IAS 16 Property, Plant and Equipment: Summary, Practice Questions & Decision Tree

An item of PPE is recognised when future economic benefits are probable and cost can be measured reliably (IAS 16.7). Cost is more than the invoice price (IAS 16.16): it includes import duties and non-refundable taxes, less trade discounts; every directly attributable cost of bringing the asset to the location and condition for intended use — site preparation, delivery, installation, professional fees, testing (net of sale proceeds from items produced while testing); and the initial estimate of dismantling, removal and site restoration obligations, recognised as a provision under IAS 37 and capitalised into the asset.

• Capitalised: delivery, installation, site prep, testing, borrowing costs for qualifying assets (IAS 23), dismantling estimates
• Expensed: staff training, advertising and launch costs, administration and general overheads, initial operating losses (IAS 16.19)
• Abnormal costs — wasted material, labour from errors — are never capitalised (IAS 16.22)

Later spending faces the same recognition test. Day-to-day servicing — repairs and maintenance — is expensed as incurred (IAS 16.12). Replacement of a significant part is capitalised, with the carrying amount of the replaced part derecognised even if it was not depreciated separately (IAS 16.13, 70). Major inspections and overhauls required for continued operation are capitalised as a component and depreciated to the next inspection (IAS 16.14). The dividing line is simple in principle: does the spend meet the asset recognition criteria, or does it merely maintain the existing level of performance?

Depreciation allocates an asset's depreciable amount — cost minus residual value — systematically over its useful life (IAS 16.6, 50). Three mechanics matter. First, the components approach: each part with a cost significant to the whole and a different life is depreciated separately — an aircraft's engines, airframe and cabin fittings each on their own schedule (IAS 16.43–44). Second, depreciation continues while an asset is idle (unless held for sale) but stops when it is derecognised or fully depreciated (IAS 16.55). Third, residual values, useful lives and the depreciation method are reviewed at least annually, with changes applied prospectively as changes in estimate under IAS 8 (IAS 16.51, 61).

After initial recognition, each class of PPE follows one of two models (IAS 16.29). The cost model carries assets at cost less accumulated depreciation and impairment. The revaluation model carries them at fair value at revaluation date less subsequent depreciation, provided fair value can be measured reliably — and revaluations must be regular enough that carrying amount doesn't drift materially from fair value, applied to the entire class to prevent cherry-picking (IAS 16.31, 34, 36).

The surplus mechanics are the exam favourite (IAS 16.39–40): an upward revaluation is credited to a revaluation surplus in OCI, except to the extent it reverses a previous downward revaluation of the same asset in P&L. A downward revaluation is charged to P&L, except to the extent a surplus exists for that asset — which is debited first through OCI. While the asset is used, an entity may transfer the excess depreciation (actual depreciation minus depreciation on historical cost) each year from surplus to retained earnings; on disposal the whole remaining surplus moves to retained earnings — never through profit or loss (IAS 16.41).

An item leaves the balance sheet on disposal or when no future benefits are expected (IAS 16.67). The gain or loss — net disposal proceeds minus carrying amount — lands in profit or loss, but is never classified as revenue (IAS 16.68). One nuance: gains on disposal of revalued assets do not include the revaluation surplus; that balance transfers within equity, so a company cannot boost profit by selling appreciated revalued assets.