IAS 16 Property, Plant and Equipment (PPE) Explained | Tangible Asset Accounting under IFRS

IAS 16 Property, Plant and Equipment (PPE) – ACCA Skill Level Study Guide

IAS 16 – Property, Plant and Equipment (PPE) deals with the accounting treatment for tangible fixed assets. It covers recognition, measurement, depreciation, and revaluation. Whether you’re preparing for ACCA or want a practical understanding of PPE, this guide simplifies the IAS 16 standard with clear examples and explanations.

1. Recognition Criteria for PPE 

IAS 16 defines PPE as tangible assets held for use in production/supply of goods/services, for rental, or for administrative purposes, and expected to be used for more than one period.

 

Recognition conditions:

- It is probable that future economic benefits associated with the item will flow to the entity.

- The cost of the item can be measured reliably.

 

Examples:

- A machine bought to manufacture goods qualifies as PPE.

- A fire-suppression system that allows continued operations can be capitalised.

 

Spare parts:

- Recognised as PPE if they are expected to be used for more than one year.

- Otherwise, they are treated as inventory.

2. Measurement of PPE

Initial Measurement:

- PPE is initially measured at cost.

- Cost includes: purchase price (net of discounts), import duties, non-refundable taxes, directly attributable costs (installation, delivery, testing), and estimated dismantling/restoration costs.

 

Subsequent Measurement:

- Cost Model: Carrying amount = Cost - Accumulated depreciation - Impairment losses.

- Revaluation Model: Carrying amount = Fair value - Subsequent depreciation and impairment.

- Increases go to revaluation surplus (OCI); decreases go to P&L unless reversing a previous surplus.

3. Depreciation and Useful Life

- Depreciation is charged over the asset’s useful life.

- Depreciable amount = Cost - Residual value.

 

Methods:

- Straight-line: Equal annual charges.

- Reducing balance: Higher charges in early years.

- Units of production: Based on usage.

 

Residual value and useful lives must be reviewed at least annually.

 

Component Depreciation:

- Significant components with different useful lives must be depreciated separately.

4. Derecognition of PPE

- Derecognise an asset when it is disposed of or no future economic benefits are expected.

- Gain/loss on disposal = Proceeds - Carrying amount.

- If revaluation surplus exists, transfer to retained earnings (not P&L).

 

Example:

- A machine with carrying amount ₹20,000 sold for ₹28,000 → Gain = ₹8,000.

5. Disclosure Requirements

Entities must disclose for each PPE class:

- Measurement bases (cost or revaluation).

- Depreciation methods and useful lives.

- Gross carrying amount and accumulated depreciation.

- Reconciliation of carrying amounts (opening to closing).

 

Other disclosures:

- Restrictions on title or pledged assets.

- Capital commitments.

📘 Also Read: IFRS 5 – Assets Held for Sale & Discontinued Operations

- Depreciation expense and revaluation surplus changes.