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Assets · IAS 16

IAS 16 Property, Plant and Equipment

Summary, key points, exam traps and a worked example — written for ICAP, ACCA, ICAI, CIMA and ICAEW students.

On this page
  1. Status & recent changes
  2. Objective
  3. Scope
  4. Key definitions
  5. Recognition & measurement
  6. Key disclosures
  7. Common exam traps
  8. Worked example
  9. Related standards
  10. Practise MCQs

Status & recent changes

  • Amendments effective from 2022 require proceeds from selling items produced while an asset is being brought to its intended use to be recognised in profit or loss, not deducted from cost.

Objective

Sets out when to recognise property, plant and equipment, how to measure it initially and subsequently, and how to depreciate and derecognise it.

Scope

  • Tangible items held for use in production or supply of goods or services, for rental to others or for administration, and expected to be used for more than one period.
  • Includes bearer plants. Excludes assets held for sale (IFRS 5), biological assets other than bearer plants (IAS 41), mineral rights and exploration assets, and investment property measured at fair value (IAS 40).

Key definitions

Depreciable amount
Cost (or revalued amount) less residual value.
Residual value
The estimated amount the entity would currently obtain from disposal, after disposal costs, if the asset were already of the age and condition expected at the end of its useful life.
Useful life
The period the asset is expected to be available for use, or the number of units of production expected from it.

Recognition & measurement

Recognition

  • Recognise when it is probable that future economic benefits will flow to the entity and cost can be measured reliably.
  • Significant parts with different useful lives are depreciated separately (component accounting), e.g. an aircraft's engines and body.
  • Day-to-day servicing is expensed; replacement parts meeting the criteria are capitalised and the replaced part derecognised.
  • Major inspections can be capitalised as a component and depreciated until the next inspection.

Initial measurement (cost)

  • Purchase price including import duties and non-refundable taxes, after deducting trade discounts and rebates.
  • Directly attributable costs of bringing the asset to the location and condition needed: site preparation, delivery, installation, professional fees, and testing.
  • Initial estimate of dismantling and site restoration costs, where an obligation exists (measured under IAS 37, usually at present value).
  • Excluded: administration and general overheads, staff training, advertising, costs of opening a new facility, relocation costs, and initial operating losses.
  • Borrowing costs on qualifying assets are capitalised under IAS 23.

Subsequent measurement

  • Choose the cost model or the revaluation model as a policy for each entire class of assets.
  • Revaluations must be kept up to date so carrying amount does not differ materially from fair value.
  • Revaluation increases go to OCI (revaluation surplus), except to the extent they reverse a previous decrease recognised in profit or loss.
  • Revaluation decreases go to profit or loss, except to the extent of any surplus held for that asset, which is reduced first through OCI.
  • The surplus may be transferred to retained earnings as the asset is used (excess depreciation) or on disposal; this is never recycled through profit or loss.

Depreciation and derecognition

  • Depreciate the depreciable amount systematically over the useful life, starting when the asset is available for use.
  • Land usually has an unlimited life and is not depreciated; land and buildings are accounted for separately.
  • Review residual value, useful life and depreciation method at least at each financial year end; changes are changes in estimate (IAS 8).
  • On disposal, the gain or loss (proceeds less carrying amount) goes to profit or loss; it is not revenue.

Key disclosures

  • Measurement bases, depreciation methods, and useful lives or rates for each class.
  • Reconciliation of carrying amounts from opening to closing (additions, disposals, depreciation, revaluations, impairments).
  • For revalued classes: effective date, whether an independent valuer was used, and the carrying amount under the cost model.
  • Restrictions on title and assets pledged as security; contractual commitments to acquire PPE.

Common exam traps

  • Staff training and opening ceremonies are never part of cost.
  • Depreciation starts when the asset is available for use, not when it is first used.
  • Revaluing one building means revaluing the whole class.
  • A revaluation loss first uses up that same asset's surplus; it cannot be offset against another asset's surplus.
  • Changing useful life is prospective, not a prior-year restatement.

Worked example: Cost and depreciation

Scenario. A machine has a list price of $100,000 with a 5% trade discount. Delivery costs $2,000, installation $3,000 and staff training $1,500. The present value of an obligation to dismantle it is $5,000. Useful life 10 years, residual value $5,000, straight-line.

  1. Purchase price after discount = 100,000 × 95% = $95,000.
  2. Add delivery 2,000 + installation 3,000 + dismantling 5,000 = $105,000. Training is expensed.
  3. Annual depreciation = (105,000 − 5,000) ÷ 10 = $10,000.

Answer: Initial cost $105,000; depreciation $10,000 a year.

Practise MCQs on this standard

Test your understanding of IAS 16 with free chapter-wise MCQs and explanations in these question banks.

CAF-1 Financial Accounting and ReportingICAP CAFACCA FA Financial AccountingACCAACCA FR Financial ReportingACCACAF-6 Corporate ReportingICAP CAFCIMA BA3 Fundamentals of Financial AccountingCIMA Certificate in Business AccountingICAEW AF Accounting FundamentalsICAEW ACA Certificate LevelCA Inter P1 Advanced AccountingICAI CA Intermediate

ICAI CA Intermediate examines Indian Accounting Standards, which are based on but can differ from IFRS. Check your syllabus.

Read the official IAS 16 text on ifrs.org