Enquiry:

It has been noted that in case of a textile Company, building on freehold land, generators and electric installations relating to Power House were revalued while assets of the same class (i.e. building on freehold land, electric installations & plant and machinery) not belonging to Power House were stated at historical costs.

The Company’s auditor is of the opinion that Power House which included building, electrical installations do constitute a separate class of assets as their use is distinct to other assets. However, in our opinion para 37 of lAS 16 “Property, plant and Equipment” specifically describes separate class of assets and for constituting a separate class of assets the asset must be of a similar nature and use and for the subject case, the stated assets of Power House are not of a similar nature but use. Hence group of assets forming part of Power House do not constitute a separate class of assets.

Hence selective revaluation done by the Company which resulted in reporting of amounts in the financial statements that are a mixture of costs and their values as at different dates is in contravention with the requirements of IAS-16. Specific paras of lAS 16 are stated below for ready reference.

Para 36 of the International Accounting Standard 16 “Property, Plant and Equipment” (“IAS-16”) states that:
“ If an item of property, plant & equipment is revalued, the entire class of property, plant & equipment to which that assets belongs shall be revalued” (Emphasis Added)

Para 37 of the IAS-l6 states that:

“A class of property, plant and equipment is a grouping of assets of a similar nature and use in an entity’s operations. 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; and
(h) office equipment. ” (Emphasis Added)

AND WHEREAS, para 38 of the IAS-16 states that:

“The items within a class of property, plant and equipment are revalued simultaneously to avoid selective revaluation of assets and the reporting to amounts in the financial statements that are a mixture of costs and values as at different dates. However, a class of assets may be revalued on a rolling basis provided revaluation of the class of assets is completed within a short period and provided the revaluations are kept up to date” (Emphasis Added)

In view of the above, ICAP is requested to provide technical advice on the above stated matter.

Opinion:

The Committee considered your enquiry and is of the view that determining the class of assets according to their nature and use is an area involving significant estimates and judgment. There may be instances where management intends to put assets of similar nature to dis-similar use. Accordingly, such assets may be grouped as separate class of assets.

However, in the instant case, the Committee could not reach to a conclusion that the assets comprising land, building and power generators forming part of Power House do not constitute a separate class of assets as all facts which may have been considered by the management in considering the assets as separate class are not available with the Committee.

(September 05, 2014)