IAS 16: Property, plant and equipment
What goes into cost, depreciation by component, and the revaluation model step by step.
ACCA exams this helps with: FR Financial Reporting SBR Strategic Business Reporting See the ACCA map
New to this topic?
What it is: IAS 16 is the standard for property, plant and equipment. These are physical assets the business keeps and uses for more than one year, such as buildings, machines and vans.
What it covers: (1) Which costs are part of the asset’s cost. (2) How to depreciate it. (3) How to revalue it to its current value, if the company chooses to.
Revaluation gains: A gain goes to a revaluation surplus in equity. It does not go into profit.
Example. A company bought offices for £500,000. They are now worth £800,000. Under the revaluation model the offices are shown at £800,000. The £300,000 gain goes to the revaluation surplus.
Key words
- Cost model
- Showing an asset in the accounts at what it cost, minus the depreciation charged so far.Example: A machine cost £20,000 and has £8,000 of depreciation, so it is shown at £12,000.
- Revaluation model
- Showing an asset in the accounts at its current market value (fair value), minus any depreciation charged since that valuation.Example: A building is revalued from £400,000 to £600,000 and shown at £600,000.
- Revaluation surplus
- The part of equity that holds the gains from revaluing assets upwards. The gains are not counted as profit.Example: A building revalued from £400,000 to £600,000 creates a £200,000 revaluation surplus.
- Component depreciation
- Depreciating the main parts of one asset separately when they last for different lengths of time.Example: An aircraft’s engines last 8 years and its body lasts 25 years, so each part is depreciated over its own life.
- Residual value
- The amount an asset is expected to be worth at the end of its useful life.Example: Machinery costs £20,000 and is expected to sell for £2,000 after 5 years. The residual value is £2,000.
Learn
IAS 16 covers property, plant and equipment: physical assets kept and used for more than one year.
What goes into cost
| Include in cost | Do not include (treat as an expense) |
|---|---|
| Purchase price, including import duties, minus discounts | Staff training |
| Delivery and handling | General office costs and overheads |
| Preparing the site and installing the asset | Advertising a new product |
| Testing that the asset works | Costs of opening a new site |
| Professional fees, such as architects | Maintenance contracts |
| Estimated cost of taking the asset down at the end (as a provision) | Losses while the business waits for customers to build up |
Depreciation
- Depreciate over the useful life, down to the residual value. Check both at least once a year.
- If a large part has a different life, depreciate it separately. This is called a component. Example: an aircraft’s engines and its body.
- Land is usually not depreciated.
The revaluation model
A company can choose to show a whole class of assets (for example, all its buildings) at fair value. The values must be kept up to date.
- Value goes up: the gain goes to other comprehensive income, into the revaluation surplus. If it reverses an earlier loss that went to profit, that part goes to profit.
- Depreciation after revaluing is based on the new value over the remaining life.
- Excess depreciation is the new depreciation minus the depreciation based on the original cost. Each year, the company may move this amount from the revaluation surplus to retained earnings. It does not go through profit or loss.
- Value goes down: take the loss off any surplus for that asset first. Any amount left over goes to profit or loss.
- Selling the asset: profit or loss = money received − carrying amount. Move any surplus left to retained earnings.
Example: A building cost £100,000 with a 20-year life, so depreciation is £5,000 a year. After 10 years its carrying amount is £50,000. It is revalued to £80,000. Revaluation surplus = £80,000 − £50,000 = £30,000. New depreciation = £80,000 ÷ 10 years left = £8,000. Excess depreciation = £8,000 − £5,000 = £3,000 a year, moved from the surplus to retained earnings.
Watch it explained
Press play to watch the animation, or step through it at your own pace with the arrows.
Videos from YouTube tutors
These videos are made by independent tutors on YouTube, not by Trial Balance. Some use US terms or older exam names (for example F7 for FR), but the principles are the same.
Worked example
A building cost £500,000 ten years ago and has a 50-year life (£10,000 a year). Its carrying amount is now £400,000. It is revalued to £600,000. The remaining life is still 40 years.
| Working | £ |
|---|---|
| Carrying amount (500,000 − 100,000) | 400,000 |
| Fair value | 600,000 |
| Revaluation surplus (to OCI) | 200,000 |
| New annual depreciation (600,000 ÷ 40) | 15,000 |
| Depreciation based on cost | 10,000 |
| Excess depreciation transferred to retained earnings each year | 5,000 |
| Account | Dr £ | Cr £ |
|---|---|---|
| Accumulated depreciation | 100,000 | |
| Property | 100,000 | |
| Revaluation surplus | 200,000 | |
| (Revaluation of building to fair value of £600,000) | ||
Practice questions
Type or choose your answers, then press Check answer. Questions with a New numbers button can be repeated with different figures.