Ind AS 16 'Property, Plant and Equipment' 17. On 1 st October, 20X1, XY Ltd. completed the construction of a power generating facility. The total…
CA Final · Financial Reporting · RTP · November 2024
Ind AS 16 'Property, Plant and Equipment' 17. On 1 st October, 20X1, XY Ltd. completed the construction of a power generating facility. The total construction cost was 2 crore. The facility was capable of being used from 1 st October, 20X1 but XY Ltd. did not bring the facility into use until 1 st January, 20X2. The estimated useful life of the facility at 1 st October, 20X1 was 40 years. Under legal regulations in the jurisdiction in which XY Ltd. operates, there are no requirements to restore the land on which power generating facilities stand to its original state at the end of the useful life of the facility. However, XY Ltd. has a reputation for conducting its business in an environmentally friendly way and has previously chosen to restore similar land even in the absence of such legal requirements. The directors of XY Ltd. estimated that the cost of restoring the land in 40 years' time (based on prices prevailing at that time) would be 1 crore. A relevant annual discount rate to use in any discounting calculations is 5%. When the annual discount rate is 5%, the present value of 1receivable in 40 years' time is approximately 0.142. Explain and show how the above event would be reported in the financial statements of XY Ltd. for the year ended 31 st March, 20X1. Ignore comments on potential future reclassification issues.
Suggested Answer and Working Notes:
The facility is depreciated from the date it is ready for use, rather than when it actually starts being used. In this case, then, the facility is depreciated from 1 st October, 20X1. Although XY Ltd. has no legal obligation to restore the piece of land, it does have a constructive obligation, based on its past practice and policies. The amount of the obligation will be - 14,20,000 being the present value of the anticipated future restoration expenditure (1,00,00,000 x 0.142). This will be recognised as a provision under non-current liabilities in the balance sheet of XY Ltd. at 31 st March, 20X2. As time passes the discounted amount unwinds. The unwinding of the discount for the year ended 31 st March, 20X2 will be - 35,500 (14,20,000 x 5% x 6/12). The unwinding of the discount will be shown as a finance cost in the statement of profit and loss and the closing provision will be - 14,55,500 (14,20,000 + 35,500). The initial amount of the provision is included in the carrying amount of the non-current asset, which becomes - 2,14,20,000 (2,00,00,000 + 14,20,000). The depreciation charge in profit or loss for the year ended 31 st March, 20X2 is 2,67,750 (2,14,20,000 x 1/40 x 6/12). The closing balance included in non-current assets will be - 2,11,52,250 (2,14,20,000 – 2,67,750).
Topics: Ind AS 16
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