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Published in: Accountancy | Accounts
  • Vivek K

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In this part, we have discussed what is not covered under the bearer plant with all the relevant examples. Bearer plant is part of PPE definition. For CA FINAL & CA IPCC.

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    PROPERTY, PLANT AND EQUIPYENT {AS-10) REVISED PART The following are not bearer plants : 2 i) Plants cultivated to be harvested as agricultural produce (for example, trees grown for use as lumber) i i) Plants cultivated to produce agricultural produce when there is more than a remote likelihood that the entity will also harvest and sell the plant as agricultural produce, other than as incidental scrap sales (for example, trees that are cultivated both for their fruit and their lumber); and i i i) Annual crops (for example, maize and wheat) . When bearer plants are no longer used to bear, produce they might be cut down and sold as scrap, for example, for use as firewood. Such incidental scrap sales would not prevent the plant from satisfying the definition of a bearer plant. Example I: Mango tree is a bearer plant and it covered by AS—IO P PE, however mango grown in tree is a produce of bearer plant and is not covered by this Standard. Further in wheat crop the plant of the wheat is not a bearer plant because it is cut do wn and sold as scrap. Recognition of assets Criteria for Recognition The cost of an item of P PE should be recognized as an asset if and only if: 0 It is probable that future economic benefits associated with the asset will flow to the entity and, o The cost of the item can be measured rel i ably. The degree of certainty attached to the flow of future economic benefits must be assessed. This should be based on the evidence available at the date of initial recognition (usually the date of purchase) . The entity should thus be assured that, it will receive the rewards attached to the asset and it will incur the associated risks, which will only generally be the case when the rewards and risks have actually passed to the entity. Until then, the asset should not be recognized. Example 2: A plant and machinery is purchased for R5. 20 lakhs. It satisfied the recognition criteria: future economic benefits will flow to the entity in the form of the capability to produce goods using the machinery, sell them and earn profits. Similarly, its price can be measured reliably from the purchase invoice. Therefore, it qualifies to be recognized as property, plant and equipment (PPE) . Spare parts are usually treated as or loss as and when consumed. inventory and recognized in the profit
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    Example 3: Small spare parts for machinery are purchased at a cost of Rs. 1.25 lakhs and stored by the entity. These are regularly issued whenever required by the maintenance department. The balance of the spares on hand at the Balance 70, 000. The consumed part of R5. 55, 0005houId be Statement of Profit and loss. The balance of R5. forward as in ventory it accounting should be as Sheet date was worth Rs. shown as an expense in the 70, 0005houId be carried per AS—2. Major spare parts and standby equipment are treated as property, plant and equipment when they are expected to be used over more than one period. They are included in non—current assets from the date the cost is incurred. Example 4: Induga Ltd purchased an item of machinery for R5. 2 lakhs, together with major spare parts worth Rs. 25, 000 not readily available in the market. It should recognise the total of Rs. 2.25 lakhs and P PE Those which can be used exclusively with an item of P PE are accounted for as PPE. Example 5: Z Ltd purchases a 'made to order' machine for R5. 5 lakhs and alongside also purchased spare parts worth Rs. 60, 000 which can be used only on this machinery and not any machinery elsewhere. Advise Z Ltd on the accounting treatment of spare parts . Along with the cost of machinery, the cost of spares also, should be capitalized i.e., recognized in the carrying value, thus, the total carrying value is Rs. 5.60 lakhs Any expenditure incurred that meets these recognition criteria must be accounted for as an asset (P PE) . The Standard makes reference to individually insignificant items that can be aggregated. However, very often, in practice, entities adopt an accounting policy to expense items that are below a predetermined minimum level in order to avoid unc Iue cost in maintaining the relevant records, which includes tracking the whereabouts of the asset. The definition and recognition criteria can also be applied to spare pa rts, although these are often carried as inventory and expensed as and when utilized. However, major spare parts are usually recognized P PE when an entity expects to use them during more than one period. Safety and environmental equipment 0 The acquisition of such property, plant and equipment, although not directly increasing the future economic benefits of any particular existing item of P PE, may be necessary for an entity to obtain the future economic benefits from its other assets. 0 Such items of P PE qualify for recognition as assets because they enable an entity to derive future economic benefits from related assets in excess of what could be derived had those items not been acquired. For example, a chemical manufacturer may install new chemical handling processes to comply with environmental requirements for the production and storage of dangerous chemicals; related plant enhancements are recognized
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    as an asset because without them the entity is unable to manufacture and sell chemicals. 0 However, the resulting carrying amount of such an asset and related assets is reviewed for impairment in accordance with AS—28, Impairment of Assets . END OF PART 2


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