 Today's topic is property, plant, and equipment. This is IS-16 and in fact it's a very old one, but it's so important that in every business you will come across with these plant, equipment, property, etc. So that's why we need a proper accounting treatment of these plant and equipment. First of all, learning outcome. Students will be able to understand what constitute property, plant, and equipment. Per the prescribed format specified by the IS-16, they will record property, plant, and equipment related transactions correctly at the time purchases and sale of such assets. Learn how to present and disclose property, plant, and equipment in the financial statements. So it's not only in the balance sheet. It affects income statement. It also affects cash flow statement as well. Now property and plant and equipment involve a large amount of investment. A large amount of cash is invested in these assets. They are acquired for use in operation and not for resale. It's a very important thing. They are not for sale. They are not like inventory. They are supposed to be used for production or for even rendering services. They are long-term in nature and usually depreciated. They possess physical substance. You can kick them actually and then they are property, plant, and equipment. Purchase price includes import duties, non-refundable taxes, purchase taxes, less trade discount, and rebates. Do you remember they are deducted from the cost of the plant and property equipment? But if there are some rebates or rather you have some provision that when you make payments, you pay less. So that discount is not in fact taken into account. That is only the discount at the start of the equipment. Cost contributed to bring the assets to the location and condition. Whatever amount you spend to bring it to the condition and location. Necessary for it to be used in manner intended by the company. In fact, you are buying an asset for a certain purpose. Still such time that asset is start giving you the intended output, all expenses to be added to the cost. Then spread the cost over its estimated useful life, which is depreciation. In fact, we are using these assets and continuously they are reducing their value also. Because if you use something, obviously there is a reduction in its value. Cash paid on acquisition shown in cash flow statement, assets reported in a balance sheet, and depreciation reported in the income statement. As I said earlier, this affects all those three important statements. I-16 deals with the issue by being clear that an item of property plant equipment should be recognized as an asset. If only if it is probable that the future economic benefits associated with the assets will flow to the entity and the cost of the item can be measured reliably. Because that is also very important that how the cost is measured in a particular asset. Property plant equipment are tangible assets. As I said, they are intangible assets also, but this is a tangible. Are held for use in production or supply of goods and services for rental or to others for administrative purposes also. So these are the three main purpose of plant equipment. Are expected to be used during more than one accounting year. It will be a long term asset basically. It can be used for four year, five year depending upon the type of assets and its useful life. Depreciation basically is the systematic allocation of depreciable amount or cost less residual value of an asset over its economic useful life. Now do remember here, even the depreciation we estimate a rate. Similarly, the residual value, the solvage value when the asset is expired its life. You still get some amount out of it. So we have to make an estimate about the life and about the residual value. And then we calculate the depreciation because cost minus residual value is the depreciable value of an asset. And that will be allocated systematically. That's important. It's not that you can do and then charge any amount to the profit and loss account in any year. No, there should be some systematic methods to be charged to the income statement. Method of depreciation. Look, there are straight line method. Usually this is all over. People charge regularly that if an asset is of let's say five years. So each year same amount of depreciation they charge to the income statement and the accumulated depreciation is credited. Reducing balance method or some of your digit method. Now this is again an important one. You have to be very careful that what the examiner method is suggesting while working a question. Reducing balance method means that you reduce first year depreciation and what is the net book value after that first year depreciation. Then you take the depreciation of the net book value. I mean every year you start reducing the accumulated depreciation and then you keep charging the depreciation on that asset. Now what happened normally? Sometimes we use some of your digit method that if let's say it's five years. So what we do we add five, four, three, two, one and that comes to 15. So the first year depreciation will be five over 15 and the last year will be one over 15. So you can see the difference and the beginning we are charging a high amount of depreciation and towards the end we are charging a low amount of depreciation. And the reason being the new assets is depreciated more but the repair and maintenance is less. But as the assets keep running and using then the depreciation is reducing but the repair and maintenance is increasing. That's why reducing balance method is used. Then activity method, R's unit of output. That is also, you know there are certain assets which work on a certain number of hours after certain number of units you produce and you use those numbers, estimated numbers of the whole year, I mean the whole life of that asset and you work out the depreciation per unit or per hour. And accordingly hours served in a particular year multiply and you get the depreciation amount. So here you will see it cannot be a systematic because you never know year one, number of units are different, year two, number of units are different. That's why it's not a systematic distribution. Then there is a composite method. This is something new in the sense that if you have an asset which is a big one and the number of item attached to that. For example, take the case of airplane. You have engines, you have interior and you have exterior. So now question arise how you charge depreciation on an airplane. So what we do? We divide these three parts because the life of engine is based on flying hours. Life of interior again is shorter because people use those seats and the damage damage them. Outline mean outsider, mean the out. That will be a slightly more but still sometimes we do re-innovation of the outer part of it as well. But that is again not increasing the value or the life of the assets. Now residual value is the estimated amount that an entity would currently obtain from the disposal of an assets after deducting the estimated cost of disposal. Obviously it is an estimated figure because you never know that when the asset is used up you might get more than what you have estimated earlier. Then cost method carrying amount. This another important thing we should use the word carrying amount, not the carrying value. Carrying amount is the amount at which an asset is recognized after deducting any accumulated depreciation and accumulated impairment losses. Depreciation is okay but so far impairment loss is concerned. That will be covered in the next topic, impairment of assets. Fair value method. So sometimes we also look into that assets will be reported in the balance sheet income statement on the basis of fair value. And again it is an independent standard on it. So we will discuss it separately that how the fair value of certain assets are determined. The buyer and seller act in their best interest. Thank you very much.