IAS 16: property, plant and equipment

For most companies, property, plant and equipment is the biggest asset on the statement of financial position and depreciation is one of the biggest charges to profit. Every choice here moves the numbers: what you count as part of the cost, how long you say the asset will last, whether you revalue it.

International Accounting Standard (IAS) 16, Property, Plant and Equipment, sets the rules for recognising these assets, measuring them, and charging their cost to profit over time.

This topic covers the definition and recognition of property, plant and equipment, componentisation, the elements of cost and what is excluded, exchanges of assets, later expenditure and major inspections, the cost and revaluation models, depreciation and its reviews, derecognition and the main judgements. The previous topics covered revenue. The next topics cover investment property, intangibles and provisions.

November 2025 Question 1 tested the revaluation of a foreign property and a change in a residual value.

Key terms in plain English

Syllabus check

IAS 16 is examinable at this level. This topic covers:

• B2(a) assessing how recognition and measurement methods and their timing affect the reported position of non-financial assets;
• B2(b) discussing and appraising the treatment of non-current assets, including property, plant and equipment under IAS 16;
• B1(a) the effect of measurement bases on reported performance.

CAMA 2020 and property, plant and equipment

The Companies and Allied Matters Act 2020 (CAMA 2020) requires the records and statements within which these assets sit.

Definition and recognition

Property, plant and equipment comprises tangible items that (a) are held for use in the production or supply of goods or services, for rental to others or for administrative purposes, and (b) are expected to be used during more than one period.

The cost of an item is recognised as an asset if, and only if, it is probable that future economic benefits will flow to the entity and the cost can be measured reliably. This test applies when costs are incurred, both to acquire or build the asset and later to add to, replace part of or service it.

Componentisation. Each part with a cost that is significant compared with the total is depreciated separately. For example, an aircraft’s engines and its body may have different lives.

Initial measurement

An item is first measured at cost, which is all the cost needed to bring it to working condition for its intended use.

Elements of cost

• The purchase price, after trade discounts and rebates, plus import duties and non-refundable purchase taxes.
• Directly attributable costs of bringing it to the location and condition for use: employee benefits arising directly from construction or acquisition, site preparation, initial delivery and handling, installation and assembly, testing, and professional fees.
• The initial estimate of the cost of dismantling and removing the asset and restoring the site, where there is an obligation (recognised as a provision under IAS 37).

Not part of cost

• Costs of opening a new facility.
• Costs of introducing a new product or service, including advertising and promotion.
• Costs of business in a new location or with a new class of customer, including staff training.
• Administration and other general overheads.
• Costs incurred after the asset is ready for use but before it is used or while it runs below capacity.
• Initial operating losses while demand builds.
• Costs of relocating or reorganising operations.

Recognition of cost stops when the asset is in the location and condition capable of operating as management intends. Borrowing costs on a qualifying asset are capitalised under IAS 23, and government grants are dealt with under IAS 20.

Exchanges of assets

An asset acquired in exchange for another is measured at fair value, using the fair value of the asset given up unless the fair value of the asset received is clearer. Exceptions: the exchange lacks commercial substance, or neither fair value can be measured reliably. Then the cost is the carrying amount of the asset given up.

An exchange has commercial substance if the pattern or the present value of the cash flows of the asset received differs from those of the asset given up.

Subsequent expenditure

Later expenditure is capitalised if it meets the recognition criteria: it improves the asset (enhances performance or extends life) or it replaces a part, in which case the carrying amount of the part replaced is derecognised. Repairs and maintenance are expensed.

A major inspection required as a condition of operating is capitalised as a replacement if the criteria are met, and any remaining carrying amount of the previous inspection is derecognised.

Measurement after recognition

An entity chooses one of two models for each class of property, plant and equipment (for example, vehicles at cost and land and buildings at revaluation):

• Cost model: cost less accumulated depreciation and accumulated impairment.
• Revaluation model: fair value at the date of revaluation, less later accumulated depreciation and impairment. Revaluations must be frequent enough that the carrying amount does not differ materially from fair value at the end of the reporting period. If one item is revalued, the whole class is revalued.

Accounting for a revaluation

• Increase: credit to other comprehensive income and accumulate in equity as a revaluation surplus. But recognise it in profit or loss to the extent that it reverses a decrease on the same asset previously charged to profit or loss.
• Decrease: debit to profit or loss. But charge it to other comprehensive income to the extent of any credit balance in the revaluation surplus for the same asset.
• After revaluation, depreciation is based on the new carrying amount over the remaining life.
• Realisation of the surplus: the surplus may be transferred directly to retained earnings when the asset is derecognised, or gradually as the asset is used, by the difference between depreciation on the revalued amount and on original cost. Transfers do not pass through profit or loss.

Depreciation

Depreciation is the systematic allocation of the depreciable amount over the useful life. It begins when the asset is available for use and stops at the earlier of the date it is classified as held for sale under International Financial Reporting Standard (IFRS) 5 and the date it is derecognised. It does not stop when the asset becomes idle or is retired from active use.

The entity reviews useful life and residual value at least at each year end, and the depreciation method periodically. Changes are changes in accounting estimate under IAS 8, applied from the date of change, with no restatement: the carrying amount at the date of change, less the residual value, is written off over the remaining life.

A change in method is a change in estimate because it reflects a changed pattern of using up the benefits. Land is not depreciated.

Derecognition

The carrying amount is derecognised on disposal or when no future benefits are expected from use or disposal. The gain or loss, the difference between net proceeds and carrying amount, goes to profit or loss and is not classified as revenue.

Areas of judgement

• Which costs to capitalise.
• Whether later expenditure qualifies.
• How to split assets into components.
• Depreciation methods, lives and residual values.
• The policy: cost or revaluation, and the allocation of assets to classes.

Disclosure

For each class: the measurement bases, depreciation methods and rates or lives, gross carrying amount and accumulated depreciation, and a reconciliation of the opening and closing carrying amounts (additions, disposals, revaluations, depreciation, impairment). For revalued assets: the date, whether an independent valuer was used, and the revaluation surplus movements. Also restrictions on title, assets pledged, and capital commitments.

The rules in more depth

Why training and opening costs are expensed

They do not add to the asset’s capacity or condition. They are costs of running the business, not costs of getting an asset ready.

Why the whole class is revalued

Revaluing only the items that went up would let a company pick gains. Revaluing a class together avoids selective revaluation.

Why a decrease is first set against the surplus

The surplus was a gain put to equity earlier. Giving it back first is the mirror of how it came in, and only the excess hits profit.

Why a change in estimate is prospective

The old depreciation was based on the best information at the time. New information changes the future charge, not the past one.

Effects on ratios

Revaluing upwards raises equity and lowers gearing, but raises depreciation and so lowers profit, return on capital and earnings per share. Capitalising more cost raises profit now and shifts the charge to later years.

Worked examples

1. Cost.
   50 − 3 + 5 + 2 + 4 + 1 + 6 = ₦65 million.
2. Expensed:
   training ₦1.5m + operating losses ₦2m + ceremony ₦0.5m = ₦4 million.
3. Annual depreciation.
   (₦65m − ₦5m) ÷ 5 = ₦12 million.

1. Carrying amount at the start of year 3 = ₦200m − 2 × ₦20m = ₦160m.
   Revaluation surplus = ₦240m − ₦160m = ₦80 million (other comprehensive income).
2. Depreciation from year 3 = ₦240m ÷ 8 remaining years = ₦30 million (instead of ₦20m).
3. Annual transfer from surplus to retained earnings.
   ₦30m − ₦20m = ₦10 million, not through profit or loss.
4. At the end of year 4: carrying amount = ₦240m − 2 × ₦30m = ₦180m.
   Surplus remaining = ₦80m − 2 × ₦10m = ₦60m.
5. Decrease to fair value ₦100m = ₦80m. ₦60m is charged to other comprehensive income (against the surplus) and ₦20m to profit or loss.

1. Original annual depreciation.
   (30 − 2.1) ÷ 6 = ₦4.65m.
   Accumulated to 1 January 2024 = 3 × 4.65 = ₦13.95m.
   Carrying amount = ₦16.05m.
2. Remaining life = 3 years.
   New annual depreciation = (16.05 − 3.9) ÷ 3 = ₦4.05 million.
3. Depreciation is ₦0.60 million a year lower from 2024. It is a change in estimate, applied prospectively, with no restatement of 2021 to 2023.

1. Cost = GH¢45m ÷ 6 = ₦7.5m.
   Depreciation for 2024 = ₦7.5m ÷ 20 = ₦0.375m.
   Carrying amount before revaluation = ₦7.125m.
2. Revalued amount.
   GH¢52.5m ÷ 5 = ₦10.5m.
3. Revaluation surplus.
   ₦10.5m − ₦7.125m = ₦3.375 million, taken to other comprehensive income and to property, plant and equipment.

The translation of foreign amounts is covered in the topic on foreign currency. Under s. 374(1) of CAMA 2020 the asset register must support these figures.

How to score full marks

• Apply the two recognition tests to every item and say which costs are excluded and why.
• For cost computations, list each item with a reason, then total. Show the depreciation on cost less residual value.
• For revaluations, work in this order: surplus, depreciation on the new amount, transfer to retained earnings, then any later decrease split between the surplus and profit or loss.
• Classify changes correctly: life, residual value and method are changes in estimate, applied prospectively.
• Remember the class rule: the same model for the whole class.
• Link to ratios where asked: revaluation lowers gearing but usually lowers return on capital and earnings per share.

Common mistakes in the exam

• Capitalising training, advertising or initial operating losses.
• Leaving the dismantling estimate out of cost, or forgetting it is also a provision.
• Depreciating land.
• Charging a revaluation decrease to profit or loss when there is a surplus on the same asset.
• Stopping depreciation when the asset is idle.
• Restating earlier years for a change in useful life or residual value.
• Revaluing one asset and leaving the rest of its class at cost.
• Classifying a gain on disposal as revenue.

Quick revision

• Recognise if probable benefits and reliable cost. Depreciate significant parts separately.
• Cost: price (net of discounts, plus non-refundable taxes), directly attributable costs, dismantling estimate.
• Not cost: training, advertising, opening, overheads, initial operating losses.
• Later expenditure: capitalise improvements and replaced parts. Expense repairs.
• Models: cost or revaluation, by class. Whole class revalued.
• Revaluation increase: other comprehensive income. Decrease: profit or loss after any surplus.
• Depreciation: from available for use. Stops on held for sale or derecognition, not idleness. Reviews are changes in estimate.
• Disposal gain or loss: profit or loss, not revenue.
• CAMA 2020: ss. 374(1), 377(1), 378, 404(7), 407(3).

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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