IAS 16
Property, Plant and Equipment
1Objective and scope
IAS 16 prescribes the accounting treatment for property, plant and equipment (PPE): the timing of recognition of the asset, the determination of its carrying amount, and the depreciation charges and impairment losses to be recognised. It applies to tangible items held for use in production or supply of goods/services, for rental to others, or for administrative purposes, and expected to be used for more than one period.
2Key definitions
3Recognition and measurement
Initial measurement
An item of PPE is recognised as an asset only if it is probable future economic benefits will flow to the entity and its cost can be measured reliably. Subsequent expenditure is capitalised only if it meets these same recognition criteria (an improvement that increases future economic benefits); routine day-to-day servicing and repairs are expensed as incurred.
Measurement after recognition
An entity chooses either the cost model (cost less accumulated depreciation and accumulated impairment losses) or the revaluation model (fair value at the date of revaluation, less any subsequent accumulated depreciation and impairment) as its accounting policy, and applies it to an entire class of PPE. Where the revaluation model is used, revaluations must be kept sufficiently up to date so the carrying amount does not differ materially from fair value.
| Event under the revaluation model | Where it is recognised |
|---|---|
| Revaluation increase | Other comprehensive income (revaluation surplus), unless it reverses a previous decrease of the same asset previously recognised in profit or loss, in which case that portion is recognised in profit or loss |
| Revaluation decrease | Profit or loss, unless it reverses a previous increase of the same asset held in the revaluation surplus, in which case that portion is recognised in OCI |
Depreciation
Each significant part of an item of PPE with a useful life different from the rest is depreciated separately (the component approach - e.g. an aircraft's engines depreciated separately from its airframe). Useful life, residual value and depreciation method are reviewed at least at each financial year end, and any change is accounted for prospectively as a change in accounting estimate under IAS 8.
4Derecognition and disclosure
An item of PPE is derecognised on disposal, or when no future economic benefits are expected from its use or disposal. The gain or loss on derecognition (proceeds less carrying amount) is recognised in profit or loss; it is never classified as revenue. Any remaining revaluation surplus for that asset may be transferred directly to retained earnings (not through profit or loss).
- Measurement bases used for determining the gross carrying amount, for each class of PPE
- Depreciation methods used, useful lives or depreciation rates
- Gross carrying amount and accumulated depreciation at the beginning and end of the period
- A reconciliation of the carrying amount at the beginning and end of the period (additions, disposals, depreciation, impairment, revaluations, exchange differences)
5Examinable focus
What KASNEB tests
Depreciation computations (straight-line and reducing balance, including part-year depreciation on additions and disposals), the double entry for a revaluation gain and a subsequent revaluation loss on the same asset (watch which portion goes to OCI vs profit or loss), and disposal gain/loss calculations are all standing numerical questions. Distinguishing capital expenditure (capitalised) from revenue expenditure (expensed) is a frequent written point.