoption of Ind AS.
2.
Introduction
Property, Plant and Equipment is often one of the most significant asset classes appearing in an entity’s Balance Sheet. Consequently, its transition from previous GAAP to Indian Accounting Standards requires careful evaluation, particularly where accounting treatments under the previous GAAP differ from the recognition and measurement principles prescribed under Ind AS 16. While Ind AS 101, First Time Adoption of Ind AS permits a firsttime adopter to continue the previous GAAP carrying amount of PPE as its deemed cost, this does not eliminate the need to evaluate several practical issues that arise on transition.
Practical Insights on Ind AS and SAs
Understanding the Transition of Property, Plant and Equipment from Previous GAAP to Ind AS through Case Studies
5
Questions relating to capital spares, revaluation reserves, impairment losses, and assets previously classified as held for sale frequently require specific analysis to ensure that the Opening Ind AS Balance Sheet faithfully reflects the requirements of Ind AS. This article discusses some of the important transition issues relating to PPE through practical business scenarios and explains the accounting treatment required under Ind AS 101 and other relevant standards. The following extracts from the Standalone Financial Statements of 2 Listed Entities for the FY ending 31st March 2017 is presented for better understanding of the concept discussed above:
3.
Recognition of Capital Spares on Transition to Ind AS
One of the common issues encountered during transition is whether spare parts that were recognised as inventory under previous GAAP should continue to be presented as inventory after adopting Ind AS. This question becomes particularly relevant where the entity has elected to continue the previous GAAP carrying amount of its Property, Plant and Equipment as deemed cost under Paragraph D7AA of Ind AS 101. Although Paragraph D7AA permits an entity to continue the previous GAAP carrying amount of assets already recognised as PPE, the exemption does not prohibit recognition of additional assets that satisfy the recognition criteria prescribed under Ind AS. Consequently, the transition process requires an entity to reassess whether certain items previously classified under another head actually meet the definition of Property, Plant and Equipment under Ind AS 16.
3.1.
Practical Scenario
Nova Steel Limited operates an integrated steel manufacturing facility consisting of blast furnaces, rolling mills and continuous casting equipment. Certain specialised turbine rotors, furnace rollers and gearbox assemblies are maintained exclusively for replacement during major overhauls. Under previous GAAP, these high-value spares were classified as inventories because they were not installed in the machinery on the reporting date. On transition to Ind AS, the company elected to adopt the previous GAAP carrying amount of its PPE as deemed cost under Paragraph D7AA of Ind AS 101. Management questioned whether these specialised spare parts should continue to remain under inventories since the deemed cost exemption prevented any adjustment to existing PPE balances.
3.2. Analysis Paragraph 8 of Ind AS 16 provides that spare parts, standby equipment and servicing equipment should be recognised as Property, Plant and Equipment when they are expected to be used during more than one period and satisfy the recognition criteria prescribed by the Standard.
6
Practical Insights on Ind AS and SAs
Understanding the Transition of Property, Plant and Equipment from Previous GAAP to Ind AS through Case Studies
The deemed cost exemption under Paragraph D7AA merely permits continuation of the carrying amount of assets that were already recognised as PPE under previous GAAP. It does not prohibit recognition of assets that qualify as PPE under Ind AS but were previously classified differently. Accordingly, the specialised spares should be reclassified from inventories to Property, Plant and Equipment on the date of transition, provided they satisfy the recognition requirements of Ind AS 16. Their carrying amount under previous GAAP would become their initial carrying amount under Ind AS.
4. Treatment of Revaluation Reserve after Adopting the Cost Model Many entities had historically adopted the revaluation model under previous GAAP and accumulated substantial balances in revaluation reserve. On transition to Ind AS, such entities often elect to continue the previous GAAP carrying amount of PPE as deemed cost while subsequently adopting the cost model prescribed under Ind AS 16. This raises an important question regarding the accounting treatment of the existing revaluation reserve appearing in equity.
4.1. Practical Scenario Apex Infrastructure Limited had revalued its manufacturing facilities several years before transition to Ind AS. Consequently, the Balance Sheet contained a revaluation reserve of ₹42 crore together with the corresponding deferred tax liability recognised under previous GAAP. On transition to Ind AS, the company elected to continue the previous GAAP carrying amount of PPE as deemed cost under Paragraph D7AA of Ind AS 101 and decided that future measurement of all Property, Plant and Equipment would follow the cost model under Ind AS 16. Management sought guidance regarding the treatment of the existing revaluation reserve and the related deferred tax liability appearing in the opening Balance Sheet.
4.2. Analysis Paragraph 11 of Ind AS 101 requires adjustments arising from changes in accounting policies on transition to be recognised directly in retained earnings or another appropriate category of equity. Since the entity has decided to adopt the cost model after transition, the historical revaluation reserve no longer represents a separate reserve arising from subsequent measurement under Ind AS. Consequently, the existing revaluation reserve should be transferred to retained earnings or another appropriate component of equity in the Opening Ind AS Balance Sheet. However, the accounting treatment differs for deferred tax. Ind AS 12 requires deferred tax to be recognised on taxable temporary differences unless a specific exemption applies. As
Practical Insights on Ind AS and SAs
Understanding the Transition of Property, Plant and Equipment from Previous GAAP to Ind AS through Case Studies
7
the accounting carrying amount and tax base of the revalued assets continue to differ, the deferred tax liability recognised under previous GAAP remains relevant under Ind AS and should therefore continue to be recognised.
5.
Can Previously Recognised Impairment Losses be Reversed?
Entities often assume that once previous GAAP revaluation amounts are adopted as deemed cost, all historical impairment losses recognised before transition can also be reversed. However, the transition provisions do not permit such a blanket reversal.
5.1.
Practical Scenario
Zenith Cement Limited had revalued one of its manufacturing plants in 2018. Subsequently, due to adverse market conditions, the company recognised an impairment loss against the revalued asset under previous GAAP. While preparing its Opening Ind AS Balance Sheet, the company elected to use the earlier revalued amount as deemed cost under Paragraph D6 of Ind AS 101. Management believed that since the revalued amount had become the deemed cost under Ind AS, the impairment recognised under previous GAAP should also be reversed on transition.
5.2. Analysis Paragraph D6 of Ind AS 101 permits the previous revaluation amount to be treated as deemed cost where the revaluation is broadly comparable to fair value or depreciated cost under Ind AS. However, this exemption does not automatically reverse impairment losses recognised under previous GAAP. The deemed cost merely establishes the carrying amount from which future accounting under Ind AS commences. After determining the deemed cost, the entity must apply Ind AS 36 prospectively from that point onwards. Accordingly, any reversal of impairment is permissible only if the conditions prescribed in Ind AS 36 are satisfied after the deemed cost date. Where an entity instead applies Ind AS 16 retrospectively without using the deemed cost exemption, impairment recognised under previous GAAP may also be reassessed in accordance with Ind AS 36 throughout the retrospective period.
6. Assets Previously Classified as Held for Sale Another practical issue arises where certain assets were classified as “Assets Held for Sale” under previous GAAP but fail to satisfy the classification criteria prescribed under Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations.
8
Practical Insights on Ind AS and SAs
Understanding the Transition of Property, Plant and Equipment from Previous GAAP to Ind AS through Case Studies
In such cases, the assets are required to be reclassified as Property, Plant and Equipment. The question then arises whether the entity may still apply the deemed cost exemption available under Paragraph D7AA of Ind AS 101.
6.1. Practical Scenario Orion Engineering Limited had decided to dispose of an idle manufacturing unit shortly before transitioning to Ind AS. Under previous GAAP, the assets forming part of the unit were presented separately as “Assets Held for Sale”, and depreciation was discontinued. On evaluating the transaction under Ind AS 105, management concluded that the conditions necessary for classification as held for sale were not satisfied because the proposed disposal was no longer highly probable. Consequently, the assets required reclassification as Property, Plant and Equipment in the Opening Ind AS Balance Sheet. The company wanted to determine whether these assets could continue at their previous GAAP carrying amount under Paragraph D7AA despite not being presented as PPE under previous GAAP.
6.2. Analysis Paragraph D7AA permits an entity to use the previous GAAP carrying amount as deemed cost where the asset satisfies the definition of Property, Plant and Equipment under Ind AS 16. The exemption focuses on the nature of the asset rather than its presentation under previous GAAP. Accordingly, if an asset qualifies as Property, Plant and Equipment under Ind AS, the previous GAAP carrying amount may continue as its deemed cost even though it was separately presented as an asset held for sale before transition. Therefore, the assets should first be reclassified as Property, Plant and Equipment and thereafter measured using their previous GAAP carrying amount as deemed cost.
7.
Conclusion
The deemed cost exemption available under Ind AS 101 significantly simplifies the transition of Property, Plant and Equipment by allowing entities to avoid the complexities of full retrospective application. However, this relief should not be interpreted as a complete exemption from applying the recognition, classification and presentation requirements of Ind AS. Transition may still require entities to recognise additional PPE such as capital spares, reclassify assets previously presented under different heads, appropriately deal with historical revaluation reserves, and evaluate impairment in accordance with Ind AS 36. A careful assessment of these issues ensures that the Opening Ind AS Balance Sheet faithfully represents both the transitional relief available under Ind AS 101 and the recognition principles contained in Ind AS 16.
Practical Insights on Ind AS and SAs
Understanding the Transition of Property, Plant and Equipment from Previous GAAP to Ind AS through Case Studies
9
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