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International Accounting Standards
IAS 16
Property, Plant and Equipment

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Objective
To explain how an enterprise accounts
for items of property, plant and
equipment

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Scope
IAS 16 should be applied unless another IAS permits
a different accounting treatment
IAS 16 does not apply to:
• forests and similar regenerative natural resources;
• or mineral rights, the exploration for and extraction of
minerals, oil, natural gas and similar non-regenerative
resources.
IAS 16 applies to separable property, plant and
equipment.

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Key Principles
Property, plant and equipment – tangible assets to be
used during more than one period and that are held
for use:
• in the production or supply of goods or services;
• for rental to others; or
• for administrative purposes.
Cost – is the fair value of the consideration given to
acquire the asset.

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Continued-Key Principles
Depreciable Amount – is cost less its residual value.
Residual Value – the amount the enterprise expects
to obtain at the end of its useful life,after
deducting costs of disposal.
Useful life – is either:
• The period of time over which it is expected to be used;
or
• The number of production units expected to be obtained
from it.

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Continued-Key Principles
Depreciation – the systematic allocation of the
depreciable amount of an asset over its
useful life.
Fair Value – the amount for which the asset
could be exchanged between
knowledgeable, willing parties in an arm’s
length transaction.

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Continued-Key Principles
Carrying amount – the amount for which the
asset is recognized after deducting
accumulated impairment losses.
Impairment Loss – is the amount by which an
asset’s carrying amount exceeds its
recoverable amount.

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Recognition
Property, plant and equipment should be recognized
as an asset when:
• It is probable that future economic benefits associated
with the asset will flow to the enterprise.
• The cost of the asset can be measured reliably.
Property, plant and equipment – initially measured at
cost.
Cost is the amount of cash paid or the fair value of
the consideration given to acquire an asset.

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Cost of Acquired or Self-constructed
assets
Initial measurement – at cost.
Illustration: Cost of Acquired or self
constructed assets
Before constructing a new building, an entity
incurs costs of demolishing an old building
on the site. The cost should be capitalized.

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Cost of Non-Monetary Exchanges
• If the exchanged assets are dissimilar, cost is the
fair value of the asset received.
• Net carrying value of the item exchanged less fair
value = profit or loss.
• If the exchanged assets are similar, the cost of the
new asset is the carrying amount of the asset given
up.
• If the cash or other assets are less than 10 per cent
of the fair value of the asset being exchanged, the
fair values of the assets would be regarded as
similar.

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Subsequent Expenditure
Subsequent expenditure should be capitalized
only when it is probable that future
economic benefits will flow to the
enterprise in excess of the originally
assessed standard of performance.

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Continued-Subsequent…
Expenditures that:
• extend useful life,
• increase capacity
• substantially improve output quality, or
• enable substantial reduction in operating costs generally
should be capitalized.
All other expenditures should be expensed when
incurred, e.g., expenditure on repairs and
maintenance

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Continued-Subsequent
Type of Expenditure Expense Capitalize Reduce Accumulated
Depreciation
Addition:
Enlarging an asset or adding a new
feature
x
Betterment:
Increasing operating efficiency or
capacity
x
Repairs and Maintenance:
Maintaining an asset in current
working condition
x
Extraordinary Repairs:
Extending the service life of an asset
x

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Major Inspection or Overhaul Costs
SIC-23 : costs of a major inspection or overhaul
occurring at regular intervals should be capitalized
when:
• The enterprise has separately identified a component of
the asset and has already depreciated that component,
• It is probable that future economic benefits associated
with the asset will flow to the enterprise, and
• The cost of the inspection or overhaul can be measured
reliably.

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Continued-Major Inspection
Capitalization of major inspection or overhaul costs
requires that a components approach to
depreciation be applied.
The part of the asset representing the major
inspection or overhaul should be depreciated over
a period shorter than the rest of the asset.
Changes in the method of depreciation is treated as a
change in accounting estimate (i.e., the
depreciation charge for the current and future
periods is adjusted).

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Carrying Amount after Initial
Recognition
Benchmark
– Property, plant and equipment should be measured at
cost less accumulated depreciation and accumulated
impairment losses.
Allowed Alternative
– Property, plant and equipment should be revalued to its
fair value less any subsequent accumulated depreciation
and accumulated impairment losses.
Revaluations to fair value should be regularly
revised..

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Revaluation
Basis = the fair value of the asset at the date
of revaluation.
Fair value = the amount at which an asset
could be exchanged between
knowledgeable, willing parties in an arm’s
length transaction.

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Continued-Revaluation
Two alternative treatments of accumulated
depreciation:
• The accumulated depreciation may be restated
proportionately so that the carrying amount of the asset
after revaluation equals its revalued amount.
• Eliminate the accumulated depreciation against the
gross carrying amount of the asset and restate the net
amount to the revalued amount of the asset.

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Continued-Revaluation
The entire class of property , plant and equipment
should be revalued (i.e., assets of similar nature
and use like building, ships or machinery).
When the carrying amount is increased, the increase
should be charged to a revaluation surplus ( in
equity).
To reverse a revaluation decrease, the revaluation
should be recognized as income (to the extent of
the amount recognized as an expense). This only
applies to individual assets.

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Continued-Revaluation
It is not permitted to offset a revaluation decrease on
asset against a revaluation surplus on another
asset.
When the carrying amount is decreased, the decrease
should be charged to expense.
However, if there is a related evaluation surplus, the
decrease should be charged directly against this
with the excess charged to the income statement.
This only applies to individual assets.

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Depreciation
Depreciation = the systematic allocation of
the depreciable amount of the asset over its
useful life.
Depreciable amount = is the cost or revalued
carrying value less the residual value.

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Continued-Depreciation
Examples:
• straight-line method (constant charge)
• the diminishing balance method (decreasing
charge) and
• sum-of-the-units or units of production method
(a fluctuating charge per period based on use)

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Useful Life & Depreciation Method
The useful life must be reviewed periodically.
If the useful life has changed significantly,
the depreciation charge for current and
future periods should be adjusted.
The net carrying value ( less residual value) at
the review date is simply depreciated over
the new future life. This results in the new
annual depreciation charge.

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Continued-Useful Life…
The depreciation method should be reviewed
periodically in the light of the pattern of
estimated economic benefits.
If a change of depreciation method has to be
made, the change should be accounted for
as a change in accounting estimate.
The depreciation charge for the current and
future periods should be adjusted.

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Impairment
An impairment loss must be recognized
whenever the carrying amount exceeds its
recoverable amount.
The recoverable amount is the higher of:
• Net selling price;
• Value in use; the present value of estimated
future cash flows

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Continued-Impairment
An impairment loss should be recognized in
the income statement for assets carried at
cost. A revaluation decrease should be
recorded for assets carried at revalued
amount.
The carrying amount after the impairment
should be used to calculate future
depreciation

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Retirements and Disposals
Property, plant and equipment should be
eliminated from the balance sheet on
disposal.
Gain or loss = net disposal proceeds less
carrying amount.
Any revaluation surplus relating to an
eliminated asset should be transferred to
retained earnings.

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Continued-Retirement…
No gain or loss would be recognized if an
asset is exchanged for a similar asset.
If an asset is exchanged for a different asset,
any difference between the fair value of the
asset exchanged and its carrying amount
should be recognized in the income
statement.

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Disclosure
Disclosure required for each class of property,
plant and equipment:
• Measurement basis: if more than one basis has
been used
• Depreciation methods.
• Useful lives or depreciation rates.
• Gross carrying amount of accumulated
depreciation (aggregate with accumulated
impairment losses) at beginning and ending of
the period.

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Continued-Disclosure
• A reconciliation at the beginning and end of period
showing:
o additions
o disposals
o acquisitions through business combinations
o revaluations
o impairment losses (recognized as expenses and as equity)
o reversal of impairment losses (recognized as expenses and as
equity)
o depreciation
o foreign currency translation differences, and
o any other movements
Comparative information not required

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Continued-Disclosure
• Existence and amount of restrictions on title to assets.
• Property, plant and equipment pledged as security for
liabilities
• Accounting policy for the estimated costs of restoring
the site of items of property, plant and equipment
• The amount of expenditures on account for property,
plant and equipment in the course of construction.
• Commitments for acquisition of property, plant and
equipment

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Continued-Disclosure
Disclosure requirements for revalued assets:
• The basis used to revalue assets.
• Date of revaluation.
• Whether an independent valuer was involved.
• Nature of any indices used to determine
replacement cost.
• The carrying amount of each class of revalued
property, plant and equipment as if they had
been carried at cost.