IAS16

Objective

The objective of IAS 16 is to prescribe the accounting treatment for property, plant,

and equipment (PP&E) so that users of the financial statements can discern

information about the entity’s investment in its PP&E and any changes in those

investments.

The principal issues associated with accounting for PP&E are (¶1)

• recognition of the assets when they are acquired

• determination of the carrying amounts of these assets in subsequent periods

• determination of depreciation charges and any impairment losses to be recognized

in relation to these assets.  International Accounting Standard 16 (IAS 16), Property, Plant and Equipment• 2

The general principle underlying IAS 16 is that, first, an entity accounts for all costs of

property, plant, and equipment at the time these costs are incurred and, second, it then

allocates the costs over the useful life of the asset. These concepts should already be familiar

to Canadian accountants; what IAS 16 adds to GAAP is the option to use fair value to

determine the carrying value of PP&E subsequent to acquisition.

Cost model:

 After recognition as an asset, an item of property, plant and equipment

shall be carried at its cost less any accumulated depreciation and any accumulated

impairment losses. 

Revaluation model: 

After recognition as an asset, an item of property, plant and

equipment whose fair value can be measured reliably shall be carried at a revalued

amount, being its fair value at the date of the revaluation less any subsequent

accumulated depreciation  and subsequent accumulated impairment losses.

Revaluations shall be made with sufficient regularity to ensure that the carrying

amount does not differ materially from that which would be determined using fair

value at the balance sheet date.

If an asset’s carrying amount is increased as a result of a revaluation, the increase

shall be credited directly to equity under the heading of revaluation surplus. However,

the increase shall be recognised in profit or loss to the extent that it reverses a

revaluation decrease of the same asset previously recognised in profit or loss. If an

asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be

recognised in profit or loss. However, the decrease shall be debited directly to equity

under the heading of revaluation surplus to the extent of any credit balance existing in

the revaluation surplus in respect of that asset. 

Depreciation:

Depreciation is the systematic allocation of the depreciable amount of an asset over its

useful life. Depreciable amount is the cost of an asset, or other amount substituted for

cost, less its residual value.  Each part of an item of property, plant and equipment

with a cost that is significant in relation to the total cost of the item shall be

depreciated separately.  The depreciation charge for each period shall be recognised in

profit or loss unless it is included in the carrying amount of another asset. 

The depreciation method used shall reflect the pattern in which the asset’s future

economic benefits are expected to be consumed by the entity.