IAS 16: Property, Plant and Equipment

Vocabulary flashcards covering key IAS 16 concepts, definitions, and accounting treatments for Property, Plant and Equipment.

IAS 16

International Accounting Standard that prescribes accounting treatment for Property, Plant and Equipment (PPE).

Property, Plant and Equipment (PPE)

Tangible items held for production, supply, rental, or administrative use and expected to be used for more than one period.

Initial Measurement of PPE

Recorded at cost on acquisition date.

Recognition Criteria (IAS 16)

(1) Probable future economic benefits will flow to the entity; (2) Cost can be measured reliably.

Cost Components of PPE

Purchase price + directly attributable costs + dismantling & restoration cost + eligible borrowing costs.

Purchase Price

Price paid, including import duties and non-refundable taxes, minus trade discounts and rebates.

Directly Attributable Costs

Expenditures that bring the asset to the location and condition necessary for intended use (e.g., site prep, installation, testing).

Dismantling and Restoration Cost

Initial estimate of costs to dismantle, remove, and restore the site of the asset.

Borrowing Costs (IAS 23)

Interest incurred on funds borrowed to construct or acquire a qualifying asset; capitalised as part of cost.

Examples of Directly Attributable Costs

Employee benefits, site preparation, initial delivery & handling, installation & assembly, testing, professional fees, decommissioning, borrowing costs.

Costs NOT Included in PPE

Start-up costs, advertising/promotion, staff training, admin & general overheads—expensed to SOPL.

Subsequent Costs (Capitalise)

Expenditure that (1) yields probable future benefits and (2) is measurable reliably, e.g., major replacements or inspections.

Subsequent Costs (Expense)

Day-to-day servicing, routine repairs and maintenance—recognised in SOPL when incurred.

Derecognition (Component Replacement)

Remove carrying amount of replaced part; recognise gain/loss in SOPL; capitalise cost of new part.

Subsequent Measurement Models

(1) Cost model (cost – accumulated depreciation/impairment); (2) Revaluation model (fair value – accumulated depreciation/impairment).

Cost Model

Assets carried at historical cost less accumulated depreciation and impairment losses.

Revaluation Model

Assets carried at fair value at revaluation date less subsequent depreciation/impairment; changes taken to equity or P&L per IAS 16 rules.

Fair Value (IAS 16)

Price that would be received to sell an asset in an orderly transaction between market participants at measurement date.

Revaluation Surplus

Equity reserve representing cumulative upward revaluations of PPE; not distributable as dividends.

Impairment Loss

Excess of carrying amount over recoverable amount (higher of fair value less costs to sell and value in use).

Conditions to Use Revaluation Model

Reliable market values available; entire asset class revalued simultaneously; same method applied consistently over time.

Revaluation Gain (Upward)

Increase credited to OCI and accumulated in revaluation surplus; PPE carrying amount raised.

Revaluation Loss (Downward)

Decrease recognised in P&L (or offset against any existing revaluation surplus for that asset).

Depreciation Adjustment After Revaluation

Depreciation charged based on new revalued carrying amount over remaining useful life.

Overhaul / Reconditioning Costs

Periodic major servicing costs capitalised when incurred and depreciated until next overhaul; no provision created beforehand.

Inspection Costs

Capitalised at the time of inspection and depreciated over period until the next inspection cycle.

Transfer of Revaluation Surplus on Disposal

Remaining surplus for disposed asset moved directly to retained earnings (equity).

Depreciation of PPE

Systematic allocation of depreciable amount over useful life; separate depreciation for significant components.

Straight-Line Method

Depreciation expense recognised evenly over asset’s useful life when benefits are received uniformly.

Written-Down Value (Declining Balance) Method

Higher depreciation in early years, lower in later years, matching a pattern of diminishing benefits.

Useful Life

Period over which an asset is expected to be available for use by an entity.

Residual Value

Estimated amount an entity expects to obtain from disposal of an asset at the end of its useful life, minus disposal costs.

Derecognition of PPE

Remove asset on disposal or when no future economic benefits expected; recognise resulting gain or loss in P&L.