How are property, plant and equipment depreciated

IAS plus

IAS 16 Property, plant and equipment

overview

IAS 16Property, plant and equipment affects the accounting treatment for most types of property, plant and equipment. Property, plant and equipment are initially valued at cost and subsequently either at amortized cost or according to a revaluation model. They are depreciated in such a way that the depreciation amount is sensibly distributed over the useful life.

A revised version of IAS 16 was issued in December 2003 and is to be applied to reporting periods beginning on or after January 1, 2005.

History of IAS 16

August 1980

Draft E18, accounting for property, plant and equipment in connection with the historical cost method

March 1982

IAS 16, Accounting for Property, Plant and Equipment

January 1, 1983

Entry into force of IAS 16 (1982)

May 1992

Draft E43, tangible assets

December 1993

IAS 16, Accounting for Property, Plant and Equipment (Revised as part of the project on 'Comparability of Financial Statements' based on E32)

January 1, 1995

Entry into force of IAS 16 (1993), Property, Plant and Equipment

1998

IAS 16 was revised by IAS 36, Impairment of Assets

July 1, 1999

IAS 16 (1998) Entry into force of IAS 16 including revisions from 1998

December 18, 2003

Publication of the revised version of IAS 16 by the IASB

January 1, 2005

Entry into force of IAS 16 (revised 2003)

May 22, 2008

IAS 16 amended as part of the 2007 annual improvements in relation to the realizable value and in relation to the sale of rental property

January 1, 2009

May 2008 effective date of changes

May 17, 2012Changes issued as part of the annual improvements 2009-2011 (classification of maintenance devices) - further information
January 1, 2013Effective date of May 2012 changes (annual improvements 2009-2011)
December 12th 2013IAS 16 as part of the annual improvement project 2010-2012 to clarify the revaluation method - proportional re-presentation of accumulated depreciation changed
May 12, 2014Clarification of acceptable depreciation methods (amendments to IAS 16 and IAS 38)released; The changes clarify which methods can be used for the depreciation of property, plant and equipment and intangible assets (further information)
30 June 2014Agriculture: Bearing Plants (Amendments to IAS 16 and IAS 41)released; With the changes, fruit-bearing plants are brought into the scope of IAS 16 (further information)
July 1, 2014Date of entry into force of the amendments to IAS 16 dated December 2013
January 1, 2016Date of entry into force of the changes from May and June 2014
May 20, 2020changed by Property, plant and equipment - Income before intended use (amendments to IAS 16)
January 1, 2022Date of entry into force of the changes from May 2020

Relevant interpretations

Changes planned by the IASB

Summary of IAS 16

Objective of IAS 16

The objective of IAS 16 is to specify the accounting treatment of property, plant and equipment. The fundamental questions relate to the timing of assets, the determination of their book values ​​and their depreciation expenses to be recorded.

scope of application

While IAS 16 does not apply to property, plant and equipment held for sale, biological assets associated with agricultural activity (see IAS 41) or mining and prospecting rights (see IFRS 6) as well as mineral resources such as oil, natural gas and similar non-regenerative resources , it applies to property, plant and equipment that is used to develop or maintain such assets and does not fall within the scope of IFRS 5. [IAS 16.3]

The standard applies to fruit-bearing plants, but not to the agricultural products that grow on the fruit-bearing plants. [IAS 16.3]

approach

Property, plant and equipment are to be recognized as assets if: [IAS 16.7]

it is probable that future economic benefits associated with the property, plant and equipment will accrue to the company; and

the acquisition or production costs of the property, plant and equipment can be reliably determined.

These recognition criteria are to be applied to all acquisition or production costs of property, plant and equipment at the time they are incurred. The acquisition and production costs include the costs originally incurred for the acquisition or construction of the property, plant and equipment, as well as follow-up costs for the expansion, replacement or maintenance.

IAS 16 does not specify a unit of measurement for the approach - i.e. it does not define what an individual property, plant and equipment represents. [IAS 16.9] It should be noted, however, that if the acquisition cost model is used (see below), each part of an item of property, plant and equipment whose acquisition value is significant in relation to the total value of the object must be written off separately. [IAS 16.43]

It is stated in IAS 16 that parts of some property, plant and equipment may need to be replaced at regular intervals. The book value of an item of property, plant and equipment includes the cost of replacing part of such an item at the time the costs are incurred, provided that the recognition criteria (future benefit and reliability of the valuation) are met. The carrying amount of those parts that have been replaced is derecognized in accordance with the derecognition provisions of IAS 16.67-72. [IAS 16.13]

The continuation of the operation of a fixed asset (e.g. an aircraft) can also require the performance of regular major maintenance, regardless of whether parts are replaced. Whenever major maintenance is carried out, the costs are recognized in the book value of the property, plant and equipment as a replacement, provided that the recognition criteria are met. If necessary, the estimated cost of future similar maintenance can be used as an indication of what the cost of the current maintenance item was at the time the item was purchased or manufactured. [IAS 16.14]

Initial evaluation

The valuation upon entry is made at acquisition or production cost. [IAS 16.15] The acquisition or production costs include all costs incurred to bring the asset into the intended operational condition. This includes not only the purchase price, but also the costs of site preparation, initial delivery and movement, installation and monthly costs, fees, as well as the estimated costs for the demolition and removal of the item and the restoration of the site (see IAS 37 Provisions, contingent liabilities and contingent claims). [IAS 16.16-17]

Income from the sale of items manufactured while an item of property, plant and equipment is being brought into the location and condition necessary for it to be used in the manner intended by management is not deducted from the cost of the property, plant and equipment; but recorded in the income statement. [IAS 16.20A]

If the payment for the property, plant and equipment exceeds the usual payment deadlines, market interest rates are to be recorded or included. [IAS 16.23]

If an asset is acquired in exchange for another asset (of the same or a different type), the acquisition costs are to be measured at fair value, unless (a) the exchange transaction lacks economic substance, or (b) the fair value of the still received the given asset can be reliably estimated. If the purchased item is not measured at fair value, the acquisition cost is measured at the book value of the asset given. [IAS 16.24]

Follow-up evaluation

IAS 16 permits two valuation methods:

  • Acquisition or production cost model. The asset is valued at acquisition or production cost less accumulated depreciation and any impairment losses. [IAS 16.30]
  • Revaluation model. The asset is valued at the revaluation amount, which corresponds to its fair value at the time of the revaluation less subsequent depreciation, provided that the fair value can be measured reliably. [IAS 16.31]

Revaluation model

When using the revaluation model, revaluations must be carried out regularly so that the book value of the asset does not differ significantly from its fair value on the balance sheet date. [IAS 16.31]

If an item of property, plant and equipment is revalued, the entire group of property, plant and equipment to which this item belongs must be revalued. [IAS 16.36]

Revalued assets are depreciated in the same way as when using the cost model (see below).

If a revaluation leads to an increase in the book value, the increase in value must be posted directly to equity under the item revaluation reserve, unless the increase in value reverses a devaluation recorded as an expense. In this case it is to be recorded as income. [IAS 16.39]

If a revaluation leads to a reduction in the book value, the impairment must be recognized as an expense to the extent that it exceeds previous increases in the value of the same asset recorded in the revaluation reserve. [IAS 16.40]

If the asset is sold, the revaluation reserve can be added directly to the revenue reserves or left in equity under the item revaluation reserve. The transfer to the revenue reserves has to be neutral to profit (no “recycling” via the income statement). [IAS 16.41]

Depreciation (acquisition cost model and revaluation model)

The following applies to all depreciable assets:

The depreciation volume (acquisition or production costs less past depreciation, impairment losses and residual value) is to be distributed in a systematic manner over the useful life of the asset. [IAS 16.50]

The residual value and useful life of an asset must be reviewed at least at the end of each financial year; if expectations differ from previous estimates, the changes must be accounted for as changes in estimates in accordance with IAS 8. [IAS 16.51]

The depreciation method must correspond to the expected consumption of the future economic benefits of the asset by the company. [IAS 16.60] A revenue-based depreciation method resulting from an activity that involves the use of the asset does not provide an appropriate representation of consumption. [IAS 16.62A]

The depreciation method must be reviewed at least at the end of each financial year and, if changes have occurred in the expected benefit, it must be changed prospectively as a change in an estimate in accordance with IAS 8. [IAS 16.61] Expected future reductions in the selling price may be an indication of greater consumption of the future economic benefits of the asset. [IAS 16.56]

The depreciation amount is to be recorded in the income statement, unless it is to be included in the book values ​​of other assets. [IAS 16.48]

Depreciation begins when the asset is available and ends when it is derecognised; depreciation does not stop due to a shutdown. [IAS 16.55]

Recoverability of the book value

IAS 36 requires the impairment testing of assets and, if necessary, the recognition of impairment losses on property, plant and equipment.

Claims for compensation for depreciation in value from third parties are to be recognized in the income statement when the compensation can be claimed. [IAS 16.65]

Write-off (shutdown and sale)

An asset is to be derecognized from the balance sheet when it is disposed of or decommissioned, without future economic benefits being expected from its disposal. The profit or loss from the sale corresponds to the difference between the proceeds and the book value and is to be recorded in the income statement. [IAS 16.67-71]

Information

For each group of property, plant and equipment: [IAS 16.73]

  • the valuation principles for determining the book value;
  • the depreciation method (s) used;
  • the useful lives or depreciation rates;
  • the gross book value and the accumulated depreciation and impairment losses;
  • a reconciliation of the book value at the beginning and at the end of the period stating the:
    • Accesses;
    • Assets classified as held for sale or belonging to a disposal group classified as held for sale and other disposals;
    • Acquisitions through business combinations;
    • Increases or decreases due to revaluations;
    • Impairment losses;
    • Write-ups;
    • Depreciation;
    • Net currency translation differences;
    • other changes.

also include: [IAS 16.74]

  • Restrictions on rights of disposal;
  • Expenses for the construction of property, plant and equipment in the period;
  • Obligations to purchase property, plant and equipment;
  • Third-party compensation for property, plant and equipment that has decreased in value, has been lost or taken out of service that has been recognized in the income statement.

If property, plant and equipment are recorded at revalued amounts, further information is required: [IAS 16.77]

  • the date of the revaluation;
  • whether an independent appraiser was consulted;
  • the methods and key assumptions that led to the estimate of fair value;
  • the extent to which the fair values ​​were determined directly with reference to the prices observed in an active market or to recent transactions under normal market conditions, or whether other valuation methods were used for the estimate;
  • the book value that would have been recognized if the assets had been valued using the cost model;
  • the revaluation reserve, with details of the change in the period and existing distribution restrictions.