IAS 16 Property, Plant and Equipment: A Practical Guide
IAS 16 governs the recognition, measurement and depreciation of property, plant and equipment. This guide covers the key requirements, the cost vs revaluation model, and componentisation.
What Does IAS 16 Cover?
IAS 16 Property, Plant and Equipment establishes accounting requirements for tangible fixed assets — buildings, machinery, vehicles, and equipment. It covers initial recognition, subsequent measurement, depreciation, and derecognition. It is one of the most widely applied IFRS standards and is examinable at multiple levels of ACCA and CIMA.
Initial Recognition
An item of PPE is recognised when it is probable that future economic benefits will flow to the entity and its cost can be measured reliably. Initially measured at cost — including purchase price, import duties, non-refundable taxes, and directly attributable costs of bringing the asset to working condition (installation, site preparation, professional fees). Borrowing costs directly attributable to acquiring a qualifying asset must be capitalised under IAS 23.
Cost Model vs Revaluation Model
Cost model: Carry the asset at cost minus accumulated depreciation and accumulated impairment losses. This is simpler and more common. Revaluation model: Carry the asset at its fair value at the date of revaluation, less subsequent depreciation and impairment. Revaluations must be carried out with sufficient regularity to ensure the carrying amount is not materially different from fair value. If one asset in a class is revalued, the entire class must be revalued. Revaluation surpluses go to Other Comprehensive Income (revaluation reserve); downward revaluations go to profit or loss unless reversing a prior surplus.
Depreciation
Each significant component of an asset must be depreciated separately if it has a different useful life — the componentisation requirement. Depreciation method must reflect the pattern of consumption of the asset's economic benefits. The useful life and residual value must be reviewed at each year end. A change in depreciation method is a change in accounting estimate (prospective treatment), not a change in policy.
Derecognition
An asset is derecognised on disposal or when no future economic benefits are expected. The gain or loss = proceeds minus carrying amount, recognised in profit or loss.
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