Residual Value Dilemmas | PPE Disposal Cost Exceeding the Recoverable Amount

ABC Limited (hereinafter referred to as “the Company”) is a leading firm in procuring, transmitting, processing, and marketing natural gas. The company owns and operates through gas pipelines which are considered to be critical assets for the company’s operation. The company accounts these pipelines in accordance with Ind AS 16, Property, Plant, and Equipment (PPE) and Schedule II of the Companies Act, 2013.

The company has estimated and maintained the residual value the pipeline as 5% without considering the reasonable factors such as the location of pipelines, historical data, and future projections which shows that the company had not established an accounting policy for periodically reviewing the residual value and useful life of assets. Furthermore, the company has replaced one of its pipeline with a carrying value of Rs. 19 crores in the books of account. The replacement process incurred a cost of Rs. 24 crores for digging out and disposing of the old pipeline, from which only Rs. 14 crores was recovered. Despite, the disposal cost exceeding the recoverable amount, the company has maintained the residual value at 5%.

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