Key takeaways
- IAS 16 sets out when property, plant and equipment (PPE) is recognised, what goes into its cost, and how it is depreciated and derecognised.
- Cost includes purchase price, import duties and non-refundable taxes, directly attributable costs and estimated dismantling or restoration costs.
- Significant components with different useful lives are depreciated separately.
- Useful lives, residual values and depreciation methods must be reviewed at least at each financial year-end.
For manufacturers, PPE is often the largest asset on the balance sheet: buildings, machinery, generators, effluent treatment plants, vehicles and IT equipment. IAS 16 Property, Plant and Equipment governs how these assets are recorded and depreciated. Errors here affect profit for many years, and auditors routinely test capitalisation decisions, useful lives and depreciation calculations.
This guide covers the full life cycle — recognition, initial cost, the cost and revaluation models, depreciation, componentisation, and derecognition — with a worked comparison of depreciation methods.
1. Recognition
An item of PPE is recognised as an asset when it is probable that future economic benefits associated with it will flow to the entity and its cost can be measured reliably. PPE consists of tangible items held for use in production or supply, for rental or for administrative purposes, and expected to be used for more than one period. Major spare parts and standby equipment qualify as PPE when they meet this definition; otherwise they are inventory.
Many companies set a capitalisation threshold below which small items are expensed. This is acceptable as an application of materiality, provided the threshold is documented and its total effect is immaterial.
2. What goes into cost
| Include in cost | Do not include (expense) |
|---|---|
| Purchase price, import duties and non-refundable purchase taxes, net of trade discounts | Recoverable VAT or input tax |
| Costs of site preparation, delivery, handling, installation and assembly | Costs of opening a new facility, introducing a new product, advertising |
| Professional fees (engineers, architects) directly attributable | Administration and general overheads |
| Testing whether the asset functions properly | Training staff to use the asset |
| Initial estimate of dismantling, removal and site restoration (if an obligation exists) | Initial operating losses and costs incurred while the asset is not yet used as intended |
| Borrowing costs for qualifying assets (IAS 23) | Abnormal waste of materials or labour |
Capitalisation stops when the asset is in the location and condition necessary for it to be capable of operating as intended. Following an amendment effective from 2022, proceeds from selling items produced while bringing an asset to that condition (for example, test samples) are recognised in profit or loss, not deducted from cost.
3. Cost model or revaluation model
After recognition, an entity chooses for each class of PPE either the cost model (cost less accumulated depreciation and impairment) or the revaluation model (fair value at the revaluation date less subsequent depreciation and impairment). Under the revaluation model, valuations must be regular enough that the carrying amount does not differ materially from fair value. Increases go to other comprehensive income and a revaluation surplus in equity (unless reversing a previous decrease recognised in profit or loss); decreases go to profit or loss after using any surplus for that asset. Land and buildings are the most common class carried at revaluation in Bangladesh, often to reflect significant increases in land values.
4. Depreciation
Depreciation allocates the depreciable amount (cost less residual value) systematically over the asset’s useful life. It begins when the asset is available for use — not when it is first used — and continues even when the asset is idle, unless it is fully depreciated or classified as held for sale. Land usually has an unlimited life and is not depreciated.
The method must reflect the pattern in which economic benefits are consumed. Straight-line is the most common; the diminishing (reducing) balance and units-of-production methods are also permitted. Revenue-based depreciation is presumed inappropriate.
Reducing balance at 40%: Year 1 = 1,000,000 × 40% = 400,000; Year 2 = 600,000 × 40% = 240,000; … final year adjusted to reach the 100,000 residual
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Carrying amount of a BDT 1 million machine under two depreciation methods (illustrative)
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| Period | Straight-line | Reducing balance (40%) |
|---|---|---|
| Start | 1,000k | 1,000k |
| Year 1 | 820k | 600k |
| Year 2 | 640k | 360k |
| Year 3 | 460k | 216k |
| Year 4 | 280k | 130k |
| Year 5 | 100k | 100k |
| Year | Straight-line charge | Reducing balance charge | SL carrying amount | RB carrying amount |
|---|---|---|---|---|
| Year 1 | 180,000 | 400,000 | 820,000 | 600,000 |
| Year 2 | 180,000 | 240,000 | 640,000 | 360,000 |
| Year 3 | 180,000 | 144,000 | 460,000 | 216,000 |
| Year 4 | 180,000 | 86,400 | 280,000 | 129,600 |
| Year 5 | 180,000 | 29,600 | 100,000 | 100,000 |
Figures are illustrative. Useful lives and methods should reflect the entity’s actual expected use, maintenance policy and technical or commercial obsolescence — not tax depreciation rates. Differences from tax rates are dealt with through deferred tax (see IAS 12).
5. Componentisation
Each part of an item of PPE with a cost that is significant in relation to the total must be depreciated separately if its useful life differs. Examples include a building’s structure (40–50 years) versus its lifts and HVAC (10–20 years), an aircraft’s airframe versus its engines, or a power plant’s generator versus its major overhaul. When a component is replaced, the new part is capitalised and the carrying amount of the replaced part is derecognised. The cost of major inspections can also be capitalised as a component and depreciated until the next inspection.
6. Annual reviews
Residual value, useful life and depreciation method must be reviewed at least at each financial year-end. Changes are changes in accounting estimates under IAS 8, applied prospectively from the date of change — previous years are not restated. A common audit finding is fully depreciated assets still in heavy use, which suggests that useful lives were too short and that depreciation has been overstated in earlier years.
7. Derecognition and disclosure
An item is derecognised on disposal or when no future economic benefits are expected. The gain or loss — net proceeds less carrying amount — goes to profit or loss (and is not classified as revenue). Disclosures include, for each class, the measurement basis, depreciation methods, useful lives or rates, a reconciliation of carrying amounts from opening to closing, and details of revaluations, restrictions on title and assets pledged as security.
8. Practical controls for a fixed asset register
- A capitalisation policy with thresholds and examples of capital versus revenue expenditure.
- A fixed asset register reconciled to the general ledger every month.
- Asset tagging and periodic physical verification, with results investigated and adjusted.
- Capital work-in-progress reviewed monthly so completed assets start depreciating on time.
- Annual review of useful lives and residual values, documented with operations input.
- Impairment indicator review at each reporting date (see IAS 36).
Standards referenced in this article
IAS and IFRS are one body of standards — IFRS Accounting Standards, issued by the IASB. Standards issued before 2001 keep their IAS numbers and remain fully in force unless replaced. See the full IFRS & IAS standards list for every number and replacement.
| Standard | Title | Status | IFRS # & IAS # link |
|---|---|---|---|
| IAS 8 | Accounting Policies, Changes in Accounting Estimates and Errors | In force (renamed ‘Basis of Preparation of Financial Statements’ by IFRS 18 from 2027) | No IFRS number |
| IAS 12 | Income Taxes | In force | No IFRS number — IAS 12 is the IFRS standard |
| IAS 16 | Property, Plant and Equipment | In force | No IFRS number — IAS 16 is the IFRS standard |
| IAS 23 | Borrowing Costs | In force | No IFRS number |
| IAS 36 | Impairment of Assets | In force | No IFRS number — IAS 36 is the IFRS standard |
Frequently asked questions
When does depreciation start under IAS 16?
When the asset is available for use — in the location and condition necessary for it to be capable of operating in the manner intended by management — even if it has not yet been brought into use.
Can an entity use tax depreciation rates in its IFRS accounts?
Only if they happen to reflect the asset's actual useful life and pattern of consumption. IAS 16 requires depreciation based on expected use; differences between accounting and tax depreciation are accounted for as deferred tax under IAS 12.
Is a change in useful life applied retrospectively?
No. A change in useful life, residual value or depreciation method is a change in accounting estimate under IAS 8 and is applied prospectively from the date of the change.
Conclusion
IAS 16 is conceptually simple but full of practical judgements: what to capitalise, which components to separate, how long assets will really last and what they will be worth at the end. A clear capitalisation policy, a reconciled asset register, timely transfers from work-in-progress and an annual review of lives and residual values keep PPE — and years of depreciation — accurate.
Written by Liakat Hossain
Finance and accounts professional with experience in FP&A, SAP FICO, Power BI, internal control, reporting, audit, tax, VAT and export-oriented business operations.
This article is original educational content based on professional finance practice. Real-project examples are anonymized, and scenario figures are identified as model outputs rather than guaranteed results.