IND AS 16 – PPE

IND AS 36 – Impairment of Assets

IND AS 105 – Non-Current Assets Held for Sale & Discontinued
Operations
IND AS 38 – Intangible Assets

1. A manufacturing company has acquired agricultural land for setting up a

factory building. For construction of the building, certain permissions are
required from regulatory authorities. The company has to incur
significant costs (non-refundable) for obtaining such permissions such as
environmental clearance and change of land use, etc. Whether such cost
can be capitalised?

2. ABC Ltd. is setting up a new refinery outside the city limits. In order to
facilitate the construction of the refinery and its operations, ABC Ltd. Is
required to incur expenditure on the construction/development of railway
siding, road and bridge. Though ABC Ltd. incurs (or contributes to) the
expenditure on the construction/development, it will not have ownership
rights on these items and they are also available for use to other entities
and public at large. Whether ABC Ltd. can capitalise expenditure
incurred on these items as PPE? If yes, how should these items be
depreciated and presented in the financial statements of ABC Ltd.?

3. Continuing the illustration, ABC Ltd. under an understanding with local

authorities also construct a school, which will be subsequently handed
over to be managed by an independent trust. Though ABC Ltd. incurs
expenditure on the construction/development of the school, it will not
have ownership rights and the assets will also be available for use to the
general public (however, preference will be given to employees of the
Company). Whether ABC Ltd., can capitalise expenditure incurred as its
PPE?

4. Company A has exhibited certain rare and expensive paintings and

sculptures for aesthetic purposes at entrance hall, conference rooms etc.
The entity does not trade in these items in the ordinary course of business.
 How such items should be recognised in the financial statements of
Company A?

5. Company XYZ plans to construct a hotel on a site which is currently

occupied by the residents of a small town. The Company XYZ agrees to
pay the cost of relocating the residents to another site. Whether the cost of
relocating should be capitalised as part of the cost of land for the hotel?

6. ABC Ltd. is engaged in retail business and it has a chain of departmental

stores across the country. It has acquired a new store at another location.
In order to start the new store significant renovation expenditure are
required at that location and the management expects that the renovations
would continue for the period of six months. Management has prepared
the budget for this period including expenditure related to construction
and remodeling costs, salaries of staff participating in hiring (not related
to construction), salary costs of staff on the bench, training, etc. Can ABC
Ltd. capitalise all the costs incurred during the period of 6 months?

7. A manufacturing company enters into a contract with a supplier to

procure equipments over a period of 3 years. The Company has to pay
cancellation fees for terminating the contract. The cancellation fees would
only be in respect of those equipments which are not procured by the
Company as per the contract. The Company decides to terminate the
contract at the end of year 1 since it has identified another supplier which
would result in a significant reduction in cost for the company. It pays the
cancellation fees in respect of the remaining equipments not yet procured.
Whether the cancellation fee paid by the Company should be capitalised
as part of the cost of the equipment purchased?

8. A public sector company is engaged in refining, transportation and sale of

petroleum products. It incurs demurrage on imported plant and
machinery. Demurrage represents payment made for detention of
imported plant and machinery at discharge location for a period more
than the period agreed with the supplier/transporter. The incidence of
demurrage was on account of a nationwide transporters’ strike due to
which the company could not take delivery of the machinery. Whether
demurrage should be considered as an element of cost for the purpose of
determining the cost of imported plant and machinery?
9. X Ltd began construction of its factory on 1/4/2015. Related costs
incurred till 31/03/2016 are as follows:

Demolition of existing structures on site 5,00,000

Materials consumed 60,00,000
Factory architect & consultant fees 4,00,000
Employment costs * 18,00,000
Other direct costs * 12,00,000
Administrative overheads (not related to construction) 6,00,000
Relocation of staff to new factory 3,00,000
Formal opening of factory 2,00,000
PV of estimated costs to dismantle 2,00,000

Note: Employment costs are related to salaries from Apr-Dec’15 of

employees involved in construction/related activities. The construction
was complete & factory was ready for use by end of Nov’15.
Other costs include a cost of 200 related to repairing damage resulting
from a gas leak.

Estimate the initial carrying value of factory building.

10.Company A has textile manufacturing facilities in two different

geographical locations for similar products or products with similar
markets. The company wants to classify both the manufacturing facilities
as different class of property, plant and equipment, based on their
different geographical location. Whether the company is permitted to do
so?
Would the response be different if the company manufactured different
products, say pharmaceuticals and textiles in the same geographical
location?

11.A shipping company is required by law to bring all ships into dry dock
every 5 years for a major inspection & overhaul. The initial cost of the
ship is 20 mn which includes 5 mn of the overhauled component. The
ship is expected to have a life of 20 years. At the end of 5 years, the
actual overhaul costs incurred are 6 mn. Discuss treatment of overhaul
charges & SLM depreciation through years 1-10.

12.MS acquired a heavy machinery costing Rs 100 lakhs. There is no

breakdown of value of component parts. Estimated useful life is 10 years.
 At the end of 6th year, turbine – a major component part requires
replacement as repair is uneconomical. The rest of the machine is perfect
& can be used for the next 4 years. Cost of new turbine is Rs 45 lakhs.
Assume cost of capital 5%. Explain how the new turbine will be treated.
Assume SLM.

13.On 1/4/2017 an equipment is offered for sale at 10 mn – payable in 3

equal instalments on 1/4/2017, 31/3/2018 & 31/3/19. Implicit interest rate
is 5.36% pa. How will the property be recorded?

14.Asset was acquired 3 years ago at Rs 50 lakhs. It was depreciated at 10%

using WDV method. At end of 3 years, entity estimates revised useful life
to be 8 years & decides to adopt SLM method henceforth. Show
necessary treatment.

15.A Ltd. purchased a machinery of Rs 100 crore on April 1, 2001. The

machinery has a useful life of 5 years. It has NIL residual value. A Ltd.
adopts straight line method of depreciation for depreciating the
machinery. Following information has been provided as on March
31,2002:
Estimated net cash flows in Rs cr for next 4 fin years – 15, 30, 40 & 10
Discount Rate 10%
FV less costs to sell – Rs 70 cr
Calculate impairment loss if any as on 31st March 2022

16. Machinery was purchased on 1/04/2011 for Rs 20,000 lakhs. The salvage
value at end of estimated useful life of 8 years was Rs 500 lakhs. On
31/03/2014 the fair value net of disposal costs was Rs 10,000 lakhs.
Estimated annual net cash flows are: 14-15 – Rs 2,000; 15-16 & 16-17 –
Rs 3,000; 17-18 – Rs 4,000; 18-19 – Rs 2,000 lakhs. The discount rate is
15%. Estimate impairment loss 31/3/14 & depreciation for 14-15.

17.A Ltd. purchased an asset of Rs 100 lakh on April 1, 2000. It has useful
life of 4 years with no residual value.
Recoverable amount of the asset in Rs lakhs is as follows:
31/03/2001 – 60
31/03/2002 – 40
31/03/2003 - 28
Calculate the amount of impairment loss or its reversal, if any, on March
31 - 2001, 2002 and 2003
 18.Entity ABC owns an item of property and it was stated at the following
amounts in its last financial statements on 31/03/2011:
Cost: Rs 12,00,000
Accumulated Depreciation: Rs 6,00,000
Net book value: Rs 6,00,000
Annual depreciation is Rs 120,000. During July 2011, entity ABC
decides to sell the asset and on 1st August it meets the conditions to be
classified as held for sale and fair value less costs to sell is determined at
Rs 5,00,000. On 31/03/2012 fair value less costs to sell is estimated at Rs
4,50,000. Asset is finally sold on 30th April 2012 at Rs 475,000. Analyse.

19. X Ltd has expertise in business consulting. Over the years it has acquired
30% of market share & considers recognizing it as intangible asset. Is it
justified?

20. A new product was developed during the year ended March 2022. A
total sum of Rs 30 lakhs was spent. Of this Rs 15 lakh was spent upto
30/09/2021 when the technical feasibility was established. New product
will be launched during the next 4 months and it’s recoverable amount is
expected to be Rs 14 lakh. Explain reporting requirements.

21.A new production is under development during 2019-20. During Apr-

Dec’19 Rs 2,700 lakhs was spent while Rs 900 lakhs was spent during
Jan-Mar’20. On 1st Jan’20 the production process met the criteria for
recognition of intangible asset. The amount recoverable from the process
was estimated as Rs 1,000 lakhs. Further expenditure of Rs 6,000 lakhs
was incurred in 2020-21. Asset was brought into use on 31/3/21 and is
expected to be in use for 6 years. As on 31 st Mar’22 the recoverable
amount from the process is estimated to be Rs 5,000 lakhs. Explain
treatment during 19-20, 20-21 & 21-22.