Property Plan & Equipment (IAS 16)

The Objective of IAS 16 (Property, Plant & Equipment) prescribes the principles for the
initial recognition and subsequent accounting for property, plant, and equipment.

Summary
 Items of property, plant, and equipment should be recognised as assets when 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.
 Initial recognition at cost, which includes all costs necessary to get the asset ready
for its intended use. If payment is deferred, interest must be recognised.
 In accounting subsequent to acquisition, IAS 16 allows a choice of accounting
model:
 Cost model: The asset is carried at cost less accumulated depreciation and
impairment.
 Revaluation model: The asset is carried at revalued amount, which is fair
value at revaluation date less subsequent depreciation.
 Under the revaluation model, revaluations must be done regularly. All items of a
given class must be revalued (for instance, all buildings). Revaluation increases
are credited to equity. Revaluation decreases are charged first against the
revaluation surplus in equity, and any excess against profit and loss. When the
revalued asset is disposed of, the revaluation surplus in equity remains in equity
and is not recycled through profit and loss.
 If the cost model is used, components of an asset with differing patterns of
benefits must be depreciated separately.
 Under the cost model, depreciation is charged systematically over the asset’s
useful life. The depreciation method must reflect the pattern of benefit
consumption. The residual value must be reviewed a least annually. If operation
of an item of property, plant, and equipment (for example, an aircraft) requires
regular major inspections, when each major inspection is performed, its cost is
recognised in the carrying amount of the asset as a replacement if the recognition
criteria are satisfied.
 Impairment of property, plant, and equipment must be assessed under IAS 36.
 All exchanges of property, plant, and equipment should be measured at fair value,
including exchanges of similar items, unless the exchange transaction lacks
commercial substance or the fair value of neither the asset received nor the asset
given up is reliably measurable.
 Disclosures include accounting policies; depreciation methods and lives;
acquisitions, disposals, impairments, and reversals; amounts and details of
revaluations; and commitments.
Impairment
Businesses recognize impairment when the financial statement-carrying amount of a
long-lived asset or asset group exceeds its fair value and is not recoverable. A carrying
amount is not recoverable if it is greater than the sum of the undiscounted cash flows
expected from the asset’s use and eventual disposal. IASB defines impairment loss as the
amount by which the carrying value exceeds an asset’s fair value.