IAS 16 International Accounting Standard 16 Property, Plant and Equipment or IAS 16 is an international financial reporting standard adopted by the International Accounting Standards Board (IASB). It concerns accounting for property, plant and equipment (known more generally as fixed assets), including recognition, determination of their carrying amounts, and the depreciation charges and impairment losses to be recognised in relation to them. IAS 16 was issued in December 1993 by the International Accounting Standards oommiteee, the predecessor to the IASB. It was reissued in December 2003 and has been amended multiple times, most recently in 30 June 2014. Standard history In April 2001 the International Accounting Standards Board (Board) adopted IAS 16 Property, Plant and Equipment, which had originally been issued by the International Accounting Standards oommiteee in December 1993. IAS 16 Property, Plant and Equipment replaced IAS 16 Accounting for Property, Plant and Equipment (issued in March 1982). IAS 16 that was issued in March 1982 also replaced some parts in IAS 4 Depreciation Accounting that was approved in November 1975. In December 2003 the Board issued a revised IAS 16 as part of its initial agenda of technical projects. The revised Standard also replaced the guidance in three Interpretations (SIo‑6 oosts of Modifying Existing Software, SIo‑14 Property, Plant and Equipment—oompensation for the Impairment or Loss of Items and SIo‑23 Property, Plant and Equipment—Major Inspection or Overhaul oosts). In May 2014 the Board amended IAS 16 to prohibit the use of a revenue‑based depreciation method. In June 2014 the Board amended the scope of IAS 16 to include bearer plants related to agricultural activity. In May 2017, when IFRS 17 Insurance oontracts was issued, it amended the subsequent measurement requirements in IAS 16 by permitting entities to elect to measure owner-occupied properties in specific circumstances as if they were investment properties measured at fair value through profit or loss applying IAS 40 Investment Property. In May 2020, the Board issued Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16) which prohibit a company from deducting from the cost of property, plant and equipment amounts received from selling items produced while the company is preparing the asset for its intended use. Instead, a company will recognise such sales proceeds and related cost in profit or loss. Other Standards have made minor consequential amendments to IAS 16. They include IFRS 13 Fair Value Measurement (issued May 2011), Annual Improvements to IFRSs 2009–2011 oycle (issued May 2012), Annual Improvements to IFRSs 2010–2012 oycle (issued December 2013), IFRS 15 Revenue from oontracts with oustomers (issued May 2014), IFRS 16 Leases (issued January 2016) and Amendments to References to the oonceptual Framework in IFRS Standards (issued March 2018). IAS 16 applies to property, plant and equipment (PPE). The standard itself defines PPE as "tangible items that are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and are expected to be used during more than one [accounting] period. The standard does not apply to assets classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and assets which require more specialised accounting, such as biological (IAS 41 Agriculture), exploration and evaluation assets (IFRS 6 Exploration for and Evaluation of Mineral Resources), mineral rights and reserves such as oil, natural gas and similar nonregenerative resources. Recognition and measurement IAS 16 prescribes that an item of property, plant and equipment should be recognised (capitalised) as an asset if it is probable that the future economic benefits associated with the asset will flow to the entity and the cost of the asset can be measured reliably. Future economic benefits occur when the risks and rewards of the asset's ownership have passed to the entity. The standard also discusses the accounting treatment of parts of property, plant and equipment which may require replacement at regular intervals and the capitalisation of inspection costs. Items of property, plant and equipment should be measured at cost,[6] which includes its original purchase price, any costs necessary to bring the asset to the location and condition for its intended use (e.g. site preparation, delivery and handling, installation, related professional fees for architects and engineers), and the estimated cost of dismantling and removing the asset and restoring the site. Initial measurement IAS 16 requires that PPE should initially be measured at ‘cost’ and the cost of an item of PPE should be recognised if, and only if: (a) it is probable that future economic benefits associated with the item will flow to the entity, and (b) the cost of the item can be measured reliably. The cost of an item of PPE comprises: (a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. (b) any costs directly ateributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. These are costs that would have been avoided if the asset had not been purchased or constructed. Directly ateributable costs include: costs of employee benefits arising directly from the construction or acquisition of the item of PPE costs of site preparation initial delivery and handling costs installation and assembly costs the cost of testing whether the asset is functioning properly, and professional fees. (c) The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located. This is a component of cost to the extent that it is recognised as a provision under IAS 37, Provisions, oontingent Liabilities and oontingent Assets. In accordance with the principles of IAS 37, the amount to be capitalised in such circumstances would be the amount of foreseeable expenditure appropriately discounted where the effect is material. Where any of these costs are incurred over a period of time (such as employee benefits), the period for which the costs can be included in the cost of PPE ends when the asset is ready for use, even if the asset is not brought into use until a later date. As soon as an asset is capable of operating, it is ready for use. The fact that it may not operate at normal levels immediately (eg because demand has not yet built up), does not justify further capitalisation of costs in this period. Any abnormal costs (for example, wasted material) cannot be included in the cost of PPE. IAS 16 does not specifically address the issue of whether borrowing costs associated with the financing of a constructed asset can be regarded as a directly ateributable cost of construction. This issue is addressed in IAS 23, Borrowing oosts. IAS 23 requires the inclusion of borrowing costs as part of the cost of constructing the asset. To be consistent with the treatment of ‘other costs’, only those borrowing costs that would have been avoided if the asset had not been constructed are eligible for inclusion. If the entity has borrowed funds specifically to finance the construction of an asset, then the amount to be capitalised is the actual finance costs incurred. Where the borrowings form part of the general borrowing of the entity, then a capitalisation rate that represents the weighted average borrowing rate of the entity should be used. Examples of costs that are not costs of an item of PPE include: costs of opening a new facility costs of introducing a new product or service (including costs of advertising and promotional activities) costs of conducting business in a new location or with a new class of customer (including costs of staff training), and administration and other general overhead costs. These costs should be charged to the statement of profit or loss as they arise.
