IAS 16 Property, Plant and Equipment

Objective

IAS 16 sets the guidelines for accounting for property, plant, and equipment (PPE), enabling users to understand an entity’s investment in PPE and the changes in such investments. The key aspects are recognizing assets, determining their carrying amounts, and recognizing depreciation and impairment losses.

Scope

This standard applies to all PPE except when other standards dictate different treatments. It excludes PPE held for sale, biological assets, exploration and evaluation assets, and mineral rights and reserves. However, PPE used to develop or maintain these excluded items must follow IAS 16.

Definitions

• Bearer Plant: A living plant used in agricultural production that is expected to produce for more than one period and is not typically sold except as scrap.

• Carrying Amount: The value at which an asset is recognized, minus accumulated depreciation and impairment losses.

Measurement at Recognition

PPE should initially be measured at cost, which includes purchase price, directly attributable costs, and the initial estimate of dismantling and removing the asset.

Subsequent Costs

Subsequent costs related to PPE should be capitalized only if it is probable that future economic benefits will flow to the entity and the cost can be reliably measured. Routine repairs and maintenance costs are expensed as incurred. Examples of capitalized subsequent costs include:

• Replacing part of an item of PPE.

• Major inspections or overhauls that occur at regular intervals.

Measurement After Recognition

Entities must choose between two models for subsequent measurement:

Cost Model: PPE is carried at cost less accumulated depreciation and impairment losses.

Revaluation Model: PPE is carried at revalued amounts, fair value at the date of revaluation less subsequent depreciation

and impairment losses. Revaluations must be regular enough to ensure carrying amounts do not differ materially from

fair values.

Depreciation:

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount is the cost of the asset less its residual value. Depreciation starts when the asset is available for use and continues until it is derecognized.

Impairment:

An asset is impaired when its carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use.

Derecognition:

An asset is derecognized on disposal or when no future economic benefits are expected from its use or disposal. The difference between the net disposal proceeds and the carrying amount is recognized in profit or loss.

Disclosure

Entities must disclose information about the measurement bases used for determining gross carrying amounts and accumulated depreciation, the depreciation methods used, and the useful lives or depreciation rates used.

This summary simplifies the core elements of IAS 16, making it easier to understand the essential aspects of accounting for property, plant, and equipment, including how to handle subsequent costs.

Notes

1. Directly Attributable Costs

Include costs directly related to bringing the asset to the location and condition necessary for it to be capable of operating

in the manner intended by management.

2. Initial Estimate of Dismantling/Removing Costs

This is often considered as part of the asset's cost under the provision for the present value of the costs to dismantle,

remove, or restore the site on which it is located.

3. Residual Value

The estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated

costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.

4. Useful Life

The period over which an asset is expected to be available for use by an entity, or the number of production or similar units

expected to be obtained from the asset by an entity.

5. Fair Value

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market

participants at the measurement date.

6. Value in Use

The present value of the future cash flows expected to be derived from an asset or cash-generating unit.

These formulas and notes should help clarify the calculations and considerations required under IAS 16 for accounting for property, plant, and equipment.