Ind AS 16 requires an item of property, plant and equipment to be recognised at cost — including its purchase price, directly attributable costs of bringing it to working condition, and the initial estimate of decommissioning costs where relevant — and then measured subsequently using either the cost model or the revaluation model, applied consistently. The standard's most commonly missed requirement is componentization: where an asset's significant parts have materially different useful lives, each part has to be depreciated separately, rather than depreciating the whole asset as a single unit at one blended rate.
What gets capitalised into cost
| Capitalised | Expensed as incurred |
|---|---|
| Purchase price, import duties, non-refundable taxes | General administrative overheads |
| Costs of site preparation, installation and assembly | Costs of relocating or reorganising operations |
| Professional fees directly attributable to bringing the asset to use | Costs incurred after the asset is capable of operating as intended, even before it's actually brought into use |
| Initial estimate of dismantling/restoration costs, where an obligation exists | Costs of opening a new facility, or introducing a new product (even if related to using the new asset) |
Componentization, worked
A manufacturing building might have a shell with a 40-year useful life, a roof requiring replacement every 15 years, and electrical/HVAC systems with a 20-year life. Depreciating the whole building at a single blended rate based on its overall expected life understates the depreciation charge in years the roof and systems are actually being consumed faster than the shell, and overstates the asset's carrying value once the roof is replaced but the old roof's remaining book value was never separately written off. Componentization requires splitting the original cost across these parts at recognition, so each depreciates on its own schedule.
A fixed asset register showing a single blended useful life for a building with components that clearly wear out on different schedules has not applied Ind AS 16's componentization requirement — this is a compliance gap worth raising even where the aggregate depreciation charge doesn't look obviously wrong on its face.
Gain or loss on disposal
- 01Derecognise the asset's carrying amountNet book value at the date of disposal, not original cost.
- 02Compare net disposal proceeds to that carrying amountThe difference is recognised in profit or loss as a gain or loss on disposal — never as revenue, and never netted against the cost of a replacement asset.
- 03Check the disposal date is correctly identifiedThe date control actually transfers to the buyer, consistent with the same risk-and-reward logic used for revenue recognition generally, not simply the date an invoice was raised.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Fixed assets & capexFixed asset register audit: completeness and accuracy checksWhat a fixed asset register must contain, how to tie it to the general ledger, and the gaps that quietly survive year after year if nobody checks for them.
- Fixed assets & capexDepreciation testing: audit procedure and recomputationChecking useful lives against Schedule II, recomputing the charge independently for a sample, and handling mid-year additions, disposals and changes in estimate.
- Audit documentationInd AS 20: government grants, and why they're never recognised as equityA grant is income, recognised over the period it's meant to compensate for — not a windfall credited to reserves the day it's received.
Free tools, no signup
Each one reads a file entirely in your browser — or, for two of them, just answers a few questions — and nothing is ever uploaded.
- Purchase register checkDuplicate payments, round-sum amounts, weekend-dated invoices, incomplete records.
- GSTR-2B reconcilerMatches your purchase register against GSTR-2B — missing invoices either side, amount mismatches.
- Bank reconciliation checkerMatches your cash book against a bank statement — what's outstanding on each side.
- Payroll red-flag scannerBank accounts shared across employees, and records missing an ID, PAN or salary.
- CARO applicability checkerAnswer a few questions about the company and see which CARO 2020 clauses likely apply.
- MSME payment delay checkerMSME-flagged invoices paid — or still unpaid — beyond the 45-day Section 22 limit.
- Related-party transaction screenerTransactions above a threshold you set with no approval reference, grouped by counterparty.
- Depreciation useful life checkerCompares a useful life in use against the Schedule II, Part C indicative figure.
- Materiality calculatorOverall and performance materiality against PBT, revenue, assets or equity, with reasoning shown.
- Sample size calculatorStatistical sample size for a test of controls or a substantive test of detail.