Objective
IAS 16 prescribes the accounting treatment for property, plant, and equipment (PPE).
It covers recognition, measurement, depreciation, and derecognition of tangible fixed assets.
1. Definition
Property, Plant and Equipment (PPE) are tangible assets that:
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Are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
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Are expected to be used during more than one period (i.e., long-term use).
2. Recognition Criteria
An item of PPE shall be recognized as an asset if and only if:
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It is probable that future economic benefits will flow to the entity; and
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The cost can be measured reliably.
Example:
A company buys a delivery truck for $50,000 to use for five years.
✅ Future economic benefits = delivery service revenue.
✅ Cost measurable = $50,000 purchase price.
→ Therefore, recognize it as PPE.
3. Initial Measurement
PPE is initially measured at cost, which includes:
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Purchase price (including import duties, non-refundable taxes)
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Directly attributable costs (e.g., installation, testing, delivery)
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Dismantling/restoration costs (if required)
Example:
A company purchases machinery:
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Purchase price: $80,000
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Delivery: $5,000
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Installation: $3,000
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Testing: $2,000
Total Cost = $90,000
This $90,000 becomes the initial carrying amount.
4. Subsequent Measurement
After initial recognition, PPE can be measured using one of two models:
(a) Cost Model
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PPE is carried at cost less accumulated depreciation and impairment losses.
(b) Revaluation Model
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PPE is carried at revalued amount (fair value) less subsequent depreciation and impairment.
Example:
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Cost Model: A machine purchased for $100,000; accumulated depreciation $40,000 → Carrying amount = $60,000.
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Revaluation Model: If fair value rises to $120,000 → Record revaluation surplus of $60,000 ($120,000 – $60,000).
5. Depreciation
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
Depreciable amount = Cost – Residual value
Common methods:
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Straight-line method
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Reducing balance method
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Units of production method
Example (Straight-line method):
A building costs $200,000, has a useful life of 20 years, and a residual value of $20,000.
Depreciable amount = $200,000 – $20,000 = $180,000
Annual depreciation = $180,000 / 20 = $9,000 per year
6. Subsequent Expenditure
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Day-to-day repairs → expensed immediately.
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Major improvements or replacements → capitalized if future benefits increase.
Example:
Replacing tires of a truck = expense.
Replacing engine that increases efficiency = capitalize as new asset component.
7. Derecognition
An asset is derecognized when:
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It is disposed of, or
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No future economic benefits are expected from its use or disposal.
Gain or loss = Proceeds – Carrying amount
→ Recognized in profit or loss.
Example:
A machine with carrying amount $40,000 is sold for $45,000.
→ Gain = $5,000 recognized in P&L.
8. Disclosure Requirements
Entities must disclose:
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Measurement bases used
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Depreciation methods and rates
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Reconciliation of carrying amounts
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Restrictions or pledged assets
Summary Table
| Stage | Key Point | Example |
|---|---|---|
| Recognition | Future benefits + measurable cost | Delivery truck |
| Initial Measurement | Cost + directly attributable costs | Machinery setup |
| Measurement Model | Cost or Revaluation | Fair value adjustment |
| Depreciation | Systematic over useful life | Building – $9,000/year |
| Repairs vs. Improvements | Expense vs. Capitalize | Engine replacement |
| Derecognition | Disposal or no future use | Sold machine – gain $5,000 |