Property, Plant and Equipment under Companies (Auditor’s Report) Order [CARO]

Table of Contents

1. Clause 3(i)(a)(A), 3(i)(b) and 3(i)(d) of CARO, 2020
2. Systematic Analysis of Clause 3(i)(a)(A), 3(i)(b) and 3(i)(d) of CARO
3. Verification and Reporting Requirements of Clause 3(i)(a)(A), Clause 3(i)(b) and Clause 3(i)(d)
4. Interpretation of the requirements of Clause 3(i)(a)(A)/3(i)(b)/3(i)(d)

Check out Taxmann's CARO with Corporate Practices which provides a para-wise commentary on Companies (Auditor's Report) Order (CARO). It serves as a comprehensive guide for Auditors, emphasizing CARO's 2020 applicability and reporting for standalone and consolidated financial statements. Additionally, it provides clause-wise analysis, FAQs, and case studies.

1. Clause 3(i)(a)(A), 3(i)(b) and 3(i)(d) of CARO, 2020

(i)(a) (A) whether the company is maintaining proper records showing full particulars, including quantitative details and situation of Property, Plant and Equipment;

(B) whether the company is maintaining proper records showing full particulars of intangible assets;

(b)  Whether these Property, Plant and Equipment have been physically verified by the management at reasonable intervals; whether any material discrepancies were noticed on such verification and if so, whether the same have been properly dealt with in the books of account;

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(d)  whether the company has revalued its Property, Plant and Equipment (including Right of Use assets) or intangible assets or both during the year and, if so, whether the revaluation is based on the valuation by a Registered Valuer; specify the amount of change, if change is 10% or more in the aggregate of the net carrying value of each class of Property, Plant and Equipment or intangible assets;

2. Systematic Analysis of Clause 3(i)(a)(A), 3(i)(b) and 3(i)(d) of CARO

(A) Matters of fact to be reported

(a) whether company is maintaining records of property, plant and equipment(PPE) items showing full particulars including quantitative details and situation of PPE items [Clause 3(i)(a)(A)]

(b) whether the management have physically verified these PPE items [Clause 3(i)(b)]?

(c) whether any discrepancies have been noticed on physical verification? [Clause 3(i)(b)]

(d) whether

• • • the company has revalued its PPE (including Right of Use assets) or intangible assets or both during the year and,
    • If so,
      • Whether revaluation is based on the valuation by a registered valuer;
      • Specify the amount of change, if change is 10% or more in the aggregate of the net carrying value of each class of PPE or intangible assets [Clause 3(i)(d)]

(B) Matters of opinion to be reported

(a) Whether the records of PPE in (A)(a) above are ‘proper records’? [Clause 3(i)(a)(A)]

(b) Whether the intervals of physical verification in (A)(b) above are ‘reasonable intervals’ [Clause 3(i)(b)]

(c) Whether the discrepancies in (A)(c) above are ‘material’ discrepancies? If so, whether the same have been properly dealt with in the books of account [Clause 3(i)(b)]

(C) Data to be reported

If company has revalued its PPE (including Right of Use assets) or intangible assets or both during the year, specify the amount of change, if change is 10% or more in the aggregate of the net carrying value of each class of PPE or intangible assets.

The auditor must cross check the amount of change in net carrying value of PPE/intangible assets due to revaluation (where change is 10% or more in aggregate value of each class of PPE/intangible assets) with amount of change in the “reconciliation of the gross and net carrying amounts of each class of assets at the beginning and end of the reporting period” disclosed in notes to accounts in accordance with Division I, Division II and Division III of Schedule III. The requirements regarding disclosure of “reconciliation of the gross and net carrying amounts of each class of assets at the beginning and end of the reporting period” in respect PPE/tangible assets” in notes to accounts in Division I, Division II and Division III have been substituted by Notification No. 207(E), dated 24.03.2021 with effect from 01.04.2021 so as to require distinct disclosure in the reconciliation of amount of change due to revaluation (if change is 10% or more in the aggregate of the net carrying value of each class of Property, Plant and Equipment/intangible assets)

(D) Inter-Linkages between Clauses 3(i)(a)(A) and 3(i)(b) of CARO

Clause 3(i)(a)(A) is inter-linked with Clause 3(i)(b). If Company is not maintaining proper records of PPE, then it is not possible for auditor to comment whether any material discrepancies were noticed on physical verification of PPE by management and whether the same have been properly dealt with in books of account.

(E) Linkages with other reporting requirements of section 143 of Companies Act, 2013

• Section 143(3)(i)
• Section 143(3)(j) read with Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014
• Section 143(3)(e).

(F) Corresponding disclosure requirements of Schedule III

Para 6Y (ii). I.I. Notes. GIPBS,

Para 6L (iii) I.I. Notes. GIPBS,

Para 6L (iv) II.I. Notes. GIPBS,

Para (WB) (iii). III. I. Notes. GIPBS and

Para (WB) (iv) III. I. Notes GIPBS of amended Schedule III.

(G) Linkages to tax audit report in Form No. 3CD

Clause 18 of Form No. 3CD.

(H) Relevant Professional Pronouncements

Guidance Note on Audit of Plant, Property and Equipment issued by ICAI, Revised 2022 Guidance Note issued by ICAI.

3. Verification and Reporting Requirements of Clause 3(i)(a)(A), Clause 3(i)(b) and Clause 3(i)(d)

3.1 Matters required to be verified and reported as per Clause 3(i)(a)(A)

Clause 3(i)(a)(A) requires auditor to verify and report whether the company is maintaining proper records showing full particulars, including quantitative details and situation of Property, Plant and Equipment.

3.2 Matters required to be verified and reported as per Clause 3(i)(b)

Clause 3(i)(a)(A) requires auditor to verify and report:

(a) whether Property, Plant and Equipment have been physically verified by the management;

(b) whether the physical verification by Management has been carried out at reasonable intervals;

(c) whether any material discrepancies were noticed on such verification and

(d) if answer to (c) above is “yes”, whether the same have been properly dealt with in the books of account.

Auditor must verify all four aspects as above. His comment must cover all the four aspects as above. If not, reporting would be incomplete and would not be in accordance with Clause 3(i)(b).

For example, a comment in CARO report on Clause 3(i)(b) is incomplete if it mentions that physical verification of PPE has been carried out by Management but does not mention whether the verification is at reasonable intervals. Merely mentioning the periodicity of verification (all items covered once in 3 years according to a program or all items verified once in 2 years) will not suffice. Auditor must clearly and categorically opine whether the stated periodici- ty is reasonable in his opinion or not having regard to the size of the company and the nature of the assets.

Clause 3(i)(a)(A) is inter-linked with Clause 3(i)(b). If Company is not maintaining proper records of PPE, then it is not possible for auditor to comment whether any material discrepancies were noticed on physical verification of PPE by management and whether the same have been properly dealt with in books of account.

3.3 Matters required to be verified and reported as per Clause 3(i)(d)

Clause 3(i)(d) requires the auditor to verify and report:

(a) whether the company has revalued its Property, Plant and Equipment (including Right of Use assets) or intangible assets or both during the year and,

(b) if so,

• • whether the revaluation is based on the valuation by a Registered Valuer;
  • specify the amount of change, if change is 10% or more in the aggregate of the net carrying value of each class of Property, Plant and Equipment or intangible assets;

3.4 Applicability/non-applicability of requirements of Clause 3(i) (a)(A) and Clause 3(i)(b)

Clauses 3(i)(a)(A) and 3(i)(b) will not apply where Company has no PPE or Capital Work-in-Progress or Investment Properties or held for sale assets or ROU assets. ICAI has clarified that these clauses will apply to Investment Properties, ROU assets and held for sale assets. CWIP is part of PPE shown on the face of the balance sheet.

3.5 Applicability/non-applicability of requirements of Clause 3(i)(d)

Clause 3(i)(d) will not apply in the following situations:

1. Company has no PPE or Capital Work-in-Progress or Investment Properties or Held for sale assets or ROU assets; and
2. Company has not revalued any of these assets during the year.

3.6 Comparison of reporting requirements under Clause 3(i)(a)/(b) PPE Assets and Clause 3(ii) Inventories

A comparison of the reporting requirements of Clause 3(i) and Clause 3(ii) is given in the Table below:

4. Interpretation of the requirements of Clause 3(i)(a)(A)/3(i)(b)/3(i)(d)

4.1 Property, plant and equipment

(AS)10 Property, Plant and Equipment defines the term ‘Property, Plant and Equipment’ as under:

Property, plant and equipment are tangible items that:

(a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and

(b) are expected to be used during more than a period of twelve months.

Ind AS 16 Property, Plant and Equipment defines the term ‘Property, Plant and Equipment’ as under:

Property, plant and equipment are tangible items that:

(a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and

(b) are expected to be used during more than one period.

Thus, intangible assets as defined in (AS) 26 or Ind AS 38 are not covered under PPE. PPE covers only tangible assets.

4.2 Whether ‘PPE’ covers ROU assets, investment properties and held for sale assets

According to the Revised 2022 Guidance Note, the following items are also to be considered for reporting under Clause 3(i)(a)(A) though these items are covered by AS/Ind AS other than AS10/Ind AS 16:

• Right of use (ROU) assets covered under Ind AS 116, “Leases” where the auditee-company, under a lease agreement, obtains the right to use an asset.
• Investment property (as defined under Ind AS 40, Investment Property) and
• Non-current assets held for sale (as defined under Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations)

A class of property, plant and equipment is a grouping of assets of a similar nature and use in operations of an enterprise. The following are examples of separate classes:

(a) land;

(b) land and buildings;

(c) machinery;

(d) ships;

(e) aircraft;

(f) motor vehicles;

(g) furniture and fixtures;

(h) office equipment; and

(i) bearer plants.

4.3 Distinction between PPE and Fixed Assets

The term “Fixed Assets” covers both “tangible items” (PPE) as well as “intangible assets”.

4.4 PPE covers ‘bearer plants’ also

The term ‘Property, Plant and Equipment’ covers bearer plants also.

Bearer plant is a plant that

(a) is used in the production or supply of agricultural produce;

(b) is expected to bear produce for more than a period of twelve months; and

(c) has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.

The following are not bearer plants:

(i) plants cultivated to be harvested as agricultural produce (for example, trees grown for use as lumber);

(ii) 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

(iii) 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.

Bearer plants are accounted for in the same way as self-constructed items of property, plant and equipment before they are in the location and condition necessary to be capable of operating in the manner intended by management. Consequently, references to ‘construction’ in this Standard should be read as covering activities that are necessary to cultivate the bearer plants before they are in the location and condition necessary to be capable of operating in the manner intended by management.

4.5 PPE acquired under finance/operating lease

PPE acquired under financial lease are covered [See para 34(c) of the Guidance Note on CARO, 2016] but not assets acquired under operating lease. (As per AS-19, assets acquired under operating lease will not be recognized as assets in the books of account).

4.6 Is project under sale PPE or current asset?

The Accounting Standards Board (ASB) has opined that project under sale which was originally treated as a PPE would continue to be so treated even if it is under sale and will not, therefore, be classified as a current asset. Howev- er, if an enterprise is a dealer of projects, then the project under sale would be an inventory and will be classified as a current asset and would be covered by clause 3(ii)(a) of the Order rather than clause 3(i)(a)(A)/clause 3(i)(b)/clause 3(i)(d).

4.7 Whether ‘PPE’ includes CWIP

The Revised 2022 Guidance Note also does not clarify whether requirements of CARO 2020 applicable to PPE also apply to CWIP Schedule III sub-head for disclosure on the face of the Balance Sheet under ‘Non-current Assets’ is ‘Plant, Property and Equipment including Intangible Assets’. Under this sub- head, PPE, Intangible Assets, CWIP and Intangible Assets under development are the separate liar items.

Thus, in view of the above, ‘PPE’ should be taken to include CWIP also.

Schedule III requires the following disclosures for CWIP under ARI disclosures in notes to accounts:

• Ageing Schedule; and
• Completion Schedule for CWIP where there is time-over run/cost over-run.

Management will not be able to make these disclosures without proper physical verification. Therefore, it appears that the requirements in clause 3(i)(a) (A), clause 3(i)(b) and clause 3(i)(d) shall apply to CWIP also. This is what follows from a purposive interpretation.

4.8 If any PPE item has been obtained free of cost as a Government grant, are Clauses 3(i)(a)(A), 3(i)(b) and 3(i)(d) applicable to it?

Yes.

4.9 Clause 3(i)(a)(A) of the Order does not require the auditor to comment on records maintained for intangible assets

Clause 3(i)(a)(A) of the Order requires the auditor to report

“whether the company is maintaining proper records showing full particulars, including quantitative details and situation of Property, Plant and Equipment”.

As such, the requirement as regards proper records in Clause 3(i)(a)(A) of the Order is only with reference to records for tangible assets.

Clause 3(i)(a)(A) of the Order does not require the auditor to comment on records maintained for intangible assets. Requirement is to report only on records maintained for PPE i.e. tangible assets. The requirement to report on records for intangible assets is separately contained in another distinct clause of the Order – Clause 3(i)(a)(B)

4.10 What is meant by ‘proper records’?

Clause 3(i)(a)(A) provides no guidance as to what constitutes proper records of PPE assets beyond stating that PPE records should contain full particulars including quantitative details and situation of PPE assets. Therefore, what constitutes “proper records” is a matter of matter of professional judgment made by the auditor after considering the facts and circumstances of each case. The purpose of maintaining proper records of PPE items is to physically verify them and compare the results of the physical verification with PPE items in hand as per records. This enables exercise of proper internal control over the PPE items. Whether the records are proper or not will have to be judged from whether or not the above objective is facilitated. Also, the records maintained should ensure that details as regards revaluation of PPE items which are required to be reported by auditor under Clause 3(i)(d) are readily available.

Certain general guidelines on what constitutes proper records, can be laid down based on the Order as well as the Revised 2022 Guidance Note on CARO issued by ICAI. These are as under:

(1) The records should contain full particulars about the PPE items including —

• • • Sufficient description of the PPE (colour, model, make, etc.) for easy identification
    • Classification i.e., relevant account head under which it is shown (e.g. land, land and buildings, machinery, ships, aircrafts, motor vehicles, furniture and fixtures, office equipment, bearer plants)
    • Situation (i.e., location)
    • Quantity, i.e., number of units
    • Original cost
    • Year of purchase [It would be advisable that the PPE register should indicate date of purchase also (from income-tax point of view)]
    • Date the asset became available for use [It would be advisable if PPE register indicates ‘date put to use’ (from income-tax point of view)]
    • Useful Life
    • Residual Value
    • Component-wise breakup (wherever applicable)
    • Adjustment for revaluation or for any increase or decrease in cost;
    • Date of revaluation, if any;
    • Details of Registered Valuer’s report if revaluation based on it;
    • Rate(s)/basis of depreciation, as the case may be;
    • Depreciation for the current year;
    • Accumulated depreciation;
    • Particulars regarding impairment;
    • Particulars regarding sale, discarding, demolition, destruction, etc.

(2) The records should contain the abovementioned particulars in respect of all items of PPE, whether self-financed or right to use assets (See Ind AS 116) acquired through finance lease.

(3) These records should also contain particulars in respect of:

• • • items of PPE that have been fully depreciated;
    • items retired from active use and held for disposal;
    • items that have been fully impaired during the period covered by the audit report; and
    • items that have been fully depreciated/written off in the year of purchase/acquisition itself.

(4) The aggregate original cost, depreciation to date, and impairment loss, if any, as per these records under individual heads should reconcile with the figures shown in the books of account.

(5) Situation of PPE has to be shown in PPE register to facilitate physical verification possible.

(6) Where location of certain classes of PPE items may keep changing, for example, construction equipment which has to be moved to sites, it would not be possible to show location in PPE register. In such cases, it is sufficient if record of movement/custody of the equipment is maintained.

(7) Where assets like furniture, Air-conditioner, car etc. are located in the residential premises of members of the staff (especially where these are provided as perquisite), name & designation of the person who has custody of the asset for the time being should be indicated in the PPE register.

(8) Generally, the quantity, value and situation have to be recorded item-wise. However, assets of small individual value, e.g., chairs, tables, etc. may be conveniently grouped for purposes of entry in the PPE register.

(9) For assets having same useful life, it may not be necessary to indicate the accumulated depreciation for each item; instead, depreciation for the group as a whole may be shown.

(10) Quantitative details of PPE may be maintained on the following lines:

(a) Land can be identified by survey numbers and by conveyance deeds.

(b) Leaseholds can be identified by individual leases.

(c) Buildings may be classified into:

• • • • factory buildings,
      • office buildings,
      • township buildings,
      • service buildings (like water works), etc.

The above may be further reclassified as follows:

• • • • Factory buildings into individual buildings which house a manufacturing unit or a plant or sub-plant.
      • Service buildings according to nature of service and location.
      • Township buildings into individual units or into groups of units taking into consideration the type of construction, the location and the year of construction. For example, if a company’s township has four categories of quarters, e.g., A, B, C and D, the PPE register may not record each individual quarter but may have a single entry for all ‘A’ type quarters constructed in a particular year and located in a particular area and show only the number of quarters covered by the entry.

(d) Railway sidings can be identified by length and location.

(e) Plant and machinery may be sub-divided into immovable and movable.

(f) For movable machinery, a separate record may be kept for each individual item. Movable machinery would include, for this purpose, items of plant which are for the moment fixed to the shop-floor but which can be moved, e.g., machine tools.

(g) In respect of immovable plant and machinery, a sub-division can be made according to the process, a plant for each separate process being considered as a separate identifiable unit. A further sub-division may be useful when within a process, there are plants which are capable of working independently of each other. The degree of sub-division depends upon the circumstances of each case bearing in mind the objectives of sub-division, namely, the determination of individual cost and the facility for physical verification and componentisation [See Schedule II to Companies Act, 2013]

(h) Furniture and fittings and assets like office appliances, air-conditioners, water coolers, etc., consist of individual items which can be easily identified. However, there is a practical difficulty as there may be numerous items and these may be moved from one location to another. Therefore, individual identification may be made for high-value items and identification by groups may be made for other items.

(i) Development of property is an asset head which can be easily sub-divided according to the buildings or plant for which the development work is undertaken.

(j) Vehicles can be identified by reference to the registration books.

(11) Details regarding allocation of cost over identified units of assets may not be are available in some cases. In such cases, identification would have to be made by an analysis of the purchases and the disposals of the preceding years.

(12) There may be practical difficulties in identifying the cost of each individual asset such as:

(i) non-availability of records for some of the years;

(ii) incomplete description of the asset in the records;

(iii) details of disposals not properly recorded;

(iv) subsequent additions to an existing asset may have been shown as a separate asset;

(v) a single figure of cost may be assigned to a number of assets which have to be separately identified;

(vi) assets purchased for one department may have been moved to other departments, and so on.

In such situations, the management, in consultation with the auditor, should make the best effort possible under the circumstances to identify the cost of each asset by making reasonable assumptions or approxima- tions where necessary. For example, when details of disposals are not available, it may be assumed that sale is on FIFO basis (i.e. the asset sold is the asset which was acquired earliest in point of time was sold). Similarly, when the individual cost of a large number of small items is not available, one can estimate the cost of each item and pro-rate the total cost in the proportion of the estimated cost of the item to the aggregate estimated cost.

(13) Initial identification of assets should be done by persons who are famil- iar with them, e.g., the maintenance staff. At the point of identification, a code number may be affixed on the asset which would give sufficient details for future identification.

(14) The initial identification of assets will often reveal a number of discrep- ancies between the assets as verified and the details compiled from the records. This may be on account of the features already considered in (11) above. This may also be due to the fact that assets might have been scrapped in earlier years but proper documentation may not have been made or that assets may have been broken up into smaller units or amal- gamated into larger units or otherwise modified without changing the asset records. The degree of further inquiry necessary to reconcile these discrepancies would depend upon the nature of the asset, its cost, the age of the asset, the extent of accounting or other records available and other relevant factors.

However, the concept of materiality should be borne in mind in making these further inquiries, greater attention being devoted to assets which are of large value or of relatively recent purchase. Any adjustments that finally have to be made should be properly documented. The auditor should request the appropriate level of management to carry out neces- sary adjustments.

(15) Non-maintenance of PPE register by the company is a serious documen- tation and control lacuna. This should be mentioned by the auditor while reporting under this clause.

(16) In view of sub-clause (c) of clause 3(i) [See Chapter 4], details of title deeds of PPE which are immovable properties disclosed in the financial statements of the company should be entered. Also, details to regarding custody of title deeds should be mentioned.