Meaning
International accounting standards prescribe the treatment for tangible assets that are held for use in the production of goods or for administrative purposes. The ias 16 property plant equipment standard governs how these items are initially recognized and how their value changes over time. It requires that an asset be recognized only when it is probable that future economic benefits will flow to the entity.
This standard does not apply to biological assets related to agricultural activity or mineral rights.
Measurement Basis
Cost models or revaluation models are the two paths allowed for the subsequent measurement of assets after their initial purchase. Following ias 16 property plant equipment, a firm must include all costs necessary to bring the asset to its working condition. This includes site preparation and delivery fees.
Subsequent costs are only added to the carrying amount if they improve the performance of the asset beyond its original design.
Depreciation Methodology
Systematically allocating the cost of an asset over its useful life ensures that the expense matches the period in which it generates revenue. The ias 16 property plant equipment rule mandates a review of useful life and residual value at least once every financial year. This prevents the overstatement of asset values on the balance sheet.
Disposal Recognition
Removing an item from the books requires the calculation of a gain or loss based on the difference between the sale price and the carrying amount. Compliance with ias 16 property plant equipment is mandatory for companies using international financial reporting standards.
