IAS 16 - Property, Plant & Equipment

IAS 16 – Property, Plant and Equipment (PPE)

IAS 16 Property, Plant and Equipment (PPE) provides guidance on the recognition, measurement, depreciation, and derecognition of tangible assets held for use in production, supply of goods or services, rental to others, or administrative purposes. PPE represents one of the most significant investment areas in most entities, forming the foundation of long-term business operations and growth.

Purpose of IAS 16

The objective of IAS 16 is to prescribe the accounting treatment for property, plant and equipment. The key areas covered include: – Recognition criteria – Initial measurement – Subsequent measurement – Depreciation – Derecognition of assets

Definition of Property, Plant and Equipment

IAS 16 defines property, plant and equipment as tangible items that: 1. Are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and 2. Are expected to be used during more than one accounting period.

Examples include land, buildings, machinery, motor vehicles, and computer equipment. These assets typically provide economic benefits over several years and are therefore classified as non-current assets.

Recognition Criteria

An item of property, plant and equipment shall be recognised as an asset if, and only if: 1. It is probable that future economic benefits associated with the item will flow to the entity; and 2. The cost of the item can be measured reliably.

For example, if a company purchases a new production machine that will increase efficiency and generate future sales, it meets both recognition criteria and should be capitalised.

Subsequent Costs

Repairs and Maintenance: Routine repair and maintenance costs are expensed immediately in profit or loss.
Replacement of Major Parts: The cost of replacing significant components is capitalised, and the carrying amount of the replaced part is derecognised.
Major Inspection Costs: Capitalised if they enhance or maintain the asset’s ability to generate future economic benefits. The cost of the previous inspection is derecognised.

Measurement at Recognition

An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its cost. Cost includes:

Purchase price (including import duties and non-refundable taxes, less discounts and rebates)
Costs directly attributable to bringing the asset to the location and condition necessary for operation
Initial estimate of dismantling and restoration costs

Examples of directly attributable costs include: – Site preparation – Delivery and handling – Installation and assembly – Testing costs – Professional fees

Exchange of Assets

When PPE is acquired through an exchange, the new asset is measured at fair value if the exchange has commercial substance. Otherwise, it is measured at the carrying amount of the asset given up.

Measurement After Recognition

Cost Model: Carrying amount = Cost – Accumulated Depreciation – Accumulated Impairment.
Revaluation Model: PPE is carried at revalued amount (fair value at revaluation date less subsequent depreciation and impairment losses).

Revaluations must be performed regularly to ensure carrying amounts approximate fair value. When an asset is revalued, the entire class of assets must also be revalued.

Revaluation Surplus and Losses

– Revaluation surplus is credited to equity under revaluation reserve. – Revaluation loss is recognised in profit or loss unless it reverses a previous surplus on the same asset. – Revaluation surplus may be transferred to retained earnings upon derecognition or gradually as the asset is used.

Derecognition

An item of property, plant and equipment is derecognised: 1. On disposal; or 2. When no future economic benefits are expected from its use or disposal.

Any gain or loss on derecognition is included in profit or loss (not revenue). Example: If a company sells a delivery truck for GH¢80,000 with a carrying amount of GH¢60,000, the GH¢20,000 gain is recorded in profit or loss.

Exam Practice Questions

Question	Hint / Answer Guide
1. Define Property, Plant and Equipment and state two recognition criteria under IAS 16.	Refer to IAS 16 definition; note “probable future economic benefits” and “cost can be measured reliably.”
2. Explain the accounting treatment for replacement of major parts in PPE.	Derecognise the old component and capitalise the new one.
3. Differentiate between the cost model and revaluation model.	Cost model uses historical cost; revaluation model uses fair value with periodic updates.
4. How are revaluation gains and losses treated?	Gains → equity; losses → profit or loss unless reversing a previous gain.

Related IFRS Standards

You may also be interested in: – IAS 2 – Inventories – IAS 7 – Statement of Cash Flows These standards complement IAS 16 by explaining inventory valuation and cash flow presentation for capital expenditures.

IAS 16 – Property, Plant & Equipment