IAS 16: Property Plant and Equipment

Objective of IAS 16
The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and
equipment. The principal issues are the recognition of assets, the determination of their carrying
amounts, and the depreciation charges and impairment losses to be recognized in relation to
them.
Definition of PPE
Property, plant, and equipment are tangible assets that are held for use in production,
supply of goods and services, for rental to others, or for administrative purposes, and are
expected to be used during more than one period.
Scope
IAS 16 applies to the accounting for property, plant and equipment, except where another
standard requires or permits differing accounting treatments, for example:

Assets classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale
and Discontinued Operations
Idle land and building (PAS 40)
Biological assets related to agricultural activity accounted for under IAS 41 Agriculture
Exploration and evaluation assets recognized in accordance with IFRS 6 Exploration for and
Evaluation of Mineral Resources
Mineral rights and mineral reserves such as oil, natural gas, and similar non-regenerative
resources.
The standard does apply to property, plant, and equipment used to develop or maintain the last
three categories of assets. [IAS 16.3]
The cost model in IAS 16 also applies to investment property accounted for using the cost model
under IAS 40 Investment Property. [IAS 16.5]
The standard does apply to bearer plants but it does not apply to the produce on bearer plants.
[IAS 16.3]
Recognition
Items of property, plant and equipment should be recognized as assets when it is probable that:
[IAS 16.7]
  it is probable that the future economic benefits associated with the asset will flow to the
entity, and
 the cost of the asset can be measured reliably.
This recognition principle is applied to all property, plant, and equipment costs at the time they
are incurred. These costs include costs incurred initially to acquire or construct an item of
property, plant, and equipment and costs incurred subsequently to add to, replace part of, or
service it.

IAS 16 does not prescribe the unit of measure for recognition – what constitutes an item of
property, plant, and equipment. [IAS 16.9] Note, however, that if the cost model is used (see
below) each part of an item of property, plant, and equipment with a cost that is significant in
relation to the total cost of the item must be depreciated separately. [IAS 16.43]
 Replacement of major parts
The carrying amount of those parts that are replaced are derecognized in accordance
with the derecognition provisions of IAS 16.67-72. [IAS 16.13]
 Major inspection
If necessary, the estimated cost of a future similar inspection may be used as an
indication of what the cost of the existing inspection component was when the item was
acquired or constructed. [IAS 16.14]
Initial measurement
An item of property, plant, and equipment should initially be recorded at cost. [IAS 16.15] Cost
includes all costs necessary to bring the asset to working condition for its intended use. This
would include not only its original purchase price but also costs of site preparation, delivery and
handling, installation, related professional fees for architects and engineers, and the estimated
cost of dismantling and removing the asset and restoring the site (see IAS 37 Provisions,
Contingent Liabilities, and Contingent Assets). [IAS 16.16-17]

Proceeds from selling items produced while bringing an item of property, plant, and equipment
to the location and condition necessary for it to be capable of operating in the manner intended
by management are not deducted from the cost of the item of property, plant, and equipment but
recognized in profit or loss (14 May 2020, amendments to IAS 16). [IAS 16.20A]

If payment for an item of property, plant, and equipment is deferred, interest at a market rate
must be recognized or imputed (Installment payment or issuance of bonds). [IAS 16.23]
If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature), the
cost will be measured at the fair value unless (a) the exchange transaction lacks commercial
substance or (b) the fair value of neither the asset received nor the asset given up is reliably
measurable. If the acquired item is not measured at fair value, its cost is measured at the carrying
amount of the asset given up (Exchange). [IAS 16.24]
If the acquisition of PPE is through the issuance of shares, PPE is recorded at its fair value, if the
fair value of the PPE is not present, then PPE is recorded at the fair value of share capital issued
(PFRS 2).
If the acquisition of PPE is through a donation of a shareholder, the Philippine GAAP provides
that the PPE be recorded at its fair value and a credit to Donated Capital. Expenses incurred in
the donation are recorded as a deduction to donated capital accounts because they do not increase
or enhance the value of the asset.
If the acquisition of PPE is through a donation of a non-shareholder, the PPE is recorded at fair
value and a credit to deferred grant income. The income from deferred grant income shall be
recognized in accordance with its nature (PAS 20).
If the acquisition is through a trade-in, then the PPE is recorded in the following priority:
 Fair value approach
 Trade-in value approach
Measurement Subsequent to initial recognition
IAS 16 permits two accounting models:
Cost model. The asset is carried at cost less accumulated depreciation and impairment. [IAS
16.30]
Revaluation model. The asset is carried at a revalued amount, being its fair value at the date of
revaluation less subsequent depreciation and impairment, provided that fair value can be
measured reliably. [IAS 16.31]
a. Proportional approach
b. Elimination approach
Depreciation (cost and revaluation models)
For all depreciable assets:
The depreciable amount (cost less residual value) should be allocated on a systematic basis over
the asset's useful life [IAS 16.50].
The residual value and the useful life of an asset should be reviewed at least at each financial
year-end and, if expectations differ from previous estimates, any change is accounted for
prospectively as a change in estimate under IAS 8. [IAS 16.51]
The depreciation method used should reflect the pattern in which the asset's economic benefits
are consumed by the entity [IAS 16.60]; a depreciation method that is based on revenue that is
generated by an activity that includes the use of an asset is not appropriate. [IAS 16.62A]

The depreciation method should be reviewed at least annually and, if the pattern of consumption
of benefits has changed, the depreciation method should be changed prospectively as a change in
estimate under IAS 8. [IAS 16.61] Expected future reductions in selling prices could be
indicative of a higher rate of consumption of the future economic benefits embodied in an asset.
[IAS 16.56]

Depreciation should be charged to profit or loss unless it is included in the carrying amount of
another asset [IAS 16.48].

Depreciation begins when the asset is available for use and continues until the asset is
derecognized, even if it is idle. [IAS 16.55]
Methods of Depreciation:
a. Straight-line method
b. Composite method
c. Group method
d. Working hours/Service hours
e. Output/Production method
f. Sum of the years’ digit
g. Double Declining balance method
h. 150% declining balance method
i. Inventory appraisal
j. Retirement method
k. Replacement method
Recoverability of the carrying amount
IAS 16 Property, Plant, and Equipment requires impairment testing and, if necessary, recognition
for property, plant, and equipment. An item of property, plant, or equipment shall not be carried
at more than the recoverable amount. The recoverable amount is the higher of an asset's fair
value less costs to sell and its value in use(present value).
Any claim for compensation from third parties for impairment is included in profit or loss when
the claim becomes receivable. [IAS 16.65]
Derecognition (retirements and disposals)
An asset should be removed from the statement of financial position on disposal or when it is
withdrawn from use and no future economic benefits are expected from its disposal. The gain or
loss on disposal is the difference between the proceeds and the carrying amount and should be
recognized in profit and loss. [IAS 16.67-71]

If an entity rents some assets and then ceases to rent them, the assets should be transferred to
inventories at their carrying amounts as they become held for sale in the ordinary course of
business. [IAS 16.68A]
Impairment Test (PAS 36)
The basic principle underlying PAS 36 is that assets shall not be carried at above their
recoverable amount. Impairment of assets may be based on the external source and internal
source of the said assets.
Disclosures
Uncommon Provisions in PPE:
30 June 2014 Amended by Agriculture: Effective for annual periods
Bearer Plants (Amendments beginning on or after 1
to IAS 16 and IAS 41) January 2016
14 May 2020 Amended by Property, Plant Effective for annual periods
and Equipment — Proceeds beginning on or after 1
before Intended Use January 2022
(Amendments to IAS 16)