Detailing IAS 16 Standard: Property, Plant and Equipment
IAS 16 Explained: Property, Plant and Equipment (PPE)
IAS 16 is the “filter” that decides whether today’s spend becomes a fixed asset depreciated over years, or an expense that hits profit immediately. That single decision can materially change accumulated depreciation, carrying amounts, performance ratios, and even tax-related reporting outcomes. This practical guide breaks IAS 16 down into actions: recognition, initial measurement, depreciation, derecognition, and disclosure— with examples and a built-in depreciation calculator.
- How to decide whether an item qualifies as PPE (property/plant/equipment) or not.
- What belongs in the cost of an asset vs what must be excluded (very common audit findings).
- The difference between the cost model and the revaluation model—and how they affect results and equity.
- Depreciation rules: useful life, residual value, componentization, and changes in estimates.
- Practical examples + a depreciation calculator that outputs a suggested entry (educational).
1) Why IAS 16 can change profit and analysis
IAS 16 changes the timing of cost recognition. The same invoice can be treated as either: capital expenditure (an asset that will be depreciated) or an immediate expense. That choice flows straight into profitability, KPIs, and valuation discussions.
| Decision | Where it appears | Impact on profit in year 1 | Impact on future years |
|---|---|---|---|
| Capitalize (PPE) | Balance sheet + depreciation in P/L | Lower hit (depreciation only) | Cost is spread over useful life |
| Expense immediately | P/L right away | Higher hit to current period profit | No future impact from the same spend |
2) Scope of IAS 16 (and what it excludes)
IAS 16 applies to tangible assets held for use in production or supply of goods/services, for rental to others, or for administrative purposes—and expected to be used for more than one period.
2.1 Examples typically within IAS 16
- Operational buildings (HQ, factories) and related facilities.
- Machinery, production lines, cranes, and operational vehicles.
- Furniture, fixtures, and IT equipment used for more than a year.
2.2 Examples commonly excluded (or governed by other guidance)
- Assets classified as held for sale (often treated under different requirements).
- Specialized assets that may fall under industry-specific guidance.
- Some natural resource and extraction rights (depending on the arrangement and policy).
3) Recognizing PPE: criteria + unit of account
You recognize an item as PPE when both conditions are met:
- It is probable that future economic benefits will flow to the entity.
- The cost of the item can be measured reliably.
3.1 Unit of account and components
One of the most important IAS 16 (and audit) ideas is whether an asset is managed as a single unit or as multiple components. Examples: an aircraft (airframe + engines) or a building (structure + elevators + HVAC). Components with different useful lives are typically depreciated separately (component depreciation).
4) Initial measurement: what goes into “cost”?
PPE is initially measured at cost. Cost is not just the purchase price—it includes specific elements needed to bring the asset to the location and condition necessary for it to operate as intended.
Asset Revaluation Model - Excel Template
| Included in cost | Examples | Excluded from cost | Examples |
|---|---|---|---|
| Purchase price | Net of discounts + non-refundable taxes/duties | General admin costs | HQ overhead not directly attributable to construction/installation |
| Directly attributable costs | Delivery, installation, testing, engineering fees | Training and routine start-up losses | Staff training, normal ramp-up inefficiencies |
| Site preparation | Foundations, site work required for installation | Opening/marketing costs | Launch campaigns, grand opening events |
| Dismantling / removal obligation (if applicable) | Estimated obligation to remove the asset and restore the site | Abnormal waste | Unusual material or labor waste beyond normal expectations |
5) Subsequent measurement: cost model vs revaluation
After initial recognition, IAS 16 allows two models per asset class (not selectively asset-by-asset):
- Cost model: cost − accumulated depreciation − impairment (if any).
- Revaluation model: fair value (updated regularly) − subsequent depreciation.
5.1 What happens under revaluation?
In many cases, upward revaluations are recorded in equity (often via OCI in practice), while downward revaluations are recognized in profit or loss unless they reverse previous revaluation increases for the same asset/class (subject to policy and disclosures).
6) Depreciation: the rule, methods, and components
Depreciation is the systematic allocation of the depreciable amount over the asset’s useful life. The core formula:
Depreciable amount = Cost − Residual value
Straight-line depreciation (annual) = Depreciable amount ÷ Useful life
6.1 Common methods
- Straight-line: same depreciation each year.
- Declining balance: higher depreciation in earlier years.
- Units of production: depreciation tied to actual usage/output.
6.2 Accumulated depreciation and contra presentation
In practice, depreciation is often tracked through accumulated depreciation to keep the original cost visible while reducing the carrying amount. To strengthen your entry discipline, review: Accounting Entries and Account Types.
7) Expense or capitalize? replacements and major inspections
After acquisition, you’ll see costs like repairs, replacements, and major inspections. The rule of thumb: capitalize only when the spend generates future economic benefits and can be measured reliably—otherwise expense it.
| Type of spend | Typical treatment | Audit note |
|---|---|---|
| Routine maintenance | Expense | Does not usually create measurable additional future benefits |
| Replacement of a major component | Capitalize + derecognize the old component | Critical: remove the carrying amount of the replaced part |
| Major periodic inspection | Capitalize (if criteria met) | Often treated as a separate “component” with its own life |
8) Derecognition and sale: how to calculate gain/loss
When you sell or dispose of PPE, you generally:
- Remove the cost and accumulated depreciation from the books.
- Recognize the difference between proceeds and carrying amount as a gain or loss in profit or loss.
9) Disclosure: what should appear in the notes?
IAS 16 disclosure is not “cosmetic”—it’s what enables readers to understand measurement choices (cost vs revaluation), depreciation methods and estimates, and movements in balances (additions, disposals, depreciation, transfers).
| Area | What to disclose |
|---|---|
| Measurement policy | Cost or revaluation model + which classes are affected |
| Depreciation | Methods, useful lives, residual values, depreciation expense for the period |
| PPE movements | Opening balance + additions + disposals + depreciation + transfers + closing balance |
| Revaluation details | Valuation date, approach, and the related reserve movement (if applicable) |
| Restrictions/pledges | Assets pledged as security or restricted from use (if any) |
10) PPE depreciation calculator
The calculator below estimates depreciation under IAS 16 using: Straight-line, Declining Balance (DDB), or Units of Production. It also outputs a suggested journal entry (educational). Use it for a quick close check.
11) Common mistakes + close checklist
- Capitalizing costs that do not create future benefits (training, marketing, general admin).
- Failing to derecognize the replaced component when a new part is capitalized.
- Not reviewing useful lives and residual values annually (leading to sudden large adjustments later).
- Inconsistent coding because the chart of accounts does not clearly separate CAPEX vs OPEX.
- Missing documentation and controls around measurement choices and disclosures.
- Update the fixed asset register (additions/disposals/transfers).
- Review repair/replacement invoices: expense or capitalize?
- Run depreciation and reconcile depreciation expense to accumulated depreciation movement.
- Review lives/residuals/methods; document changes and rationale.
- Prepare PPE roll-forward table for notes and reporting.
- If measurement choices require deeper review, use: Advanced Validation Techniques.
- Difference Between IAS and IFRS
- Financial Accounting: A Comprehensive Guide
- Accounting Entries and Account Types
- Chart of Accounts Design
- Accounting Systems and Tax Compliance
- Presentation of IAS 17 Standard (Leases)
- Impact of Regulatory Changes on Financial Statements
- Impacts of Various Factors on Financial Statements