Introduction

IAS 16 – Property, Plant, and Equipment (PPE) is a critical accounting standard that governs how companies recognize, measure, and report tangible fixed assets. Proper application ensures accurate financial statements, compliance with IFRS, and better decision-making for stakeholders.

In this blog, we’ll break down IAS 16 with clear examples, covering:

• Initial recognition & cost determination
• Depreciation methods (with calculations)
• Subsequent measurement (Cost vs. Revaluation Model)
• Derecognition & disposal of assets

1. Initial Recognition of PPE

1.1 When is an Asset Recognized Under IAS 16?

An asset must be recognized if:

• Future economic benefits are probable.
• The cost can be reliably measured.

1.2 What Costs Are Capitalized?

The initial cost includes:

• Purchase price (after discounts)
• Directly attributable costs (transport, installation, testing)
• Estimated dismantling & restoration costs

1.3 Example: XYZ Ltd. Purchases Machinery

• Purchase Price: $100,000
• Import Duty: $5,000
• Installation: $10,000
• Testing Costs: $3,000
• Total Capitalized Cost: $118,000

Note: Many companies expense installation costs—this is incorrect! IAS 16 requires capitalization.

2. Depreciation:

Depreciation allocates an asset’s cost over its useful life. Key considerations:

• Residual value must be reviewed annually.
• Depreciation starts when the asset is ready for use.

2.1 Depreciation Methods

2.1.1 Straight-Line Method

• Formula: (Cost – Residual Value) ÷ Useful Life
• Example: XYZ Ltd.’s Machinery:
  • Cost: $118,000
  • Residual Value: $8,000
  • Useful Life: 10 years
  • Annual Depreciation = (118,000 – 8,000) ÷ 10 = $11,000

2.1.2 Reducing Balance Method

• Formula: Carrying Amount × Depreciation Rate (e.g., 20%)
• Example: XYZ Ltd.’s Machinery:
  • Year 1: 118,000 × 20% = $23,600
  • Year 2: (118,000 – 23,600) × 20% = $18,880

2.1.3 Units of Production

• Formula: (Cost – Residual Value) ÷ Total Estimated Units
• Example: XYZ Ltd.’s
  • Cost of Machinery: $118,000
  • Residual Value: $8,000
  • Total Estimated Production: 50,000 units
  • Step 1: Calculate Depreciation per Unit
    • = (118,000−8,000) ÷ 50,000
    • = 110,000÷50,000=$2.20 per unit
  • Step 2: Year 1 Depreciation (5,000 units produced)
    • = 5,000 units × 2.20/unit = $11,000

The straight-line method is most common, but reducing balance is better for assets that lose value quickly (e.g., IT equipment).

3. Subsequent Measurement: Cost Model vs. Revaluation Model

IAS 16 allows two models for measuring PPE after recognition:

Example: Revaluation After 5 Years

• Original Cost: $118,000
• Accumulated Depreciation (5 years, straight-line): $55,000
• Carrying Amount Before Revaluation: $63,000
• Fair Value (Year 5): $80,000
• Revaluation Surplus: $17,000 (recorded in OCI)

 If fair value decreases, the loss is first offset against any previous revaluation surplus.

4. Derecognition of PPE

An asset is derecognized when:

• It is sold, scrapped, or no longer provides benefits.
• Any gain/loss is recorded in profit or loss.

Example: XYZ Ltd. Sells Machinery After 8 Years

• Original Cost: $118,000
• Accumulated Depreciation (8 years, straight-line): $88,000
• Carrying Amount at Disposal: $30,000
• Sale Price: $38,000
• Gain on Sale: $8,000 (reported in P&L)

Key Takeaways for Businesses

Capitalize all directly attributable costs—don’t expense them!
Choose the right depreciation method based on asset usage.
Revaluation model can increase equity but requires frequent fair value assessments.
Gains/losses on disposal impact net profit.

Conclusion:

Mastering IAS 16 – Property, Plant, and Equipment is essential for accurate financial reporting and compliance with IFRS. By properly recognizing, depreciating, and measuring PPE, businesses ensure transparency, optimize tax benefits, and provide stakeholders with reliable financial data. Whether using the cost model for simplicity or the revaluation model for fair value adjustments, consistent application is key. Remember, errors in PPE accounting can lead to misstated profits and compliance risks—so always stay updated with the latest IFRS guidelines.

Read more: Tax Deducted at Source (TDS) in Bangladesh

This article is written by Monir Bhuiyan, a member of ACCA (Association of Chartered Certified Accountants) and ICAB (Institute of Chartered Accountants of Bangladesh).