Prescribe the accounting treatment for Property, Plant and Equipment (PPE), which are tangible assets.
Determination of their carrying amounts (initial cost and subsequent measurement).
Calculation and recognition of depreciation charges and impairment losses (impairment covered by IAS 36).
Applies to assets held for:
Use in the production or supply of goods or services.
And are expected to be used during more than one accounting period.
Applies to accounting for most tangible non-current assets.
IAS 16 does NOT apply to:
Biological assets related to agricultural activity (IAS 41 *Agriculture*), except for bearer plants (which are within IAS 16 scope).
Mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources (IFRS 6 *Exploration for and Evaluation of Mineral Resources*).
Investment property accounted for under IAS 40 *Investment Property*.
Assets classified as held for sale under IFRS 5 *Non-current Assets Held for Sale and Discontinued Operations*.
However, IAS 16 applies to PPE used to develop or maintain the assets described above.
It is probable that future economic benefits associated with the item will flow to the entity; AND
The cost of the item can be measured reliably.
This applies to initial costs and subsequent expenditures. Spare parts and servicing equipment are typically inventory, unless they meet the definition of PPE (e.g., expected use > 1 period, meet criteria).
Examples of PPE:
Office Equipment & Furniture
Vehicles, Ships, Aircraft
Bearer Plants (e.g., grape vines, fruit trees used to produce agricultural produce over several periods)
An item of PPE qualifying for recognition is initially measured at its cost.
Cost Includes:
Its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.
Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Examples:
Costs of employee benefits arising directly from construction/acquisition.
Costs of site preparation.
Initial delivery and handling costs.
Installation and assembly costs.
Costs of testing whether the asset is functioning properly (net of proceeds from selling items produced during testing).
Professional fees (e.g., architects, engineers).
The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located (obligation incurred either upon acquisition or due to use). See IAS 37.
Borrowing costs directly attributable to acquisition/construction of a qualifying asset are capitalized under IAS 23.
Costs Excluded from Initial Cost (Expensed when incurred):
Costs of opening a new facility.
Costs of introducing a new product or service (including advertising/promotion).
Costs of conducting business in a new location or with a new class of customer (including staff training).
Administration and other general overhead costs.
Costs incurred while an item capable of operating as intended has yet to be brought into use or is operating at less than full capacity.
Initial operating losses.
Costs of relocating or reorganizing part or all of an entityā€™s operations.
Revaluation Model Key Rules:
Must be applied to an entire class of PPE (e.g., all land, all buildings) to prevent selective revaluation.
Revaluations must be made with sufficient regularity to ensure the carrying amount does not differ materially from fair value at the reporting date. (Annual revaluation often needed for volatile assets).
Increases in carrying amount (revaluation surplus) are recognized in Other Comprehensive Income (OCI) and accumulated in equity under the heading "Revaluation Surplus".
Decreases (revaluation deficit) are recognized in profit or loss.
However, a decrease is debited to OCI (against revaluation surplus) to the extent of any credit balance existing in the revaluation surplus for that same asset. An increase reverses a previous deficit on the same asset through P&L first, before crediting OCI.
The revaluation surplus included in equity may be transferred directly to retained earnings when the asset is derecognized, or partially over time as the asset is used (transferring the difference between depreciation based on revalued amount vs original cost).
Fair value is usually market value determined by appraisal. If no market evidence, income or depreciated replacement cost approaches might be used.
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Depreciable amount = Cost (or revalued amount) - Residual Value.
Key Principles:
Depreciation begins when the asset is available for use (i.e., in the location and condition necessary to operate as intended).
Depreciation ceases at the earlier of the date the asset is classified as held for sale (IFRS 5) and the date it is derecognized.
Depreciation is recognized even if the fair value exceeds carrying amount, but ceases if residual value equals or exceeds carrying amount.
Depreciation charge for each period is usually recognized in profit or loss, unless included in the carrying amount of another asset (e.g., depreciation of manufacturing plant included in inventory cost).
The residual value (estimated disposal value at end of useful life) and the useful life (period asset expected to be available for use) must be reviewed at least at each financial year-end. Changes are treated as changes in estimate (IAS 8 - prospective).
Land normally has an unlimited useful life and is not depreciated.
Depreciation Methods:
Various methods can be used:
Straight-line method (constant charge over useful life).
Diminishing (Reducing) balance method (decreasing charge over useful life).
Units of production method (charge based on expected use or output).
The method chosen should reflect the pattern in which the asset's future economic benefits are expected to be consumed by the entity. Method reviewed annually; change treated prospectively (change in estimate).
Requirement:
Each part of an item of PPE with a cost that is significant in relation to the total cost of the item must be depreciated separately.
This applies when components have different useful lives or provide benefits in a different pattern, requiring different depreciation methods or rates.
Rationale: Better reflects the consumption pattern of the asset's economic benefits.
Example:
An aircraft: The airframe might have a 20-year life, the engines a 7-year life (or flight hours), and interior fittings a 5-year life. Each significant component is depreciated over its own useful life.
Major inspections may also be treated as separate components if recognition criteria met, depreciated over the inspection interval.
Costs incurred after initial recognition (e.g., repairs, maintenance, replacements, enhancements).
Capitalize only if:
It is probable that future economic benefits associated with the expenditure will flow to the entity; AND
The cost can be measured reliably.
Expenditure often enhances or restores benefits (e.g., replacing a roof, upgrading machinery capacity).
The carrying amount of replaced parts is derecognized.
Costs of major inspections required for continued operation may be capitalized as a separate component if criteria are met.
Otherwise (Expense as Incurred):
Day-to-day servicing costs (repairs and maintenance) are expensed in profit or loss as incurred. These maintain, rather than enhance, the asset's performance.
When to Derecognize Carrying Amount:
On disposal (e.g., sale, finance lease, donation); or
When no future economic benefits are expected from its use or disposal.
Gain or Loss Recognition:
Gain or loss = Net disposal proceeds - Carrying amount of the asset at the time of derecognition.
The gain or loss is recognized in profit or loss in the period of derecognition (unless IFRS 16 requires different treatment for sale & leaseback). Gains are not classified as revenue.
If the revaluation model was used, any remaining balance in the revaluation surplus for that asset may be transferred directly to retained earnings upon derecognition.
At Acquisition:
Identify significant components with different useful lives requiring separate depreciation.
Estimate and include any dismantling, removal, or site restoration obligation cost.
Ensure only directly attributable costs are capitalized; exclude general overheads, start-up costs etc.
Subsequent Years:
Review depreciation method, residual value, and useful life at least annually; treat changes prospectively (IAS 8).
If using revaluation model, ensure revaluations are sufficiently regular and applied to the entire class. Track revaluation surplus/deficit correctly.
Assess for impairment indicators annually (or more frequently if indicated) per IAS 36.
Correctly distinguish between capitalizable subsequent expenditure and repairs/maintenance expense.
Apply derecognition rules when assets disposed of or no longer provide benefits.
