How is PPE accounted for under IAS 16?

Property, plant and equipment (PPE) is recognised as an asset when it is probable that future economic benefits will flow to the entity and its cost can be reliably measured. After initial recognition, it is carried using either the cost model or the revaluation model, with systematic depreciation charged over its useful life (IAS 16.7, IAS 16.29). - Recognition and initial measurement: An item of PPE is recognised only when two conditions are met: future economic benefits are probable, and the cost can be measured reliably (IAS 16.7). Initial cost includes the purchase price (net of trade discounts and rebates), import duties, non-refundable purchase taxes, and any costs directly attributable to bringing the asset to its intended location and working condition — such as site preparation, delivery, installation, and testing (IAS 16.16). Day-to-day servicing costs, such as routine labour and consumables, do not form part of the carrying amount and are expensed as incurred (IAS 16.12). - Subsequent costs: An entity evaluates all PPE costs — initial acquisition and later additions or replacements — under the same recognition principle. Parts that require regular replacement are capitalised when the recognition criteria are met, and the carrying amount of the replaced part is derecognised (IAS 16.13). Major inspection costs are also capitalised in the carrying amount when performed, with any remaining carrying amount of the previous inspection derecognised.

How do you account for a major overhaul that extends PPE life under IAS 16?

- Cost model: After recognition, an item of PPE is carried at cost less accumulated depreciation and any accumulated impairment losses (IAS 16.30). This is the simpler and more widely used approach; no upward adjustment for market movements is made. - Revaluation model: An entity may instead carry PPE at a revalued amount — its fair value at the date of revaluation less subsequent accumulated depreciation and impairment losses — provided fair value can be measured reliably (IAS 16.31). When revaluing, the entire class of PPE to which the asset belongs must be revalued, not just selected items (IAS 16.36). Revaluation increases are recognised in other comprehensive income and accumulated in equity as a revaluation surplus; decreases are charged to profit or loss unless a prior surplus exists for that asset (IAS 16.39, IAS 16.40). - Depreciation: The depreciable amount (cost or revalued amount less residual value) is allocated systematically over an asset's useful life. The depreciation method, residual value, and useful life are reviewed at least at each financial year-end and adjusted prospectively where expectations have changed.

What are the disclosure requirements and useful life estimation process for PPE by industry?

- Impairment: Where indicators suggest an asset's carrying amount may not be recoverable, an entity applies IAS 36 to determine the recoverable amount and, if necessary, recognise an impairment loss (IAS 16.63). - Including non-qualifying costs: Costs such as opening a new facility, advertising, staff training, or administrative overheads do not form part of the cost of PPE (IAS 16.19) and must be expensed. - Selective revaluation: Entities sometimes revalue only assets with increased values. This is not permitted — the entire class must be revalued simultaneously or on a rolling basis (IAS 16.36, IAS 16.38). - Deferred payment: If payment is deferred beyond normal credit terms, the asset's cost is the cash price equivalent at recognition date; the financing component is recognised as interest over the credit period unless capitalised under IAS 23 (IAS 16.23). - Cessation of capitalisation: Costs stop being capitalised once the asset is in the location and condition necessary for its intended use. Costs incurred in using or redeploying the item are not added to the carrying amount (IAS 16.20). - Spare parts and stand-by equipment: These are classified as inventory unless they meet the definition of PPE, in which case they are recognised and depreciated accordingly (IAS 16.8). - IAS 16.7 — Sets out the two recognition criteria: probable future economic benefits and reliable measurement of cost. - IAS 16.16 — Defines the elements of cost at initial recognition, including purchase price and directly attributable costs. - IAS 16.29 — Requires an entity to choose the cost model or revaluation model and apply it consistently to an entire class of PPE. - IAS 16.30 — Specifies the cost model: carrying amount equals cost less accumulated depreciation and impairment losses. - IAS 16.31 — Specifies the revaluation model: carrying amount equals fair value less subsequent depreciation and impairment losses, with regularity requirements. - IAS 16.63 — Requires an entity to apply IAS 36 to assess and recognise impairment of PPE items.

IAS 16 PPE — Cost Model vs Revaluation

IAS 16 Property, Plant and Equipment — Core Rule

Property, plant and equipment (PPE) is recognised as an asset when it is probable that future economic benefits will flow to the entity and its cost can be reliably measured. After initial recognition, it is carried using either the cost model or the revaluation model, with systematic depreciation charged over its useful life (IAS 16.7, IAS 16.29).

How IAS 16 Property, Plant and Equipment Works

Recognition and initial measurement: An item of PPE is recognised only when two conditions are met: future economic benefits are probable, and the cost can be measured reliably (IAS 16.7). Initial cost includes the purchase price (net of trade discounts and rebates), import duties, non-refundable purchase taxes, and any costs directly attributable to bringing the asset to its intended location and working condition — such as site preparation, delivery, installation, and testing (IAS 16.16). Day-to-day servicing costs, such as routine labour and consumables, do not form part of the carrying amount and are expensed as incurred (IAS 16.12).

Subsequent costs: An entity evaluates all PPE costs — initial acquisition and later additions or replacements — under the same recognition principle. Parts that require regular replacement are capitalised when the recognition criteria are met, and the carrying amount of the replaced part is derecognised (IAS 16.13). Major inspection costs are also capitalised in the carrying amount when performed, with any remaining carrying amount of the previous inspection derecognised.

Cost model: After recognition, an item of PPE is carried at cost less accumulated depreciation and any accumulated impairment losses (IAS 16.30). This is the simpler and more widely used approach; no upward adjustment for market movements is made.

Revaluation model: An entity may instead carry PPE at a revalued amount — its fair value at the date of revaluation less subsequent accumulated depreciation and impairment losses — provided fair value can be measured reliably (IAS 16.31). When revaluing, the entire class of PPE to which the asset belongs must be revalued, not just selected items (IAS 16.36). Revaluation increases are recognised in other comprehensive income and accumulated in equity as a revaluation surplus; decreases are charged to profit or loss unless a prior surplus exists for that asset (IAS 16.39, IAS 16.40).

Depreciation: The depreciable amount (cost or revalued amount less residual value) is allocated systematically over an asset's useful life. The depreciation method, residual value, and useful life are reviewed at least at each financial year-end and adjusted prospectively where expectations have changed.

Impairment: Where indicators suggest an asset's carrying amount may not be recoverable, an entity applies IAS 36 to determine the recoverable amount and, if necessary, recognise an impairment loss (IAS 16.63).

IAS 16 Property, Plant and Equipment — Common Pitfalls

Including non-qualifying costs: Costs such as opening a new facility, advertising, staff training, or administrative overheads do not form part of the cost of PPE (IAS 16.19) and must be expensed.
Selective revaluation: Entities sometimes revalue only assets with increased values. This is not permitted — the entire class must be revalued simultaneously or on a rolling basis (IAS 16.36, IAS 16.38).
Deferred payment: If payment is deferred beyond normal credit terms, the asset's cost is the cash price equivalent at recognition date; the financing component is recognised as interest over the credit period unless capitalised under IAS 23 (IAS 16.23).
Cessation of capitalisation: Costs stop being capitalised once the asset is in the location and condition necessary for its intended use. Costs incurred in using or redeploying the item are not added to the carrying amount (IAS 16.20).
Spare parts and stand-by equipment: These are classified as inventory unless they meet the definition of PPE, in which case they are recognised and depreciated accordingly (IAS 16.8).

IAS 16 Property, Plant and Equipment — Key Paragraphs

IAS 16.7 — Sets out the two recognition criteria: probable future economic benefits and reliable measurement of cost.
IAS 16.16 — Defines the elements of cost at initial recognition, including purchase price and directly attributable costs.
IAS 16.29 — Requires an entity to choose the cost model or revaluation model and apply it consistently to an entire class of PPE.
IAS 16.30 — Specifies the cost model: carrying amount equals cost less accumulated depreciation and impairment losses.
IAS 16.31 — Specifies the revaluation model: carrying amount equals fair value less subsequent depreciation and impairment losses, with regularity requirements.
IAS 16.63 — Requires an entity to apply IAS 36 to assess and recognise impairment of PPE items.