IAS 16 Property, Plant and Equipment
Last updated: March 2017
SCOPE
Apply to: Property, plant and equipment (PPE) = tangible items held for use in production/supply of Does NOT apply when another Standard requires/permits different treatment: PPE classified as held for
goods/services, rental to others, or administrative purposes AND expected use > 1 period. Includes sale (IFRS 5); biological assets related to agriculture (IAS 41); recognition and measurement of exploration
construction of bearer plants, finished bearer plants accounted for under IAS 41.
and evaluation assets (IFRS 6); and mineral rights/reserves. Recognition of leased PPE is based on IAS 17.
RECOGNITION AND INITIAL MEASUREMENT
Recognize and measure cost of item as an asset if: probable that future economic
benefits associated with item will flow to entity AND cost can be measured reliably.
 PPE that enables entity to derive future economic benefits from related assets
qualifies for recognition.
 Parts replaced at regular intervals → recognize new part if recognition criteria met
AND derecognize the parts replaced.
 Spare parts, stand-by equipment, servicing equipment →recognize as PPE if meet
definition of PPE, otherwise classify as inventory.
 Major inspections → recognize cost in carrying amount as replacement regardless if
previous inspection was identified in initial transaction.
 Day-to-day servicing/maintenance/repairs (e.g., labour, consumables, small parts) →
no additional economic benefits →recognized in P/L.
Cost comprises: purchase price, including import duties and non-refundable purchase
taxes, after deducting trade discounts and rebates.
 Directly attributable costs to bring asset to location/condition for intended operation.
 Initial estimate of cost to dismantle/remove item and restore site:
 Obligation incurred either when item is acquired (IAS 16) OR as consequence of
having used it during a particular period (if to produce inventories IAS 2 applies,
otherwise IAS 16). Apply IAS 37 to the obligation.
Measure cost at: cash price equivalent (at recognition date) – if payment deferred
beyond normal credit terms → interest recognized over credit period.
 Non monetary exchanges → measure at FV UNLESS transaction has no commercial
substance/FV not reliable (see IAS 16 for more guidance).
 PPE held by lessee under finance lease (see IAS 17).
 Carrying amount may be reduced by government grant (see IAS 20).
 May include borrowing costs (see IAS 23).
Directly Attributable Costs
 Employee benefits arising
directly from
construction/acquisition.
 Site prep, delivery, installation,
assembly.
 Testing if functioning properly
(less net proceeds on sale of
samples produced).
 Professional fees.
OTHER POINTS
Costs NOT Included in PPE
 Cost of opening new facility, introducing new
product or service (advertising/promotion).
 Staff training, admin and OH.
 Costs incurred while item capable of operation
not yet brought into use.
 Initial operating losses while demand builds.
 Incidental costs/income (e.g., rent out of site).
 Apply IAS 36 to determine impairment and
related accounting.
 See IAS 16 for disclosure.
SUBSEQUENT MEASUREMENT
REVALUATION MODEL:
If FV reliably measurable→ carry at revalued amount LESS subsequent accumulated depreciation &
Apply
accumulated impairment.
either
 Revalued amount = FV at date of revaluation.
(to entire
 Revalue regularly so that carrying amount not materially different from FV at period end.
class of
 Revalue entire class simultaneously – or on rolling basis within short period of time.
PPE):
 Accumulated depreciation is either: adjusted to equal the difference between gross carrying amount
and carrying amount of assets after considering accumulated impairment losses OR eliminated
against gross carrying amount.
COST MODEL:  ↑ in carrying amount = recognize in other comprehensive income (under Revaluation Surplus
Carry at cost
heading) EXCEPT to extent reverses previous ↓/impairment recognized in P/L for same asset – then
first recognized in P/L.
LESS
accumulated  ↓ in carrying amount = recognize in P/L EXCEPT to extent that credit balance exists in revaluation
surplus related to same asset → then first reduced to zero.
depreciation &
 Revaluation surplus included in equity may be transferred directly to retained earnings when asset is
impairment
derecognized or some of the surplus may be transferred as the asset is used.
DEPRECIATION
Depreciation = Systematic allocation of depreciable amount over useful life.
 Recognize in P/L [unless included in carrying amount of another asset (e.g., depreciation of manufacturing equipment
included in cost of inventory)].
 Reflect pattern of usage/consumption (e.g., straight-line, diminishing balance, units of production).
 Componentization = part of PPE significant in relation to total cost → depreciate component part separately.
Depreciable amount = cost (or amount substituted for cost) less residual value.
Residual value = estimated amount currently obtainable (less disposal costs) if PPE were already of age and in condition
expected at end of useful life – in practice often insignificant.
Useful life = expected period over which asset is available for use OR expected units of production.
 Consider expected capacity and physical output; expected wear and tear; technical/commercial obsolescence; or legal
or similar limits.
 Use judgment based on entity’s experience with similar assets.
 Review residual value, useful life and depreciation method at least every year-end → changes in estimate follow IAS 8.
DERECOGNITION
Derecognize carrying amount on disposal/when no future economic benefits expected from use/disposal
 Apply IAS 18 to determine disposal date on sale (or IAS 17 if finance lease).
Gain/loss = net proceeds MINUS carrying amount.
 Recognize in P/L when asset derecognized (unless sale & leaseback see IAS 17).
 DO NOT classify as revenue, unless routinely sell items held for rental to others → transfer carrying amount to
inventory and recognize revenue.
 Compensation from third parties for PPE that was impaired/lost/given up → recognized in P/L when receivable.
This communication contains a general overview of the topic and is current as of March 31, 2017 The application of the principles addressed will depend upon the particular facts and circumstances of each individual case. Accordingly,
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