In the Month of February 2021, the FRRB issued Study on Compliance of Financial Reporting Requirements (Ind AS Framework) that contains instances of common non-compliances or errors in Ind AS financial statements.
In this article below is FRRB observations relating to presentation and disclosure of property, plant & equipment (PPE) in Ind AS financial statements.
| Disclosure/ Scenario in the Financial Statements selected by the FRRB | Relevant Schedule III/ Ind AS requirement | FRRB Observation |
| 1. Subsequent expenditure related to PPE: In one of the company’s, the PPE accounting policy was as follows: “Subsequent expenditure related to an item of PPE is added to its carrying value only if it increases the future benefits from the existing asset beyond its previously assessed standard of performance” | Paragraph 7 of Ind AS 16 states: “The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if: (a) it is probable that future economic benefits associated with the item will flow to the entity; and (b) the cost of the item can be measured reliably.” Paragraph 13 of Ind AS 16 states: “…Under the recognition principle in paragraph 7, an entity recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if the recognition criteria are met.” | Under Ind AS 16, there is no criterion that capitalisation of subsequent expenditure should be done only if there is increase of future benefits from the existing asset beyond previously assessed standard of performance. Author’s remarks: Companies shall be careful while drafting the PPE accounting policy w.r.t. subsequent expenditure. |
| 2. Movement of Capital Work in Progress: A company presented PPE and Capital Work in Progress as separate line items on face of its balance sheet. Although there was movement in balances in current year and previous year, no disclosure in the capital work in progress was made. | Paragraph 74 of Ind AS 16 states: “The financial statements shall also disclose: … (b) the amount of expenditures recognised in the carrying amount of an item of property, plant and equipment in the course of its construction;” | No disclosure of movement of capital work in progress was made in the financial statements. Capital work in progress is also part of PPE and therefore should have been disclosed as per Ind AS 16.74. This view was also taken by ICAI’s ITFG Issue 33 (which dealt with whether deemed cost option under Ind AS 101 would be applicable to Capital Work in progress) Author’s remarks: Often companies miss out presenting the movement of capital work in progress balances in the PPE schedule. This movement/ reconciliation would be required to be presented. |
| 3. Depreciation on leasehold improvement: In one of the sample companies, the PPE accounting policy was as follows: “Depreciation of Leasehold improvements is provided over the primary period of lease or over the useful lives of the respective fixed assets, whichever is shorter.” | Ind AS 16 paragraphs50 & 56 state: 50 The depreciable amount of an asset shall be allocated on a systematic basisover its useful life. 56 The future economic benefits embodied in an asset are consumed by an entity principally through its use. However, other factors, such as technical or commercial obsolescence and wear and tear while an asset remains idle, of ten result in the diminution of the economic benefits that might have been obtained from the asset. Consequently, all the following factors are considered in determining the useful life of an asset: (d) legal or similar limits on the use of the asset, such as the expiry dates of related leases. | For the purpose of depreciation of leasehold improvement, the lease term should have been considered instead of considering the primary period of lease. Author’s remarks: The accounting policies of leasehold improvement shall be carefully considered by companies. It should be noted the lease term is defined under Ind AS 116 and there can be various Ind AS 116 considerations, such as, extension option, termination option, lock in period, etc. |
| 4. Classification of Toll equipment: A company classified toll equipment as an intangible asset and depreciated the same on a WDV basis over the useful life of 7 years. | Ind AS 16 defined PPE as follows: Property, plant and equipment are tangible items that: (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one period. | Classification of toll equipment as intangible asset is incorrect. It should have been classified as PPE. |
| 5. Cessation of Capitalisation cost of constructing a PPE: In one of the sample companies, the PPE accounting policy was as follows: “… All project related expenses, viz, civil works,….,borrowing costs incurred prior to the date of commercial operations are shown under Capital work in progress (CWIP).” | Ind AS 16 paragraph 20 states: “20 Recognition of costs in the carrying amount of an item of property, plant and equipment ceases when the item is in the location and condition necessary for it to be capable of operating in the manner intended by management. Therefore, costs incurred in using or redeploying an item are not included in the carrying amount of that item. For example, the following costs are not included in the carrying amount of an item of property, plant and equipment: (a) costs incurred while an item capable of operating in the manner intended by management has yet to be brought into use or is operated at less than full capacity; (b) initial operating losses, such as those incurred while demand for the item’ soutput builds up; and (c) costs of relocating or reorganising part or all of an entity’s operations.” | The company capitalised project related cost prior to the date to the date of commercial operations. As per Ind AS 16.20 recognition of cost in carrying amount of PPE ceases when the item is in the location and condition necessary for it to be capable of operating in the manner intended by the management. Therefore, capitalisation of costs until the date of commercial operations is not in line with Ind AS 16. Author’s remarks: When to cease capitalisation of costs related to construction of a self-built PPE is always a tricky issue. Companies shall determine the point in time until which they may continue to capitalise costs and should carefully look at the requirements of Ind AS 16. The accounting policy around this should be also carefully drafted and worded. |
| 6. Non presentation of Previous Year’s figures: In the note of the financial statements on PPE previous year figures were not provided for all the items. | Schedule III Division II General Instructions for the Preparation of Financial Statements of a Company to comply with Ind AS requires that financial statements to contain the corresponding amounts (comparatives) for the immediately preceding reporting period for all the items shown. | Previous year’s figures have not been provided for all the items of PPE. This is not in line with the requirements of Schedule III. Author’s remarks: While the observation is specific to PPE, it should be ensured that previous year’s comparative figures shall be presented for all the items of financial statements. |
| 7. Capitalisation of Borrowing cost: In one of the sample companies, the accounting policy stated: “Borrowing costs directly attributed to the acquisition of fixed assets are capitalised as a part of the cost of asset up to the date is put to use. Other Borrowing costs are charged to the statement of profit and loss account in the year in which they are incurred.” | Ind AS 23 states: “8 An entity shall capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. An entity shall recognise other borrowing costs as an expense in the period in which it incurs them. 22 An entity shall cease capitalising borrowing costs when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.” | The policy states that the borrowing cost directly attributable to the acquisition of fixed assets are capitalised. The word should have been qualifying asset rather than fixed asset. Also, the borrowing costs were capitalised which were incurred upto the date of asse is put to use. The point until which the capitalisation should be carried out until the date of the asset is ready for its use. Author’s remarks: The point at which the captalisation of borrowing cost should cease shall be when the qualifying asset is ready for use rather than when it is put to use. |
| 8. Amortisation of Leasehold land: In one of the sample companies, in the notes, leasehold land was shown having same amounts in the reporting year and the comparative periods. | Ind AS 16 states: “43 Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. 50 The depreciable amount of an asset shall be allocated on a systematic basis over its useful life.” | The company does not amortise leasehold land. This is non- compliant with the Ind AS 16 requirements. Author’s remarks: Leasehold land shall be mandatorily amortised under the requirements of Ind AS 116/ Ind AS 16. |
| 9. Accounting policy for Leasehold Land on finance lease: In one of the sample companies, the accounting policy on PPE states as follows: “The lease term in respect of leasehold land in 97 years. The lease term in respect of land acquired under finance lease is up to 97 years with ability to opt for renewal of lease term on fulfilment of certain conditions.” | Ind AS 8 states as follows: 7 When an Ind AS specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item shall be determined by applying the Ind AS. | The accounting policy note was provided for land acquired under finance lease. Author’s remarks: Appropriate leasehold land accounting policy shall be disclosed. |
| 10. Assets not owned: In one of the sample companies, the accounting policy on PPE states as follows: ” Property, Plant and Equipment .. Assets not owned by the Company are amortised over a period of ten years.” | Ind AS 1 paragraph 7 states as follows: “Information is obscured if it is communicated in a way that would have a similar effect for primary users of financial statements to omitting or misstating that information. The following are examples of circumstances that may result in material information being obscured:- (a) information regarding a material item, transaction or other event is disclosed in the financial statements but the language used is vague or unclear; (b) information regarding a material item, transaction or other event is scattered throughout the financial statements; (c) dissimilar items, transactions or other events are inappropriately aggregated; (d) similar items, transactions or other events are inappropriately disaggregated; and (e) the under standability of the financial statements is reduced as a result of material information being hidden by immaterial information to the extent that a primary user is unable to determine what information is material.” | No disclosure is made regarding nature and details of the assets not owned anywhere in the financial statements. Also, the basis of for 10 years period of amortisation is not disclosed. Author’s remarks: When there are such typical transactions/ events such as assets not owned, appropriate disclosures shall be provided, including, accounting estimates and management judgement. |