Background:
The Institute of Chartered Accountants of India (ICAI) has repeatedly observed instances where financial reporting disclosures fall short of meeting statutory requirements or fail to offer stakeholders a comprehensive depiction of a company’s financial position. Through diligent scrutiny, several deficiencies in reporting practices related to Property Plant and Equipment under IND AS 16 have been identified. Recognizing these shortcomings is crucial for preparers and presenters to rectify and improve their reporting standards. By addressing these commonly observed pitfalls, companies can ensure transparency, compliance, and accuracy in their financial disclosures:
Shortcomings: IND AS 16 “Property Plant and Equipment”
| S. No. | Observation(s) | Remarks |
| 1 | It was observed that as per IND AS 16 “Property, Plant and Equipment”, Accounting policy for recognition and de-recognition criteria of Property, plant, equipment is not disclosed in material accounting policies. | As per Indian Accounting Standard (IND AS) 1 mandates the disclosure of material accounting policies, which are those policies that can reasonably be expected to influence decisions made by users of financial statements. Specifically, regarding Property, Plant, and Equipment (PPE), an entity should disclose its recognition and derecognition criteria as per IND AS 16 ‘Property, Plant & Equipment’. Para 7 outlines the recognition criteria for PPE, stating that the cost of an item of PPE should be recognized as an asset if it is probable that future economic benefits associated with the item will flow to the entity, and if the cost of the item can be measured reliably. Para 67 specifies the derecognition criteria for PPE, stating that the carrying amount of an item of PPE should be derecognized either upon disposal or when no future economic benefits are expected from its use or disposal. |
| 2 | The company was found to have used the term “tangible assets” instead of the correct nomenclature “Property, Plant, and Equipment,” as suggested by Ind AS 1, Ind AS 16, and Division II of Ind AS Schedule III to the Companies Act, 2013. Additionally, in another instance, the company referred to “fixed assets” instead of “Property, Plant, and Equipment | Ind As 16, Property, Plant and Equipment to be read with Ind AS 1, Presentation of financial statements and Format of Balance Sheet given under Division -II Ind AS Schedule III to of the Companies Act, 2013 that states the balance sheet shall include the line items that present the following amounts: ASSETS 1.Non-Current Assets a) Property, Plant and Equipment’s |
| 3 | In certain cases, the accounting policy stated that certain expenses such as indirect costs / other incidental expenses which were incurred during construction period, were included in the amounts capitalized. | Reference in this regard is made to the requirements of IND AS 16, which states: “The cost of an item of property, plant and equipment comprises: its purchase price and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.” Consequently, it needs to be elaborated in the accounting policy as to whether the indirect costs were in fact directly attributable to construction of the asset |
| SW Remarks: The discrepancies highlighted underscore the importance of meticulous adherence to accounting standards such as IND AS 16. Clear disclosure of recognition criteria, accurate nomenclature, and explicit accounting policies regarding indirect costs are essential for maintaining transparency and trust in financial reporting practices. |
Umang Mittal, Audit Associate, SW
