IAS 16: property, plant and equipment accounting and depreciation
A machine or building involves more than its purchase price. IAS 16 requires an assessment of eligible costs, components and useful lives. Use these worked examples to prepare your fixed asset register and explain depreciation in IFRS reporting.
By Sarah Prieur · Swiss certified accountant
IAS 16: the essentials
IAS 16 governs property, plant and equipment in IFRS financial statements. It covers tangible assets such as machinery, vehicles and buildings used over time in the business, including recognition, initial cost, depreciation and subsequent carrying amounts.
- The invoiced price is not always the amount to capitalise.
- Depreciation starts when the asset is available for its intended use.
- Significant components with different useful lives require separate depreciation.
- Impairment must also be assessed when circumstances indicate a loss of value.
The standard applies to IFRS reporting. Swiss tax depreciation rates do not automatically establish the appropriate economic useful lives. Our article on depreciation in Switzerland explains that broader distinction.
Which assets fall within IAS 16?
Property, plant and equipment are tangible items held for production, the supply of services, rental to others or administration, and expected to be used for more than one period.
The business must assess whether future economic benefits are probable and whether cost can be measured reliably. An invoice alone does not justify recognition if the expenditure fails to create an asset meeting the criteria.
Identify the relevant standard first. Inventory held for sale, software and certain investment properties follow other requirements. The right to use a leased asset falls under IFRS 16, which draws on IAS 16 principles for some aspects.
Practical example: a computer bought for internal use serves a different purpose from an identical computer purchased for resale. Its intended use explains the different accounting treatment, even though the physical item is the same.
Initial cost: what to capitalise and what to expense
Cost includes the purchase price after discounts, expenditure directly attributable to bringing the asset to the required location and working condition, and certain dismantling or restoration obligations.
Recoverable VAT is normally excluded from cost. Non-recoverable taxes require a different assessment. General overheads and staff training cannot simply be added to the asset.
Consider a business buying a machine. The following illustrative amounts exclude recoverable VAT.
| Expenditure | Amount | Treatment in this example |
|---|---|---|
| Machine, net purchase price | CHF 100,000 | Capitalised |
| Necessary transport | CHF 8,000 | Capitalised |
| Directly attributable installation | CHF 12,000 | Capitalised |
| Operator training | CHF 5,000 | Expensed |
| Cost of the asset | CHF 120,000 | Recorded in the asset register |
The capitalised amount is CHF 120,000, although the payments shown total CHF 125,000. Any additional expenditure would need its own assessment.
Proceeds from selling items produced while preparing an asset for its intended use are not simply deducted from the asset's cost. The sales and related costs are recognised in profit or loss under the applicable requirements.
Calculate depreciation using the asset's useful life
The depreciable amount is cost, or the amount substituted for cost, less residual value. Allocate it according to the expected consumption of the asset's economic benefits.
For the CHF 120,000 machine, assume an estimated residual value of CHF 20,000 and a useful life of five years. Straight-line depreciation for a complete year is (CHF 120,000 − CHF 20,000) ÷ 5 = CHF 20,000.
Depreciation begins when the machine is available to operate as intended. Waiting for the first customer order may delay the expense incorrectly. Conversely, a machine still being installed may not yet be available for use.
Review useful life, residual value and the depreciation method at least at each financial year-end. Changes follow the rules for changes in accounting estimates; they do not permit an unrestricted rewrite of past results.
An idle asset does not automatically stop being depreciated. Treatment depends in part on the method and the asset's circumstances. This matters for underused equipment and sites awaiting a restart.
Why depreciate significant components separately?
Equipment may contain significant parts with different useful lives. Tracking them separately avoids spreading the entire cost over an average life that does not reflect actual consumption.
In a second example, independent of the first, equipment costing CHF 120,000 comprises a CHF 90,000 structure lasting ten years and a CHF 30,000 module due for replacement after three years. Assume zero residual values.
Annual depreciation is CHF 9,000 for the structure plus CHF 10,000 for the module: CHF 19,000 in the first complete years. Depreciating everything over ten years would produce CHF 12,000 annually, reflecting a different consumption pattern.
When a component is replaced, assess the new part for recognition and derecognise the old part's carrying amount under the applicable rules. The register must identify which component has been replaced.
Cost, revaluation and impairment
After initial recognition, IAS 16 permits the cost model or, subject to its conditions, the revaluation model. Apply the policy to an entire class of property, plant and equipment, rather than selecting only an asset whose value has risen.
Revaluation requires reliably measurable fair values and sufficiently regular updates. It does not mean freely adding an unrealised gain to profit. The treatment of increases and decreases depends on previous movements and the rules for other comprehensive income.
Under either model, consider impairment indicators such as damage, obsolescence, declining use or deteriorating prospects. IAS 36 explains how to assess the recoverable amount of affected assets.
For example, technically obsolete equipment may require an impairment loss in addition to scheduled depreciation. Continuing the original depreciation schedule without considering the new facts is insufficient. Our overview of accounting assets places these carrying amounts in the wider balance sheet.
Maintain a useful register and prepare disclosures
For each significant asset, retain a description, the date it became available for use, eligible costs, components, useful life, residual value and disposal details. Attach evidence supporting important estimates.
Reconcile the register with the balance sheet and depreciation movements. An asset sold, destroyed or replaced should not remain in the list simply because nobody updated it.
The notes to the accounts explain the required methods, useful lives, amounts and movements. Prepare this information during the annual closing, rather than after all figures have been approved.
For a first IFRS conversion, historical amounts and the elections available under IFRS 1 need separate analysis. A reliable current asset register is already a valuable starting point.
Frequently asked questions
Does IAS 16 prescribe a minimum capitalisation threshold in CHF?
No universal Swiss franc threshold is prescribed. The policy must reflect materiality and the framework's recognition criteria, and be applied consistently.
Can staff training be capitalised?
Operator training is excluded from the equipment's cost in the circumstances illustrated here. Distinguish it from expenditure directly attributable to bringing the asset into the condition needed for its intended use.
Can Swiss tax depreciation rates be used under IFRS?
The IFRS useful life must represent estimated economic use. A tax rate alone does not justify it, even if the resulting figures sometimes coincide.
Should land be depreciated with the building?
Account for land and buildings separately. Land generally has an unlimited useful life and is not depreciated, subject to particular circumstances.
Are depreciation and impairment the same thing?
No. Depreciation allocates the depreciable amount over the useful life. Impairment addresses a loss of value when the carrying amount is no longer recoverable.
