IAS 16: Property, Plant and Equipment

Standard IAS 16 prescribes the accounting treatment for property,

plant and equipment and therefore it is one of the most important
and commonly applied standards.
The main issues dealt in IAS 16 are recognition of property, plant
and equipment, measurement at and after recognition,
impairment of property, plant and equipment (although IAS 36
deals with impairment in more detail) and derecognition.

Recognition of Property, Plant

and Equipment
Property, plant and equipment are tangible items that are held for
use in the production or supply of goods or services, for rental to
others, or for administrative purposes; and are expected to be
used during more than one period.
IAS 16 states that the cost of an item of property, plant and
equipment shall be recognized as an asset if, and only if:
• it is probable that future economic benefits associated with
the item will flow to the entity; and
• the cost of the item can be measured reliably.
This recognition principle shall be applied to all costs at the time
they are incurred, both incurred initially to acquire or construct an
item of property, plant and equipment and incurred subsequently
after recognition to add to, replace part of or service it.
Initial costs
Some items of property, plant and equipment might be necessary
to acquire for safety or environmental reasons.
Although they do not directly increase the future economic
benefits, they might be inevitable to obtain future economic
benefits from other assets and therefore, should be recognized as
an asset.
For example, water cleaning station might be necessary in order
to proceed with some chemical processes within
chemical manufacturer.
Subsequent costs
Day-to-day servicing of the item shall be recognized in profit or
loss as incurred, because they just maintain (not enhance) item’s
capacity to bring future economic benefits.
However, some parts of the item of property, plant and equipment
may require replacement at regular intervals, for example, aircraft
interiors.
In such a case, an entity derecognizes carrying amount of older
part and recognizes the cost of new part into the carrying amount
of the item. The same applies to major inspections for faults,
overhauling and similar items.

 Measurement
Initial Measurement
An item of property, plant and equipment that qualifies for
recognition as an asset shall be measured at its cost.
The cost of an item of property, plant and equipment comprises:
1. its purchase price including import duties, non-refundable
purchase taxes, after deducting trade discounts and rebates
2. any costs directly attributable to bringing the asset to the
location and condition necessary for it to be capable of
operating in the manner intended by management.
Examples of these costs are: costs of site preparation,
professional fees, initial delivery and handling, installation
and assembly, etc.,
3. the initial estimate of the costs of dismantling and removing
the item and restoring the site on which it is located.
The cost of an item of property, plant and equipment is the cash
price equivalent at the recognition date.
If payment is deferred beyond normal credit terms, the difference
between the cash price equivalent and the total payment is
recognized as interest over the period of credit (unless such
interest is capitalized in accordance with IAS 23).
If an asset is acquired in exchange for another non-monetary
asset, the cost will be measured at the fair value unless:
• the exchange transaction lacks commercial substance or
• the fair value of neither the asset received nor the asset
given up is reliably measurable.
If the acquired item is not measured at fair value, its cost is
measured at the carrying amount of the asset given up.
Subsequent Measurement
An entity may choose 2 accounting models for its property plant
and equipment:
1. Cost model: An entity shall carry an asset at its cost less any
accumulated depreciation and any accumulated impairment
losses.
2. Revaluation model:An entity shall carry an asset at a
revalued amount. Revalued amount is its fair value at the
date of the revaluation less any subsequent accumulated
depreciation and subsequent accumulated
impairment losses.
An entity shall revalue its assets with sufficient regularity so that
the carrying amount does not differ materially from its fair value at
the end of the reporting period. If an item of property, plant and
equipment is revalued, the entire class of property, plant and
equipment to which that asset belongs shall be revalued.
The change of asset’s carrying amount as a result of revaluation
shall be treated in the following way:
 Change in
Carying Where
Amount

Other
Profit or loss if
comprehensive
reverses previous
income
Increase revaluation
(heading
decrease of the
“Revolution
same value
surplus”)

Other
comprehensive
income if reduces
previously
Decrease Profit or loss recognized
revaluation surplus
(heading
“Revaluation
surplus”)

Depreciation (both models)
Depreciation is defined as the systematic allocation of the
depreciable amount of an asset over its useful life.
The items of property, plant and equipment are usually
depreciated in order to maintain matching principle – as they are
in operation for more than 1 year, they assist in producing the
revenues in more than 1 year and therefore, their cost shall be
spread among those years in order to match the revenue they
help to produce.
When dealing with the depreciation please do have 3 basic things
in mind:
• Depreciable amount: Depreciable amount is simply HOW
MUCH you are going to depreciate. It is the cost of an asset,
or other amount substituted for cost, less its residual value.
• Depreciation period: Depreciation period is simply HOW
LONG you are going to depreciate and it is basically asset’s
useful life. Useful life is the period over which an asset is
expected to be available for use by an entity; or the number
of production or similar units expected to be obtained from
the asset by an entity.

IFRS16 lists several factors that shall be considered when
establishing item’s useful life:
◦ expected usage of the item,
◦ expected physical wear and tear,
◦ technical or commercial obsolescence of the item, and
◦ legal or other limits on the use of the asset.
• Useful life and asset’s residual value (input to depreciable
amount) shall be reviewed at least at the end of each
financial year. 

If there is a change in the expectations comparing to
previous estimates, then change shall be accounted for as a
change in an accounting estimate in line with IAS 8 (no
restatement of previous periods).
• Depreciation method: Depreciation method is simply HOW,
IN WHAT MANNER you are going to depreciate. The
depreciation method used shall reflect the pattern in which
the asset’s future economic benefits are expected to be
consumed by the entity.

An entity may select from variety of depreciation methods,
such as straight-line method, diminishing balance method
and the units of production methods. 

 Selected method shall be reviewed at least at the end of
each financial year. If there is a change in the expected
pattern of asset’s usage, then the depreciation method shall
be changed and be accounted for as a change in an
accounting estimate in line with IAS8 (no restatement of
previous periods).

Depreciation shall be recognized in profit or loss unless it is
capitalized into the carrying amount of another asset (for
example, inventories, or another item of property, plant
and equipment).

Each part of an item of property, plant and equipment with a
cost that is significant in relation to the total cost of the item
shall be depreciated separately. For example, aircraft interior
cost might be depreciated separately from the remaining
airplane cost.

Impairment
Here, IAS 16 refers to another standard, IAS 36 Impairment of
Assets that prescribes rules for reviewing the carrying amount of
assets, determining their recoverable amount and impairment
loss, recognizing and reversing impairment loss and more.
IAS 16 states that compensation from third parties for items of
property, plant and equipment that were impaired, lost or given up
shall be included in profit or loss when the compensation
becomes receivable.
For example, claim for compensation of damage on insured
property from insurance company is recognized to profit or loss
when insurance company accepts claim, closes the case and
agrees to compensate (or after whatever procedure is agreed in
the insurance contract).

Derecognition
IAS 16 prescribes that the carrying amount of an item of property,
plant and equipment shall be derecognized on disposal; or when
no future economic benefits are expected from its use
or disposal.
The gain (not classified as revenue!) or loss arising from the
derecognition of an item of property, plant and equipment shall be
included in profit or loss when the item is derecognized. The gain
or loss from the derecognition is calculated as the net disposal
proceeds (usually income from sale of item) less the carrying
amount of the item.