Classification of PPE under Refurbishment, its Depreciation & Impairment Thereon
- Blog|News|Account & Audit|
- 2 Min Read
- By Taxmann
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- Last Updated on 10 July, 2023
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A Ltd. is engaged in the manufacturing of urea and other complex fertilizers. It has two production plants which are idle for past 15 years. The management of the company planned to refurbish the said two plants so as to bring viability to the said plants. Management withdrew the said assets from Property Plant & Equipment (PPE) and classified them under Capital Work In Progress (CWIP) for the current year and ceased charging depreciation on the said plants from the beginning of the year. The contention of management is that the carrying amount of an item of property, plant and equipment shall be derecognized either on disposal or when no future economic benefits are expected from its use or disposal. The said assets are not in use and does not generate any economic benefits for the company, it is rightly removed from PPE.
However, the auditor was not convinced with accounting treatment of company, As per Auditor, Ind AS 16, Property Plant and Equipment, does not allow cessation of depreciation when PPE is idle or retired from use for sale. Further, there is no provision of Ind AS that allows the transfer of PPE to CWIP. Auditors believe that this accounting practice by A Ltd. has resulted in an understatement of PPE and depreciation with a corresponding overstatement of CWIP.
The company sought the opinion of Expert Advisory Committee (EAC) of ICAI on the accounting treatment followed by the Company with reference to classification from PPE to CWIP and cessation of depreciation.
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