Strategic Business Reporting (International) · Non-current assets

IAS 16 Property, Plant and Equipment for ACCA SBR

Updated 11 October 2026 · Fact-checked

IAS 16 sets out how to account for property, plant and equipment (PPE). You recognise an item at cost, depreciate each significant component over its useful life, then measure it under the cost model or the revaluation model. You remove it when you dispose of it, and take the gain or loss to profit or loss.

Understand IAS 16 Property, Plant and Equipment

Property, plant and equipment are tangible assets held for use in production, supply of goods or services, rental to others or administration, and expected to be used for more than one period. IAS 16 tells you when to put them on the statement of financial position, at what amount, and how to charge their cost to profit or loss.

You recognise an item when it is probable that future economic benefits will flow to the entity and its cost can be measured reliably. Initial cost includes the purchase price (after trade discounts, plus import duties and non-refundable taxes), costs directly attributable to bringing the asset to working condition, and the initial estimate of dismantling and site restoration costs. Staff training, general overheads and costs of opening a new facility are not included. Borrowing costs on qualifying assets are capitalised under IAS 23.

Depreciation spreads the depreciable amount (cost less residual value) over the useful life. Each part of an item with a cost that is significant relative to the total is depreciated separately. This is component accounting. A building and its lift system, or an aircraft and its engines, often have different lives. Replacing a component is accounted for by derecognising the old carrying amount and capitalising the new cost. Depreciation starts when the asset is available for use. Review useful life, residual value and method at least each year-end. Changes are changes in estimate under IAS 8, applied prospectively.

After recognition you choose a policy for each class of assets: the cost model (cost less accumulated depreciation and impairment) or the revaluation model (fair value at the revaluation date less later depreciation and impairment). Fair value is measured under IFRS 13. Revaluations must be regular enough that the carrying amount does not differ materially from fair value. If you revalue one asset, you revalue its whole class.

Under the revaluation model, a surplus goes to other comprehensive income and the revaluation surplus in equity. A deficit goes to profit or loss unless it reverses an earlier surplus on the same asset. An earlier deficit taken to profit or loss means a later surplus is recognised in profit or loss up to that amount. On derecognition (disposal, or no future benefits expected), the gain or loss is proceeds less carrying amount, taken to profit or loss. Any surplus left in equity may be transferred to retained earnings, not through profit or loss.

Key rules to remember

Initial cost: Cost = purchase price + directly attributable costs + initial estimate of dismantling/restoration; Exclude training, general overheads, initial operating losses and abnormal waste. Deduct trade discounts and rebates.
Depreciable amount: Depreciable amount = cost (or revalued amount) − residual value; Residual value is the amount you would get now for an asset of the age and condition expected at the end of its life.
Straight-line depreciation: Annual depreciation = (cost − residual value) ÷ useful life; Other methods, such as reducing balance or units of production, are allowed if they reflect the pattern of consumption.
Revaluation surplus: Surplus = fair value − carrying amount; Dr Asset, Cr Revaluation surplus (OCI). Any part reversing an earlier loss on the same asset goes to profit or loss.
Revaluation deficit: Deficit = carrying amount − fair value; Dr Revaluation surplus (to the extent of the balance for that asset), then Dr Profit or loss.
Excess depreciation transfer: Transfer = depreciation on revalued amount − depreciation on original cost; Optional. Dr Revaluation surplus, Cr Retained earnings. It is a reserve transfer, not an OCI item.
Gain or loss on derecognition: Gain/(loss) = net disposal proceeds − carrying amount; Recognised in profit or loss. It is not presented as revenue.

How to solve IAS 16 Property, Plant and Equipment questions

Use this order for any IAS 16 question, whether it is a calculation or a discussion of a policy.

1Identify the item and test recognition: probable future benefits and reliable cost. Decide if the spend is capital or revenue.
2Build the cost: purchase price, directly attributable costs and dismantling estimate. Remove items that do not qualify.
3Split into components where parts are significant and have different lives. Set each life, residual value and method.
4Calculate depreciation from the date the asset is available for use, time-apportioning for part years.
5Identify the measurement model. Under revaluation, compare fair value with carrying amount after depreciation up to that date.
6Post the revaluation: surplus to OCI, deficit to profit or loss, taking account of earlier surpluses or deficits on the same asset. Then re-estimate depreciation on the new amount over the remaining life.
7Deal with disposal or replacement: remove the carrying amount, compute the gain or loss and clear any surplus left in equity.
8Finish by applying the answer to the scenario: state the effect on profit, assets and ratios, and comment on judgement or ethics where the facts suggest manipulation.

Quickest way: Carrying amount roll-forward

When to use it: Use this when you need the year-end figure and the profit or loss and OCI effects quickly, for example in a multi-issue question.

Write cost, depreciation to date and carrying amount at the start of the year in one line.
Charge the current year's depreciation, per component if needed, to reach the pre-revaluation carrying amount.
Compare with fair value. The difference is the surplus or deficit. Put it in OCI or profit or loss using the history of that asset.
Divide the new carrying amount (less residual value) by the remaining life for next year's depreciation.
State the journal in one line each: Dr/Cr, amount, account.

Common mistakes in IAS 16 Property, Plant and Equipment

Revaluing without first depreciating up to the revaluation date.
Students compare fair value with the opening carrying amount.
Fix: Charge depreciation to the revaluation date first. Then compare fair value with that carrying amount.
Taking every revaluation deficit to profit or loss.
The rule on surpluses and deficits is remembered only in outline.
Fix: Check the revaluation surplus balance for that same asset. Charge the deficit against it first and only the excess to profit or loss.
Including training, relocation or general overheads in the cost of an asset.
These costs seem linked to the new asset.
Fix: Capitalise only directly attributable costs of getting the asset to its location and working condition. Expense the rest.
Forgetting the dismantling provision in cost.
It is not a cash payment at purchase.
Fix: Add the present value of the obligation to cost and credit a provision. Unwind the discount as a finance cost.
Depreciating land or applying one life to a whole asset with major parts.
Students treat the asset as a single item.
Fix: Land normally has an unlimited life and is not depreciated. Split the other significant parts into components with their own lives.
Revaluing one asset instead of the whole class, or taking the surplus transfer through profit or loss.
The rules are mixed with other standards.
Fix: Apply revaluation to the whole class of assets. Transfer any excess depreciation directly from the revaluation surplus to retained earnings.

Worked examples

Example 1

On 1 April 20X1, Meru Ltd buys a machine for ₹40,00,000 plus ₹2,00,000 delivery and ₹1,00,000 installation. It spends ₹50,000 on staff training. The machine is expected to last 10 years with no residual value. The company must dismantle it at the end of its life. The present value of the dismantling cost at 1 April 20X1 is ₹3,00,000. Meru has a 31 March year-end. Calculate the initial cost and the depreciation for the year to 31 March 20X2.

Show the solution

Purchase price ₹40,00,000 + delivery ₹2,00,000 + installation ₹1,00,000 = ₹43,00,000.
Add the present value of dismantling ₹3,00,000. Cost = ₹46,00,000.
Training of ₹50,000 is not capitalised. It is an expense in profit or loss.
Depreciation = ₹46,00,000 ÷ 10 = ₹4,60,000 for the full year.
Carrying amount at 31 March 20X2 = ₹46,00,000 − ₹4,60,000 = ₹41,40,000.
Journal at purchase: Dr PPE ₹46,00,000; Cr Cash ₹43,00,000; Cr Provision ₹3,00,000.

Answer: Initial cost is ₹46,00,000. Depreciation for the year is ₹4,60,000, and the carrying amount at 31 March 20X2 is ₹41,40,000. The ₹50,000 training cost is expensed. The discount on the provision also unwinds as a finance cost each year.

Example 2

Nilgiri Ltd uses the revaluation model for buildings. A building cost ₹80,00,000 on 1 April 20X0 and is depreciated straight-line over 40 years with no residual value. On 31 March 20X3 it is revalued to ₹90,00,000 and the remaining life is unchanged. On 31 March 20X5 it is revalued to ₹70,00,000. Show the accounting at each revaluation and the depreciation for the year to 31 March 20X4. Ignore deferred tax and the excess depreciation transfer.

Show the solution

Annual depreciation on cost = ₹80,00,000 ÷ 40 = ₹2,00,000.
At 31 March 20X3 the building has been depreciated for 3 years: ₹6,00,000. Carrying amount = ₹74,00,000.
Revaluation to ₹90,00,000 gives a surplus of ₹16,00,000. Dr Building ₹16,00,000; Cr Revaluation surplus (OCI) ₹16,00,000.
Remaining life at 31 March 20X3 is 37 years. Depreciation for the year to 31 March 20X4 = ₹90,00,000 ÷ 37 = ₹2,43,243 (rounded).
Carrying amount at 31 March 20X4 = ₹90,00,000 − ₹2,43,243 = ₹87,56,757. At 31 March 20X5, after a second year's charge of ₹2,43,243, it is ₹85,13,514.
Revaluation to ₹70,00,000 gives a deficit of ₹85,13,514 − ₹70,00,000 = ₹15,13,514.
The revaluation surplus is ₹16,00,000, which is more than the deficit. So the whole deficit goes to OCI: Dr Revaluation surplus ₹15,13,514; Cr Building ₹15,13,514. Nothing goes to profit or loss.
The surplus remaining is ₹16,00,000 − ₹15,13,514 = ₹86,486.

Answer: Surplus on 31 March 20X3 is ₹16,00,000, credited to OCI. Depreciation for 20X4 is about ₹2,43,243. The deficit on 31 March 20X5 is about ₹15,13,514 and is charged wholly against the revaluation surplus, leaving about ₹86,486 in the surplus.

Exam tips

Read the requirement first. Many SBR questions ask whether a cost is capitalised or expensed, and you earn marks by naming the IAS 16 criterion and applying it to the facts.
Show journals with clear Dr/Cr lines and state where the entry lands: profit or loss, OCI or equity. Markers look for the correct place.
Look for traps in the scenario: a dismantling obligation, major inspection costs, land and buildings together, or a change in life. Each points to a specific rule.
When a question mixes IAS 16 with IAS 36, IFRS 13 or IFRS 5, state the order: depreciate, revalue or impair, then reclassify if held for sale.
Discuss the effect on key ratios and on comparability when management picks the revaluation model. Add scepticism where a revaluation looks timed to improve covenants or bonuses.

Practice questions from Non-current assets

IAS 16 Property, Plant and Equipment in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

IAS 16 Property, Plant and Equipment: frequently asked questions

What is the difference between the cost model and the revaluation model in IAS 16?

The cost model carries an asset at cost less accumulated depreciation and impairment. The revaluation model carries it at fair value at the revaluation date less later depreciation and impairment. The revaluation model needs regular valuations and applies to the whole class of assets.

How do I account for component depreciation under IAS 16?

Split the asset into parts whose cost is significant relative to the total. Depreciate each part over its own useful life. When you replace a part, derecognise its carrying amount and capitalise the new cost if the recognition criteria are met.

Where does a revaluation surplus go?

A surplus is recognised in OCI and accumulated in the revaluation surplus in equity. The exception is a surplus that reverses an earlier deficit on the same asset that went through profit or loss. That part is recognised in profit or loss.

Is land depreciated under IAS 16?

Land normally has an unlimited useful life, so it is not depreciated. Buildings on the land are depreciated. Land used for a quarry or landfill may be depreciated because the benefits of the land are consumed.

How is a gain on disposal of PPE presented?

The gain or loss is the net proceeds less the carrying amount. It is recognised in profit or loss when the item is derecognised. It is not classified as revenue.