The accounting team at GCS Malta is here to outline and discuss IAS 16 to aid our esteemed clientele in better understanding the concept in our latest article.
IAS 16 Property, Plant and Equipment describe the accounting treatment for most plant and equipment property types. It was first introduced in August 1980; however, it developed significantly over the years, with the latest amendments made in 2020.
IAS 16 deals with recognising assets, determining their carrying amounts, depreciation charges, and impairment losses relating to such assets.
The standard applies to PPE except when another standard requires different accounting treatments such as assets classified as held for sale, which would fall under IFRS 5 – Non- Current Assets Held for Sale and Discontinued Operations.
Recognition criteria for IAS 16.
PPE items should only be recognised as assets when 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.
The initial measurement of PPE.
PPE items should initially be recorded at cost. The cost will include all costs necessary to bring the asset to working condition for its intended use. It would generally have the original purchase price and other costs such as delivery, handling costs, related professional fees for architects and engineers, and dismantling costs.
Subsequent measurement.
IAS 16 permits two accounting models
- Cost model: The asset will be carried at cost less accumulated depreciation and impairment when using this method.
- Revaluation model: In this case, the asset will be carried at its fair value as at the date of revaluation, less subsequent depreciation, and impairment.
Under this model, evaluations should be carried out regularly so that the carrying amount of an asset will reflect the fair value amount at the date of the statement of financial position.
Depreciation in IAS 16.
When depreciating property, plant and equipment, the depreciation method should reflect how the entity consumes the asset’s economic benefits. Also, the depreciation method should be reviewed annually, and if the consumption of economic benefits changes, then the depreciation process should be changed prospectively.
Depreciation should be charged to profit or loss and begins when the asset is available for use and continues until the asset is derecognised or sold, even if such asset may be idle.
Disclosure of information about property, plant, and equipment.
IAS 16 states that for each class of property, plant and equipment, the financial statements should have the following disclosures:
- Basis for measuring carrying amount
- Depreciation method used
- Useful lives
Why GCS Malta?
The GCS Malta accounting experts offer a full range of accounting and support services necessary for maintaining a company’s accounting records. Click here for more information.
