Other Comprehensive Income with regard to IndAS 16

CA Vineet Singhal

Extract from IndAS text

IndAS 1

Other comprehensive income comprises items of income and expense (including reclassification adjustments) that are not recognized in profit or loss as required or permitted by other Ind ASs.

The components of other comprehensive income include:

(a) changes in revaluation surplus (see Ind AS 16 Property, Plant and Equipmentand Ind AS 38) Intangible Assets);

Author’s Comments

Lets Discuss Significance of OCI in IndAS 16 Property , Plant & Equipment (1^st part of Line Item of OCI) , in a simple find tool search “OCI” has been used at 8 instances in IndAS 16

Extract from IndAS text

Ind AS 16 –

Measurement after recognition

29. An entity shall choose either the cost model in paragraph 30 or  the  revaluation  model  in  paragraph  31  as  its  accounting  policy and shall apply that policy to an entire class of property, plant and equipment

Authors’s Comments : IndAS 16 gives an option for following Cost Model or Revaluation Model for a class of asset ,

Extract from IndAS text

Revaluation  model  in  paragraph  31

After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period

Para 39

If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss

Author’s Comments

Upward Revaluation

Increase will be recognized in OCI , subject to previous revaluation decreases through P/L .

Now what is “accumulated in equity”

OCI is a line item for Statement of changes in equity

Extract from IndAS text

Para 40

If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. However, the decrease shall be recognised in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset. The decrease recognised in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus.

Author’s Comments

Downward Revaluation

Decrease will be recognized in P/L , subject to previous revaluation increases through OCI .

Extract from IndAS text

Appendix A

Changes in Existing Decommissioning, Restoration and Similar  liabilities

Under Ind AS 16, the cost of an item of property, plant and equipment includes the initial estimate of the costs of dismantling/removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. Ind AS 37 contains requirements on how to measure decommissioning, restoration and similar liabilities.

Author’s Comments :

Decommissioning cost is to be estimated and valued while valuing the asset , (Refer Example 1)

Extract from IndAS text

Issue

This Appendix addresses how the effect of the following events that change the measurement of an existing decommissioning, restoration or similar liability should be accounted for:

a) a change in the estimated outflow of resources embodying economic benefits (e.g. cash flows) required to settle the obligation

b) a change in the current market-based discount rate as defined in paragraph 47 of Ind AS 37 (this includes changes in the time value of money and the risks specific to the liability); and

c) an increase that reflects the passage of time (also referred to as the unwinding of the discount)

Author’s Comments :

Three cases are mentioned above

Change in cost of decommissionChange in discounting rateUnwinding of discount-periodic unwinding of discount is charged to P&l as finance cost(the discount that is already applied to present value decrease with passage of time)

Extract from IndAS text

Accounting Principles , Para 6

If the related asset is measured using the revaluation model:

(a) changes in the liability alter the revaluation surplus or deficit previously recognized on that asset, so that:

(i) a decrease in the liability shall (subject to (b)) be recognized in other comprehensive income and increase the revaluation surplus within equity, except that it shall be recognised in profit or loss to the extent that it reverses a revaluation deficit on the asset that was previously recognised in profit or loss;

Point (b) taken up with point (i) for better understanding

(b) In the event that a decrease in the liability exceeds the carrying amount that would have been recognized had the asset been carried under the cost model, the excess shall be recognized immediately in profit or loss

Author’s Comments :

A decrease in liability will generally be recognized in  OCI , subject to any previous decrease in value of asset through P/L

However , OCI can only take up amount limited to changes over and above had asset been valued at cost

Difference will be taken to P/L

(Refer example 2)

Extract from IndAS text

(ii) an increase in the liability shall be recognized in profit or loss, except that it shall be recognized in other comprehensive income and reduce the revaluation surplus within equity to the extent of any credit balance existing in the revaluation surplus in respect of that asset.

Author’s Comments :

An increase in liability will generally be recognized in  P/L , subject to any previous increase in value of asset through OCI

Extract from IndAS text

(b). Already taken up above

(c) a change in the liability is an indication that the asset may have to be revalued in order to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. Any such revaluation shall be taken into account in determining the amounts to be recognized in profit or loss or in other comprehensive income under (a). If a revaluation is necessary, all assets of that class shall be revalued

Author’s Comments :

If Fair value of the asset and the carrying amount are likely to differ materially , then also , Change in liablility will be taken to P/L or OCI as already discussed

Extract from IndAS text

 (d) Ind AS 1 requires disclosure in the statement of profit and loss of each component of other comprehensive income or expense. In complying with this requirement, the change in the revaluation surplus arising from a change in the liability shall be separately identified and disclosed as such.

Author’s Comments :

Entry to OCI due to change in decommissioning has to be shown separately in OCI

Extract from IndAS text

Disclosure

73 The financial statements shall disclose, for each class of property, plant and equipment:

(iv) increases or decreases resulting from revaluations under

paragraphs 31, 39 and 40 and from impairment losses recognised or reversed in other comprehensive income in accordance with Ind AS 36;

Author’s Comments :

Disclosure should be made for recognition or reversal of revaluation through OCI

Example 1

Consider an example of a mine . One will have to dig the mine deep enough so that the mine is ready for production and ore can be extracted . Further Digging will also take place as the ore is continuously extracted . Whilst in the first case , the site restoration obligation will be capitalized as PPE , in the latter case the site restoration obligation will form part of the cost of producing inventories

Example 2

Let us assume that an asset’s revalued amount is INR 1000 and there is reduction in the liability related to this asset by INR 600 , if the entity would have followed the cost model , the carrying value of the asset (after deprecation) would have been only INR 400 , In this case , the entity will adjust 400 towards reduction of liability from the revaluation surplus and the remaining 200 will be recognized as income in P & L.