IAS 16 is an International Accounting Standard that deals with Property, Plant and Equipment, commonly known as PPE. This standard provides guidance on how companies should account for their long-term physical assets like buildings, machinery, and vehicles.
IAS 16 addresses four key components in accounting for Property, Plant and Equipment. First is recognition, which determines when an asset should be recorded. Second is initial measurement, establishing the cost at acquisition. Third is subsequent measurement, including revaluation options. Finally, depreciation and impairment, which allocate costs over the asset's useful life.
For an asset to be recognized as Property, Plant and Equipment under IAS 16, it must meet specific criteria. First, it must be probable that future economic benefits will flow to the entity. Second, the cost of the asset must be measured reliably. Third, the entity must have control over the asset. Only when all three criteria are met can an item be recognized as PPE.
IAS 16 provides two measurement models for subsequent measurement of Property, Plant and Equipment. The Cost Model carries assets at cost less accumulated depreciation and impairment losses. The Revaluation Model carries assets at fair value less subsequent depreciation and impairment. Companies must choose one model and apply it consistently to entire classes of PPE.
Depreciation is a key aspect of IAS 16, systematically allocating an asset's cost over its useful life. Common methods include straight-line, diminishing balance, and units of production. The standard also requires impairment testing when indicators suggest the carrying amount may exceed recoverable amount. This ensures assets are not overstated on the balance sheet.