This free, guided checker walks your finance team through the key decision points for IAS 16 Property Plant and Equipment. Answer a few questions to see the likely treatment and the evidence to document.
Answer a few quick questions below. It is private - nothing is submitted or stored - and takes about a minute.
This tool is a high-level IFRS screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
Here is what the checker asks and why each step matters. Prefer to talk it through? Contact us and we will help directly.
PPE comprises tangible items expected to be used during more than one period in the entity's own operations, not items held for sale in the ordinary course of business or held to earn rentals or for capital appreciation. Test the intended use against the definition in IAS 16.6 and confirm the asset is owner-occupied rather than investment property. The common trap is classifying property leased out or held for capital appreciation as PPE instead of investment property under IAS 40.
The item does not meet the IAS 16.6 definition of PPE; apply IAS 2 (inventories), IAS 38 (intangibles), IAS 40 (investment property), or IFRS 16 (leases) as appropriate.
Official guidance: IFRS issued standards
Assess expected use, output, cost savings, or rental income against technical and commercial feasibility, and confirm the entity controls the resource. The probability criterion is normally satisfied for purchased assets because the purchase price evidences expected benefits. The trap is capitalizing expenditure on assets whose benefits depend on uncertain future actions or approvals that have not yet been obtained.
Future economic benefits are not probable; expense the cost in profit or loss and reassess capitalization when the recognition criteria in IAS 16.7 are met.
Official guidance: IFRS issued standards
The cost of an item of PPE comprises its purchase price (net of trade discounts and rebates), import duties and non-refundable purchase taxes, and any costs directly attributable to bringing the asset to the location and condition necessary for its intended use (IAS 16.16). Include the initial estimate of any dismantling and site-restoration obligation (IAS 16.16(c)). The trap is capitalizing administration, general overhead, or start-up costs that IAS 16.19 excludes from cost.
Cost cannot be measured reliably; defer recognition and expense the outlay until a reliable measurement of cost under IAS 16.16 is available.
Official guidance: IFRS issued standards
Capitalization of costs into the carrying amount ceases when the item is in the location and condition necessary to be capable of operating in the manner intended by management, even if it has not yet been brought into use or is operating below full capacity (IAS 16.20). Costs of opening a new facility, introducing a new product, conducting business in a new location, training, and relocation are expensed (IAS 16.19). The trap is continuing to capitalize costs during commissioning after the asset is already capable of operating.
The asset is not yet capable of operating as intended; continue capitalizing directly attributable costs in construction in progress and do not depreciate until it is ready for use (IAS 16.20; IAS 16.55).
Official guidance: IFRS issued standards
IAS 16.43 requires each part of an item of PPE with a cost significant in relation to the total cost to be depreciated separately - for example airframes and engines, building structure and integral plant, or major inspection and overhaul components. Identify significant parts by cost and by differing useful lives or consumption patterns. The trap is depreciating a complex asset such as an aircraft or vessel over a single blended life, which distorts the expense profile.
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Official guidance: IFRS issued standards
IAS 16.44 requires the amount initially recognized for the item to be allocated to its significant parts, each depreciated separately. Allocate using relative fair values at acquisition, engineering cost build-up, or supplier cost breakdowns for replacements. The remainder of the item, comprising parts individually insignificant, may be grouped and depreciated together (IAS 16.46). The trap is identifying components conceptually but never allocating cost, leaving a single-line asset that cannot be componentized.
Cost allocation to significant parts is incomplete; allocate the initial cost to each significant part and assign separate useful lives before commencing depreciation (IAS 16.44).
Official guidance: IFRS issued standards
Under IAS 16.13, when parts of an item require replacement at intervals, the cost of the replacement part is capitalized if the recognition principle in IAS 16.7 is met, and the carrying amount of the replaced part is derecognized. This applies to regular replacements, such as a furnace relining, and to major inspections or overhauls (IAS 16.14). The trap is capitalizing the replacement while leaving the old part on the register, overstating the asset.
Use the interactive tool above to see how this applies to your situation.
Official guidance: IFRS issued standards
Derecognize the carrying amount of the replaced part when the replacement is capitalized, regardless of whether the replaced part was depreciated separately (IAS 16.13). Where the cost of the replaced part was not separately identified, use the cost of the replacement as an indication of what the replaced part's cost was at acquisition and derecognize accordingly (IAS 16.70). The trap is deferring derecognition, which double-counts the asset and understates the loss on the old part.
The replaced part has not been derecognized; derecognize its carrying amount (estimating from replacement cost if not separately identified) before capitalizing the new part (IAS 16.13; IAS 16.70).
Official guidance: IFRS issued standards
Subsequent expenditure is capitalized only where it meets the recognition principle in IAS 16.7 - probable future economic benefits and reliable cost. Costs of day-to-day servicing, described as repairs and maintenance, are expensed as incurred (IAS 16.12). Test whether the outlay maintains the originally assessed performance or enhances it. The trap is capitalizing routine maintenance to smooth earnings, or expensing a genuine component replacement.
The expenditure is day-to-day servicing that maintains the asset; recognize it in profit or loss as incurred (IAS 16.12).
Official guidance: IFRS issued standards
Capitalize subsequent expenditure that enhances the asset beyond its originally assessed standard of performance - a life extension, capacity increase, or efficiency or quality improvement - because it generates additional future economic benefits (IAS 16.7). Expenditure that merely restores the original performance is maintenance expensed under IAS 16.12. The trap is treating a like-for-like repair as an improvement, or failing to capitalize a genuine upgrade embedded in a maintenance program.
The expenditure does not enhance the asset beyond its original standard of performance; recognize it in profit or loss as incurred (IAS 16.12).
Official guidance: IFRS issued standards
Depreciate each significant component's depreciable amount (cost less residual value) systematically over its useful life using a method that reflects the expected pattern of consumption of economic benefits (IAS 16.50; IAS 16.60). Review residual values, useful lives, and depreciation methods at least at each financial year-end and account for changes prospectively as changes in estimate (IAS 16.51; IAS 16.61). The trap is leaving residual values or useful lives unrevised as conditions change, distorting the charge.
Depreciation by component has not been configured; set up systematic depreciation over each component's useful life with current residual values before period-end close (IAS 16.50; IAS 16.51).
Official guidance: IFRS issued standards
IAS 36.9 requires an assessment at each reporting date of whether any indication of impairment exists, considering the external and internal indicators listed in IAS 36.12 (for example market declines, adverse changes in use, physical damage, or worse-than-expected performance). Where an indicator exists, estimate recoverable amount as the higher of fair value less costs of disposal and value in use (IAS 36.18). The trap is skipping the indicator review because no impairment was recorded last period.
Recognition, componentization, subsequent-cost treatment, depreciation, and the IAS 36 impairment indicator assessment are complete; recognize the asset at cost less accumulated depreciation and any impairment (IAS 16.30; IAS 36.9). The IAS 36 impairment indicator assessment is outstanding; complete it before finalizing the PPE carrying amount for the period (IAS 36.9; IAS 36.12).
Official guidance: IFRS issued standards
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