Ind AS 16 – Property, Plant & Equipment Interview Q&A
A. Scope & Definitions
Q1: What is the scope of Ind AS 16, and which types of assets are excluded from its application?
What the interviewer tests: The interviewer is assessing your understanding of accounting standards and asset classification.
- Scope of Ind AS 16
- Types of assets covered
- Exclusions from application
Ind AS 16 deals with the accounting of property, plant, and equipment (PPE). It outlines the recognition, measurement, and depreciation of these assets. However, it excludes assets such as investment property, biological assets related to agricultural activity, and intangible assets.
Q2: How is “property, plant and equipment” defined under Ind AS 16?
What the interviewer tests: The interviewer is checking your knowledge of asset classification and the specific accounting standards applicable to tangible assets.
- Tangible assets
- Useful life beyond one year
- Measurement at cost
Under Ind AS 16, 'property, plant and equipment' (PPE) is defined as tangible assets that are held for use in the production or supply of goods and services, or for administrative purposes, and are expected to be used for more than one accounting period. These assets are initially measured at cost, which includes all expenditures directly attributable to bringing the asset to its intended use. Subsequent measurement can involve depreciation and impairment considerations, aligning with the standard's requirements.
B. Recognition & Initial Measurement
Q3: Under what conditions should an item of PPE be recognised as an asset?
What the interviewer tests: The interviewer is assessing your understanding of the criteria for asset recognition under accounting standards.
- Control over the asset
- Future economic benefits
- Cost measurement reliability
An item of Property, Plant, and Equipment (PPE) should be recognised as an asset when it is probable that future economic benefits associated with the asset will flow to the entity, the cost of the asset can be measured reliably, and the entity has control over the asset.
Q4: What costs are included in the initial measurement of an item of PPE?
What the interviewer tests: The interviewer is checking your understanding of accounting principles related to property, plant, and equipment.
- Purchase price
- Directly attributable costs
- Initial estimates of dismantling costs
The initial measurement of an item of PPE includes the purchase price, directly attributable costs such as installation and transportation, and initial estimates of dismantling or restoration costs required to bring the asset to its intended use.
Q5: How are site dismantling, removal, and restoration costs treated under Ind AS 16?
What the interviewer tests: The interviewer is assessing your understanding of asset recognition and the treatment of related costs under accounting standards.
- Recognition of costs
- Asset valuation
- Liability treatment
Under Ind AS 16, site dismantling, removal, and restoration costs are recognized as part of the cost of an asset if they are incurred to prepare the asset for its intended use. These costs are capitalized and subsequently depreciated over the asset's useful life.
C. Measurement After Recognition
Q6: What are the two models allowed for subsequent measurement of PPE under Ind AS 16?
What the interviewer tests: The interviewer is checking your knowledge of accounting standards and the treatment of property, plant, and equipment.
- Ind AS 16 compliance
- Models for PPE measurement
- Impact on financial statements
Under Ind AS 16, the two models for subsequent measurement of Property, Plant, and Equipment (PPE) are the cost model and the revaluation model. The cost model measures PPE at cost less accumulated depreciation and impairment losses, while the revaluation model allows PPE to be carried at its fair value, with changes recognized in other comprehensive income. The choice of model affects the asset's carrying value and ultimately the financial statements.
Q7: How is the cost model applied to PPE after initial recognition?
What the interviewer tests: The interviewer is evaluating your understanding of the accounting treatment for Property, Plant, and Equipment (PPE) over time.
- Cost model application
- Depreciation methods
- Impairment considerations
After initial recognition, the cost model for Property, Plant, and Equipment (PPE) involves carrying the asset at its cost less accumulated depreciation and any impairment losses. Depreciation is systematically allocated over the asset's useful life, reflecting its consumption and wear, while impairment reviews ensure that the carrying amount does not exceed recoverable amounts.
Q8: How does the revaluation model work, and how are revaluation gains and losses presented?
What the interviewer tests: The interviewer is assessing your understanding of asset valuation and reporting standards.
- Revaluation model definition
- Presentation of gains/losses
- Impact on financial statements
The revaluation model allows companies to adjust the carrying amount of an asset to its fair value. Revaluation gains are credited to a revaluation surplus in equity, while losses are recognized in profit or loss unless they offset previous gains. This ensures that the financial statements reflect the current value of the assets.
Q9: What are the rules regarding revaluation of an entire class of assets?
What the interviewer tests: The interviewer is assessing your understanding of asset revaluation principles and compliance with accounting standards.
- Compliance with IFRS/GAAP
- Frequency of revaluation
- Impact on financial statements
Revaluation of an entire class of assets must be conducted regularly to ensure that the carrying amount does not differ materially from fair value. This is typically done at least every three to five years. Any increase or decrease in value is recognized in other comprehensive income, except for reversals of previously recognized losses.
D. Component Accounting
Q10: What is component accounting under Ind AS 16, and why is it important?
What the interviewer tests: The interviewer is assessing your understanding of component accounting and its significance in asset management.
- Definition of component accounting
- Importance in financial reporting
- Impact on asset valuation
Component accounting under Ind AS 16 involves recognizing and depreciating significant parts of an asset separately when they have different useful lives. This approach improves accuracy in financial reporting and ensures that the carrying amount of assets reflects their actual value over time, enhancing decision-making for stakeholders.
E. Depreciation & Useful Life
Q11: How is depreciation determined and allocated over an asset’s useful life?
What the interviewer tests: The interviewer is evaluating your knowledge of accounting principles and asset management.
- Depreciation Methods
- Useful Life
- Allocation
Depreciation is determined using methods such as straight-line or declining balance, based on the asset's cost, useful life, and residual value. It is allocated systematically over the asset's useful life to match expense recognition with revenue generation, adhering to the matching principle in accounting.
Q12: What factors influence the estimation of useful life and residual value?
What the interviewer tests: The interviewer is checking your understanding of asset depreciation and factors affecting asset valuation.
- Usage patterns
- Technological advancements
- Market conditions
Factors influencing the estimation of useful life and residual value include the expected usage patterns of the asset, potential technological advancements that may render the asset obsolete, and prevailing market conditions that affect resale value.
Q13: How are changes in depreciation method, useful life, or residual value accounted for?
What the interviewer tests: The interviewer is assessing your understanding of accounting principles related to depreciation.
- Understanding of GAAP
- Impact on financial statements
- Disclosure requirements
Changes in depreciation method, useful life, or residual value are accounted for prospectively, meaning the new method is applied going forward. Adjustments to the carrying amount of the asset are made, and any impact on future depreciation expense is disclosed in the financial statements.
F. Subsequent Costs & Replacements
Q14: How should day-to-day repairs and maintenance costs be treated?
What the interviewer tests: The interviewer wants to evaluate your knowledge of expense recognition and accounting treatment for maintenance costs.
- Expense recognition
- Materiality
- Capitalization vs. expense
Day-to-day repairs and maintenance costs should typically be expensed in the period they are incurred, as they do not significantly enhance the value or extend the useful life of the asset. However, if the costs are material and result in a substantial improvement, they may need to be capitalized.
Q15: When should the cost of replacing a part of an asset be capitalised, and what happens to the replaced part?
What the interviewer tests: The interviewer is assessing your understanding of capital expenditures versus repairs and maintenance.
- Capitalisation criteria
- Impact on financial statements
- Treatment of replaced parts
The cost of replacing a part of an asset should be capitalised when it significantly enhances the asset's value, extends its useful life, or adapts it for a different use. The replaced part is typically removed from the asset's book value and may be written off as a loss or treated as a disposal.
G. Derecognition
Q16: When should an item of PPE be derecognised from the books?
What the interviewer tests: The interviewer is checking your knowledge of derecognition criteria and its implications on financial statements.
- Disposal of the asset
- Loss of control
- Carrying amount removal
An item of PPE should be derecognised from the books when it is disposed of or when no future economic benefits are expected from its use or disposal. This involves removing the asset's carrying amount from the balance sheet and recognizing any gain or loss on disposal in the income statement.
Q17: How are gains or losses on disposal of PPE recognised and presented?
What the interviewer tests: The interviewer is assessing your knowledge of accounting standards and treatment of fixed assets.
- Recognition of gains/losses
- Presentation in financial statements
- Compliance with accounting standards
Gains or losses on disposal of Property, Plant, and Equipment (PPE) are recognized in the income statement as the difference between the sale proceeds and the carrying amount of the asset at the time of disposal. They are presented under 'Other Income' or 'Other Expenses' depending on whether it's a gain or loss.
H. Disclosures
Q18: What key disclosures are required for each class of PPE under Ind AS 16?
What the interviewer tests: The interviewer is testing your knowledge of accounting standards and your ability to apply them in practice.
- Classification of PPE
- Depreciation methods
- Impairment indicators
Under Ind AS 16, key disclosures for each class of Property, Plant, and Equipment (PPE) include the measurement basis used (cost or revaluation), the depreciation method applied, the useful lives of assets, and any impairment losses recognized, along with details of any significant estimates or judgments made.
Q19: Why must companies disclose the carrying amount under the cost model when the revaluation model is used?
What the interviewer tests: The interviewer is assessing your understanding of accounting principles and the importance of transparency in financial reporting.
- Compliance with accounting standards
- Transparency for stakeholders
- Consistency in financial reporting
Companies must disclose the carrying amount under the cost model to ensure compliance with accounting standards like IAS 16, which enhances transparency for stakeholders by providing a clear view of asset valuations, and ensures consistency in financial reporting across periods.
I. Real-World Scenarios & Application
Q20: Should bearer plants be classified and measured under Ind AS 16?
What the interviewer tests: The interviewer wants to evaluate your knowledge of accounting standards and the specific treatment of biological assets.
- Ind AS 16
- Bearer plants classification
- Measurement basis
Yes, bearer plants should be classified and measured under Ind AS 16 as they are considered property, plant, and equipment. They are held for the production of agricultural produce and are not intended for sale in the ordinary course of business.
Q21: What are the accounting implications when PPE is reclassified as investment property?
What the interviewer tests: The interviewer wants to evaluate your knowledge of asset classification and its effects on financial statements.
- Change in valuation approach
- Impact on depreciation
- Alteration of financial statement presentation
Reclassifying PPE as investment property requires a change in valuation approach from cost to fair value, affects the depreciation method used, and alters the presentation of assets on the financial statements, impacting overall financial ratios.
Q22: How is depreciation recalculated when an asset’s useful life is revised based on a new estimate?
What the interviewer tests: The interviewer is looking for your understanding of accounting principles related to asset management and depreciation.
- Revised useful life
- Remaining book value
- New depreciation calculation method
When an asset's useful life is revised, the depreciation is recalculated by taking the remaining book value and dividing it by the new estimated useful life, ensuring that the asset is depreciated accurately over its adjusted lifespan.
Q23: How is PPE measured when exchanged for another asset that lacks commercial substance?
What the interviewer tests: The interviewer is evaluating your knowledge of accounting standards related to asset exchanges.
- Carrying amount
- Fair value
- No gain recognition
When property, plant, and equipment (PPE) are exchanged for another asset that lacks commercial substance, the PPE is measured at its carrying amount. No gain or loss is recognized at the time of the exchange, ensuring that the financial statements reflect the ongoing value of the assets involved.
J. Ethics, Judgment & Policy Consistency
Q24: How would you address a situation where management wants to capitalise routine maintenance costs as PPE?
What the interviewer tests: The interviewer is evaluating your knowledge of capital expenditure versus operational expenditure and your ability to uphold accounting principles.
- Definition of capital vs. operational expenditure
- Relevant accounting standards
- Ethical considerations
I would explain that routine maintenance costs should be expensed as they do not enhance the asset's value or extend its useful life. According to relevant accounting standards, only costs that improve or add to the value of property, plant, and equipment can be capitalized. It's crucial to maintain ethical standards in financial reporting to ensure transparency and accuracy.
Q25: Why must a measurement model be consistently applied across a class of PPE, and how do you ensure consistency in group reporting?
What the interviewer tests: The interviewer is checking your knowledge of accounting principles and consistency in financial reporting.
- Consistency in measurement
- Comparability of financial statements
- Internal controls
A measurement model must be consistently applied across a class of Property, Plant, and Equipment (PPE) to ensure comparability and reliability in financial statements. Consistency is ensured through robust internal controls and regular reviews of accounting policies, which align with relevant accounting standards and facilitate accurate group reporting.