IND AS 16 for CFOs: Capitalise or Expense? The Decisions That Shape Your Balance Sheet

Every sizable purchase order lands on the same fork in the road: is this an asset or an expense? IND AS 16 (Property, Plant and Equipment) is the standard that decides — and because the decision changes EBITDA, depreciation, and tax posture simultaneously, it's a CFO call, not a bookkeeping detail. Yet in most companies the decision is made ad hoc at invoice time, by whoever posts the entry.

The recognition test, in plain terms

IND AS 16 says an item is PP&E when two things are true: it's probable that future economic benefits will flow to the entity, and cost can be measured reliably. In practice, the questions to operationalise are simpler: will this be used for more than one period? Is it above your capitalisation threshold? Is it a standalone functional item or part of a larger asset?

What goes into cost — more than the invoice

Capitalised cost isn't just the purchase price. IND AS 16 includes import duties, non-refundable taxes, directly attributable costs of bringing the asset to working condition — freight, installation, professional fees, trial runs — and the initial estimate of dismantling and site-restoration obligations. If your procurement system doesn't link these follow-on costs to the originating purchase, they leak into expenses and your asset base is systematically understated.

Component accounting: the part most registers skip

Paragraph 43 requires each part of an asset with a cost that is significant relative to the whole to be depreciated separately — the aircraft-engine principle. A building's lifts and HVAC don't share the building's life; a plant's control system doesn't share the machine frame's. Component accounting only works if the fixed asset register actually stores components with their own useful lives — one line per "machine" fails the standard.

Subsequent costs — and the AMC trap

Day-to-day servicing is expensed. But a major overhaul that extends useful life or capacity beyond the original assessment is capitalised. The trap: maintenance contracts that bundle a genuine life-extending refurbishment inside an "AMC". The portion that restores or extends life should be assessed for capitalisation under IND AS 16 — booking the whole contract as OpEx because the invoice says "maintenance" is the kind of misclassification auditors increasingly test for.

Useful life and residual value are estimates — review them

IND AS 16 requires useful life and residual value to be reviewed at least each financial year-end, with changes treated prospectively. Schedule II of the Companies Act provides indicative lives, but IND AS 16 permits different lives where justified — with disclosure. A register that can't hold entity-specific lives per asset class, and can't show the review trail, makes this an annual argument with your auditor instead of a report.

Why this is a systems problem, not a policy problem

Most companies have a capitalisation policy. What they lack is enforcement at the point of transaction: the PO that should have been flagged as capital, the freight invoice that never attached to the asset, the component that got lumped into a parent record. That's a procurement-to-asset pipeline issue — which is why we built procurement and asset management as one flow: assets are born from purchase orders with their costs attached, components and useful lives captured at creation, and the depreciation engine runs from data that was right on day one.

The CFO checklist

• Is the capitalisation threshold enforced by the system at PO or GRN — or applied from memory at invoice posting?
• Do follow-on costs (freight, installation, commissioning) attach to the asset record automatically?
• Does the register support components with independent useful lives?
• Are AMC and overhaul contracts screened for capitalisable portions?
• Is the annual useful-life review documented — per class, with sign-off?

Five yes answers, and IND AS 16 is a non-event at audit time. Fewer than five, and the gap is quietly reshaping your reported numbers every quarter.