IAS 16 Property, Plant and Equipment: Scope, Definitions and Disclosure

Property, plant and equipment (‘PP&E’) are tangible items that (IAS 16.6):

  1. are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
  2. are expected to be used during more than one period.

Accounting treatment for PP&E is covered in IAS 16. In particular, IAS 16 deals with recognition of PP&E, depreciation charges, impairment losses and disclosure. IAS 16 applies to all items of PP&E not covered by other IFRS. Paragraph IAS 16.3 specifies scope exemptions.

Property, plant and equipment is often abbreviated as PP&E. Sometimes, property, plant and equipment are referred to as ‘fixed assets’ together with intangible assets.

In some cases, the distinction between PP&E and inventory is not clear cut. The significance of such a distinction is that inventory, when utilised, is normally recognised as an expense impacting EBITDA, a performance measure that is key for many entities. On the other hand, PP&E is depreciated and depreciation expense is excluded from EBITDA, as the acronym implies.

Paragraph IAS 16.8 explains that items such as spare parts, stand-by equipment and servicing equipment are recognised as PP&E when they meet the definition of PP&E. Otherwise, such items are classified as inventory. Specifically, an item of PP&E must be expected to be used for more than one period (i.e. one year, though this is not stated explicitly).

There are cases where a minimum level of inventory must be maintained due to technical reasons. These instances can be split into two main categories:

  1. Such inventory cannot be sold or otherwise consumed, it stays within the PP&E until the end of the useful life and after that its value is significantly lower due to pollution etc.
  2. Such inventory is in circulation and is exchanged with new inventory.

Assets described in point 1. can be (and in my opinion should be) treated as a part of PP&E as they usually don’t meet the definition of inventory. Inventories described in point 2. should not be treated as a part of PP&E because they meet the criteria set out in IAS 2.

See the discussion on treating intangible assets (e.g. computer software) as a part of PP&E.

An item of PP&E is recognised as an asset when (IAS 16.7):

  1. it is probable that future economic benefits associated with the item will flow to the entity; and
  2. the cost of the item can be measured reliably.

Under IFRS, ‘probable’ is used in the meaning of probability exceeding 50%. IAS 16 clarifies that the flow of economic benefits may be indirect or be effected by a reduction of outflows (IAS 16.11).

IAS 16 does not prescribe the unit of account, therefore entities can aggregate individually insignificant items into one item of PP&E.

IAS 16 allows a policy choice when measuring PP&E – cost model or revaluation model. The same measurement model should be applied to an entire class of PP&E (IAS 16.29).

Under cost model,  PP&E is carried at cost less any accumulated depreciation and any accumulated impairment losses (IAS 16.30). Under the revaluation model, PP&E is carried at its fair value (i.e. revalued amount) less any accumulated depreciation and any accumulated impairment losses. Cost model is by far more popular than the revaluation model.

An item of PP&E is derecognised on disposal or when no future economic benefits are expected from its use or disposal (IAS 16.67). Gains or loss on derecognition is presented on a net basis in P/L and cannot be presented as revenue (IAS 16.68), unless PP&E is sold in the course of entity’s ordinary activities (e.g. by car rental companies) (IAS 16.68A).

Disposal of PP&E is recognised at the date the recipient obtains control of that PP&E in accordance with the requirements for determining when a performance obligation is satisfied in IFRS 15 (IAS 16.69). IFRS 15 should also be applied when determining the amount of consideration (IAS 16.72).

PP&E is subject to impairment requirements set out in IAS 36.

Paragraph IAS 16.66 clarifies that impairments or losses on items of PP&E, related claims for or payments of compensation from third parties and any subsequent purchase or construction of replacement assets are separate economic events and therefore their impact should not be offset in financial statements.

Disclosure requirements are set out in paragraphs IAS 16.73-78. Additionally, paragraph IAS 16.79 encourages, but not requires, to disclose additional information.

When an entity adopted revaluation model, disclosures set out in IFRS 13 apply.

See other pages relating to IAS 16:

IAS 16 Property, Plant and Equipment: Scope, Definitions and Disclosure
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

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