An Executive Guide to IFRS: Content, Costs and Benefits to Business

Property, plant and equipment

IAS 16 Property, Plant and Equipment is the basic standard that addresses this traditional area of the balance sheet – tangible assets. The standard builds in the conceptual framework definition by specifying that (IAS 16.7):

The cost of an item of property, plant and equipment shall be recognized as an asset if, and only if:

(a) it is probable that future economic benefits associated with the item will flow to the entity; and

(b) the cost of the item can be measured reliably.

The standard (IAS 16.16) says that at initial recognition the asset should be measured at cost. It specifies that this should include its purchase price and also (a) any non-refundable duties and taxes, (b) costs attributable to bringing the asset to the location and condition necessary for it to operate (including site preparation, professional fees, etc.), and (c) the costs of subsequently dismantling the asset and restoring the site where the entity has an obligation to do that (dealt with in IAS 37, see below). It also specifies (IAS 16.19) that costs such as those of opening a new facility, or conducting business in a new location, or administration and general overheads are not to be capitalized into the asset.

The standard also addresses depreciation. A particularity of this is that it mandates the use of component depreciation. This is a requirement to look at an asset and consider whether there are any material components that have a useful life significantly different ...