International financial reporting standard
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International Accounting Standard 16: Property, Plant and Equipment (IAS 16) is an international financial reporting standard adopted by the International Accounting Standards Board (IASB). [1] It outlines the accounting treatment for property, plant and equipment (PPE), including their recognition, the determination of their carrying amounts, and the associated depreciation charges and impairment losses. [2] The standard defines PPE as tangible items held for use in production, supply of goods, rental to others, or for administrative purposes, which are expected to be used during more than one period. [3]
IAS 16 does not apply to assets classified as held for sale under IFRS 5, biological assets related to agricultural activity under IAS 41, or mineral rights and reserves. [4]
An item of PPE shall be recognized as an asset if it is probable that future economic benefits associated with the item will flow to the entity. [5] Additionally, the cost of the item must be capable of being measured reliably for recognition to occur. [6] Items of PPE are initially measured at their cost. [7]
This cost includes the purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for its operation, and the initial estimate of the costs of dismantling and removing the item. [8] Directly attributable costs may include employee benefits, site preparation, delivery, installation, and professional fees. [9]
An entity shall choose either the cost model or the revaluation model as its accounting policy and apply that policy to an entire class of PPE. [10]
Under the cost model, an item of PPE is carried at its cost less any accumulated depreciation and accumulated impairment losses. [11] Under the revaluation model, an item whose fair value can be measured reliably is carried at a revalued amount, being its fair value at the date of the revaluation less subsequent depreciation. [12] If a revaluation results in an increase in value, the increase is recognized in other comprehensive income and accumulated in equity under the heading of revaluation surplus. [13] Conversely, a decrease in an asset's carrying amount as a result of a revaluation is recognized in profit or loss unless it offsets a previous surplus on the same asset. [14]
The depreciable amount of an asset shall be allocated on a systematic basis over its useful life. [15] The depreciation charge for each period shall be recognized in profit or loss unless it is included in the carrying amount of another asset. [16] The depreciation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. [17]
The carrying amount of an item of PPE shall be derecognized on disposal or when no future economic benefits are expected from its use or disposal. [18] The gain or loss arising from the derecognition of an item of PPE shall be included in profit or loss when the item is derecognized. [19] Gains shall not be classified as revenue. [20]
The following examples illustrate the core accounting entries for PPE.
Scenario: A company purchases machinery for $100,000 cash and incurs $5,000 in installation costs.
| Event | Debit | Credit | Rationale |
|---|---|---|---|
| Purchase and installation | Machinery (Asset) | Cash | All costs to bring the asset to its working condition are capitalized. [21] |
Scenario: Machinery with a carrying amount of $80,000 is revalued to a fair value of $100,000.
| Event | Debit | Credit | Rationale |
|---|---|---|---|
| Increase in value | Machinery (Asset) | Revaluation Surplus (OCI/Equity) | Increases are recognized in OCI under the revaluation model. [22] |
IAS 16 requires specific disclosures for each class of property, plant, and equipment to allow users to evaluate the entity's investment in its physical infrastructure and the changes in such investment. [23]
| Paragraph | Category | Disclosure Requirement | Description / Examples |
|---|---|---|---|
| IAS 16.73(a-c) | Measurement Bases | Depreciation Methods | Disclosure of the measurement bases (e.g., cost model or revaluation model), depreciation methods, and useful lives/depreciation rates. |
| IAS 16.73(d-e) | Carrying Amounts | The gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period. | |
| IAS 16.73(e) | Reconciliation | Reconciliation of Movements | A reconciliation of the carrying amount at the beginning and end of the period showing additions, disposals, acquisitions through business combinations, and depreciation. |
| IAS 16.74(a) | Restrictions & Commitments | Pledged as Security | The existence and amounts of restrictions on title, and property, plant and equipment pledged as security for liabilities. |
| IAS 16.74(b) | Expenditure in Progress | The amount of expenditures recognized in the carrying amount of an item of PPE in the course of its construction. | |
| IAS 16.74(c) | Contractual Commitments | Contractual commitments for the acquisition of property, plant and equipment. | |
| IAS 16.77 | Revaluation | Effective Date & Independent Valuer | If items are stated at revalued amounts, disclosure of the effective date of the revaluation and whether an independent valuer was involved. |
| IAS 16.77(e) | Revaluation Surplus | The revaluation surplus, indicating the change for the period and any restrictions on the distribution of the balance to shareholders. | |
| IAS 16.77(f) | Cost Model Comparison | For each revalued class of PPE, the carrying amount that would have been recognized had the assets been carried under the cost model. |