IAS 16 governs the accounting for property, plant, and equipment (PP&E). These are tangible asset that are (IAS 16.6):
- Held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
- Expected to be used during more than one (annual) period.
PP&E is sometimes referred to alongside intangible assets as ‘fixed assets’. IAS 16 applies to all PP&E items not covered by other IFRSs. However, IAS 16.3 excludes certain assets from its scope, such as those held for sale, biological assets related to agricultural activity (excluding bearer plants), and assets pertaining to exploration, evaluation, mineral rights, and non-regenerative resources like oil and natural gas.
Distinguishing between PP&E and inventory
The distinction between PP&E and inventory can sometimes be ambiguous. This differentiation is significant because inventory is typically recognised as an expense affecting EBITDA when used or sold, an essential performance metric for many entities. In contrast, PP&E is depreciated, and its depreciation expense is not included in EBITDA.
Spare parts and servicing equipment
As per IAS 16.8, items like spare parts and servicing equipment are classified as PP&E if they meet the PP&E criteria, particularly if they are expected to be used for more than one year. Otherwise, they are treated as inventory.
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Core inventory levels
Maintaining a minimum inventory level, often due to technical requirements, can lead to two scenarios:
- Inventory that is integral to PP&E, remains until the end of its useful life, and then typically loses value due to factors like pollution.
- Inventory that is regularly replaced and replenished.
Items in the first category, which cannot be sold or consumed, should be considered part of PP&E, as they do not align with the definition of inventory. Conversely, items in the second category, which circulate and are replaced, should be classified as inventory, following the criteria of IAS 2.
Distinguishing between PP&E and intangible assets
Refer to the discussion on classifying certain intangible assets, such as computer software, as part of PP&E.
Recognition
To recognise an item as PP&E, two criteria must be met (IAS 16.7):
- It is probable (more than 50% likely under IFRS) that the item will bring future economic benefits to the entity.
- Its cost can be reliably measured.
IAS 16.11 elaborates that these economic benefits might be indirect or result from reduced outflows.
IAS 16 does not specify a unit of account. Therefore, entities have the discretion to group individually insignificant items into a single PP&E asset (IAS 16.9).
Subsequent measurement
IAS 16 offers two options for measuring PP&E: the cost model and the revaluation model. It mandates that the same model be applied consistently to all assets within a specific class of PP&E (IAS 16.29).
In the cost model, PP&E is measured at its original cost minus any accumulated depreciation and impairment losses (IAS 16.30). Alternatively, the revaluation model sets PP&E’s value at its current fair value, again deducting any accumulated depreciation and impairment losses. The cost model is more commonly used than the revaluation model.
Derecognition
An item of PP&E is derecognised either upon disposal or when it no longer brings future economic benefits from its use or disposal (IAS 16.67). Any gains or losses from this derecognition are reported net in the income statement and should not be classified as revenue (IAS 16.68), except when the disposal is part of the entity’s normal business operations, such as in the case of a car rental company (IAS 16.68A).
The point at which PP&E is considered disposed of aligns with when control is transferred to the recipient, following the criteria for satisfying a performance obligation in IFRS 15 (IAS 16.69). Similarly, the determination of the disposal consideration should also adhere to IFRS 15 (IAS 16.72).
Impairment
PP&E is subject to the impairment requirements outlined in IAS 36. According to IAS 16.66, impairments or losses on PP&E, any related third-party compensation claims or payments, and costs for replacement asset acquisition or construction are distinct economic events. Therefore, their financial impacts should not be netted against each other in financial statements.
Disclosure
The specific disclosure requirements for PP&E are detailed in IAS 16.73-78. IAS 16.79 also encourages (but does not mandate) the provision of additional information. For entities using the revaluation model, the disclosure requirements of IFRS 13 are also applicable.
More about IAS 16
See other pages relating to IAS 16:
IAS 16: Cost of Property, Plant and Equipment
IAS 16 and IAS 38: Depreciation and Amortisation of Property, Plant and Equipment and Intangible Assets
IAS 16 and IAS 38: Revaluation Model for Property Plant and Equipment and Intangible Assets