IAS 16 prescribes how entities recognise, measure, and disclose property, plant and equipment (PPE). Below is a structured walkthrough of the key requirements.

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Recognition Criteria

An item of PPE is recognised as an asset only when (IAS 16.7):

• It is probable that future economic benefits associated with the item will flow to the entity
• The cost of the item can be measured reliably

Spare parts, stand-by equipment, and servicing equipment qualify as PPE when they meet these criteria; otherwise they are expensed (IAS 16.8).

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Initial Measurement

PPE is initially measured at cost (IAS 16.15), which comprises:

• Purchase price, including import duties and non-refundable purchase taxes, net of trade discounts
• Directly attributable costs to bring the asset to its location and condition (e.g., site preparation, installation, professional fees)
• Initial estimate of decommissioning, restoration, and similar obligations (IAS 16.16)

Where payment is deferred beyond normal credit terms, the cost is the present value of all future payments, with the difference recognised as interest expense (IAS 16.23).

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Subsequent Measurement – Two Models

IAS 16 permits a choice of accounting policy applied to an entire class of PPE:

• Cost Model (IAS 16.30): Asset carried at cost less accumulated depreciation and accumulated impairment losses.
• Revaluation Model (IAS 16.31): Asset carried at fair value at the revaluation date, less subsequent accumulated depreciation and impairment losses. Revaluations must be made with sufficient regularity so that the carrying amount does not differ materially from fair value.

Under the revaluation model, increases are recognised in Other Comprehensive Income (OCI) as a revaluation surplus (IAS 16.39), while decreases are recognised in profit or loss, unless reversing a prior OCI credit (IAS 16.40).

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Depreciation

Each significant component of PPE with a different useful life must be depreciated separately (IAS 16.43 – component approach). Key considerations include:

• Depreciation commences when the asset is available for use (IAS 16.55)
• The depreciable amount is cost (or revalued amount) less residual value
• Acceptable methods include straight-line, diminishing balance, and units of production (IAS 16.62)
• The method, useful life, and residual value must be reviewed at least annually (IAS 16.51, IAS 16.61)
• Land is generally not depreciated as it has an indefinite useful life (IAS 16.58)

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Impairment

PPE is subject to impairment testing under IAS 36. Where the recoverable amount falls below the carrying amount, an impairment loss is recognised immediately in profit or loss (IAS 36.59), unless the asset is carried under the revaluation model.

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Derecognition

An item of PPE is derecognised on disposal or when no future economic benefits are expected (IAS 16.67). The gain or loss is the difference between net disposal proceeds and the carrying amount, recognised in profit or loss (IAS 16.68). Gains are not classified as revenue.

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Disclosure Requirements

Key disclosures include measurement bases, depreciation methods and rates, gross carrying amounts, accumulated depreciation, and a reconciliation of movements during the period (IAS 16.73–16.79).

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