IAS 16 Property, Plant & Equipment Explained (applies in 2025) + FREE Compliance Checklist

Summary

This video provides an overview of IAS 16, the standard for accounting property, plant, and equipment (PPE). Sylvia from CPDBox.com explains key concepts, including the definition and recognition criteria for PPE, how to measure it at recognition, and how to apply subsequent treatment. She covers both the cost and revaluation models for measuring PPE, as well as the principles of depreciation. The video also delves into derecognition and handling gains or losses from asset disposals. For further learning, viewers are encouraged to visit CPDBox.com for additional resources and explanations on PPE accounting.

Takeaways

• 😀 PPE refers to tangible assets used for production, service supply, rental to others, or administrative purposes, expected to last more than one period.
• 😀 To recognize an asset as PPE, it must be probable that future economic benefits will flow to the entity, and its cost must be measurable.
• 😀 Control of the asset is crucial for recognition—if an entity does not control the asset, it cannot be classified as PPE, even if it generates benefits (e.g., animals in a safari park).
• 😀 PPE is initially measured at cost, including the purchase price, import duties, non-refundable taxes, and costs directly related to bringing the asset into use.
• 😀 When a PPE asset is purchased in exchange for a non-monetary asset, it should be measured at its fair value.
• 😀 Two main models for subsequent measurement of PPE: the Cost Model (carried at cost minus depreciation and impairment) and the Revaluation Model (carried at fair value minus depreciation and impairment).
• 😀 The Revaluation Model requires regular revaluations (every 3–5 years) and adjusts the carrying amount based on fair value changes.
• 😀 Depreciation is the systematic allocation of an asset’s depreciable amount over its useful life. The useful life can be based on time or production units.
• 😀 Depreciation methods include straight-line, diminishing balance, and number of units, and the method must be reviewed regularly for any changes.
• 😀 When PPE is disposed of, its carrying amount is derecognized, and any gain or loss from the disposal is calculated based on the difference between net disposal proceeds and carrying amount.
• 😀 For more in-depth resources and advice on PPE accounting, visit cpdbox.com for articles, video lectures, and Q&A sections.

Q & A

What is the main objective of IAS 16?

The main objective of IAS 16 is to prescribe the accounting for items of property, plant, and equipment (PPE), focusing on their recognition, measurement, and depreciation.

What two key issues are addressed by IAS 16 regarding property, plant, and equipment?

The two key issues are: 1) How to define property, plant, and equipment and when to recognize it, and 2) How to determine the carrying amount of PPE and calculate depreciation.

What is the definition of property, plant, and equipment according to IAS 16?

Property, plant, and equipment are tangible assets held by an entity for the use in the production or supply of goods or services, for rental to others, or for administrative purposes, and are expected to be used over more than one period.

Under what condition can an asset be recognized as property, plant, and equipment?

An asset can be recognized as property, plant, and equipment if it is probable that future economic benefits will flow to the entity and the cost of the asset can be reliably measured.

How is property, plant, and equipment measured when initially recognized?

When initially recognized, property, plant, and equipment is measured at cost, which includes the purchase price, directly attributable costs for bringing the asset to its location and condition for use, and any initial estimate of costs for dismantling or removing the asset.

What are the two models prescribed by IAS 16 for subsequent measurement of PPE?

IAS 16 prescribes two models for subsequent measurement of PPE: 1) The cost model, where PPE is carried at cost less accumulated depreciation and impairment losses, and 2) The revaluation model, where PPE is carried at its revalued amount, less accumulated depreciation and impairment losses.

How often should PPE be revalued under the revaluation model?

Under the revaluation model, PPE should be revalued with sufficient regularity, typically every 3 to 5 years, to ensure that its carrying amount does not differ materially from its fair value.

What is depreciation and what key elements does its definition contain?

Depreciation is the allocation of the depreciable amount of an asset over its useful life. Its key elements are the depreciable amount, useful life, and the systematic basis for allocation.

What is the meaning of 'useful life' in the context of depreciation?

Useful life is the period over which an asset is expected to be available for use by an entity, or alternatively, it is the number of production units expected to be obtained from the asset.

How is a gain or loss from the disposal of PPE calculated?

A gain or loss from the disposal of PPE is calculated as the net disposal proceeds minus the carrying amount of the PPE. Gains or losses are recognized in profit or loss but not as revenue.