IAS 16 Property Plant and Equipment: what your machines, vehicles, and office really cost

When you buy a delivery van, a production machine, or office furniture, IAS 16 Property Plant and Equipment is the standard that decides what goes on your balance sheet — and how it shrinks over time. Get this wrong and your profit is wrong too: expense something you should have capitalized and you understate this year's profit; capitalize something you should have expensed and you're deferring costs into the future. Here is IAS 16, plainly.

IAS 16 Property Plant and Equipment: what qualifies

An item is property, plant and equipment under IAS 16 if you hold it for use in production, for rental to others, or for administrative purposes — and you expect to use it for more than one period. The delivery van your courier runs for three years qualifies. The laptop the admin team uses qualifies. Your trading inventory does not (that is IAS 2), and neither does a building you hold to earn rent (that is IAS 40).

Recognition needs two tests: it is probable that future economic benefits will flow to you, and you can measure the cost reliably. In practice, if you paid a real price for a real asset, both tests pass.

What "cost" actually includes under IAS 16

The single biggest source of errors is the initial cost figure. IAS 16 says cost is not just the purchase price. It includes:

• The purchase price, including import duties and non-refundable purchase taxes, minus trade discounts and rebates.
• Costs to bring the asset to its location and working condition: delivery, installation, testing of whether it functions properly.
• The estimated cost of dismantling and restoring the site — if you are obligated to remove the asset at the end (a leased-factory modification you must tear out, for example). This gets capitalized with a matching provision under IAS 37.
• Borrowing costs for qualifying assets under IAS 23 (a building under construction that takes months to complete).

What you do not capitalize: training costs for staff on the new machine, opening costs of a new facility, advertising, and day-to-day servicing costs. Those are expenses, period. Small businesses routinely capitalize "everything the project cost us" and end up with inflated asset values — the standard draws the line at getting the asset working, not at everything around the project.

The two measurement models: cost vs revaluation

After recognition, IAS 16 lets you choose one of two accounting policies per class of asset — you cannot mix and match item by item.

The cost model is the default most small businesses use: carry the asset at cost less accumulated depreciation and any accumulated impairment losses. Simple, conservative, and usually right for a van or a laptop.

The revaluation model carries the asset at its fair value at the date of revaluation, less subsequent depreciation and impairment. If you choose it, revaluations must happen with sufficient regularity that the carrying amount never differs materially from fair value, and the entire class must be revalued together — you cannot revalue just the one property that gained in value. A revaluation increase generally goes to other comprehensive income (the revaluation surplus), while a decrease goes to profit or loss unless it reverses an earlier surplus. For most small businesses the cost model is the sensible choice: fair-value appraisals cost money every year.

How IAS 16 depreciation actually works

Depreciation under IAS 16 is systematic, not mechanical. The rules that matter:

• Component approach. Each part of an item with a cost significant in relation to the total must be depreciated separately. A building's roof (replaced every 15 years) depreciates on a different schedule than the structure (50 years). The engine of a heavy vehicle often qualifies too.
• Depreciable amount = cost minus residual value. You only depreciate what you expect to consume. If a van will fetch meaningful resale value in five years, that residual value is excluded from the depreciable amount.
• The method reflects the consumption pattern. Straight-line, diminishing balance, or units of production are all permitted — but the method should mirror how the benefits are consumed. A machine used evenly across ten years suits straight-line; a printing press whose output degrades over time suits diminishing balance or units of production. If the pattern changes, you change the method prospectively.
• Depreciation starts when the asset is available for use, not when you first switch it on. And it does not stop while the asset is idle — it stops only when the asset is classified as held for sale (IFRS 5) or derecognized.
• Review at every year-end. Residual value, useful life, and the depreciation method must be reviewed at least annually and changed prospectively if expectations differ.

One classic trap: fully depreciated assets still in use. If your accounts show a machine at zero book value while it is still earning you money, your original useful-life estimate was too short — and it is a signal that reviews were not happening.

Impairment and derecognition

IAS 16 points to IAS 36 for impairment: if something suggests the asset's value has dropped (a machine made obsolete by new technology, a damaged vehicle), you test it and write it down to its recoverable amount. IAS 16 itself handles the end: when you sell or dispose of an asset, you derecognize it, and the difference between the proceeds and the carrying amount is a gain or loss in profit or loss.

So the next time you buy equipment, run the five-step routine: does it qualify, what is the true cost, which measurement model, what depreciation reflects its real wear, and is anything impaired at year-end. It takes twenty minutes per asset, and it is the difference between financial statements you can defend and ones you cannot.

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