Library / Technical Accounting Manual: IFRS, IAS and Ind AS Equivalents

IAS 16 - Property, Plant and Equipment (PPE)

Indian equivalent: Ind AS 16 - Property, Plant and Equipment

Objective and scope

IAS 16 governs long-lived physical (tangible) assets used to run a business - land, buildings, machinery, vehicles, equipment - covering initial cost, depreciation over useful life, subsequent revaluation, and derecognition on disposal.

Core principle

When you buy a machine you don't expense the whole cost in one year. IAS 16 spreads the cost over the years the machine helps you earn - this spreading is depreciation. You may keep the asset at cost less depreciation, or optionally revalue it to current fair value.

Defined terms and technical terminology

Term	Technical meaning
Property, Plant & Equipment	Tangible items held for use in production, supply, rental or administration, expected to be used for more than one period.
Cost	Purchase price + import duties + non-refundable taxes + all costs to bring the asset to working condition (delivery, installation, testing) + initial dismantling/restoration obligation.
Depreciation	Systematic allocation of the depreciable amount over the asset's useful life.
Depreciable amount	Cost (or revalued amount) minus residual value.
Useful life	The period over which the asset is expected to be available for use.
Residual value	Estimated amount obtainable on disposal at the end of useful life.
Carrying amount	Cost (or revalued amount) less accumulated depreciation and impairment.
Revaluation model	Carrying the asset at fair value at revaluation date less subsequent depreciation, updated regularly.
Component approach	Depreciating significant parts of an asset with different useful lives separately.

Application and worked illustrations

Measuring cost at initial recognition

A factory buys a machine: price ₹10,00,000, transport ₹50,000, installation ₹30,000, test-run ₹20,000. IAS 16 cost = ₹11,00,000 - everything needed to make it usable, plus the present value of any obligation to dismantle and restore the site at the end. A one-year insurance premium of ₹15,000 is a running cost → expensed, not capitalised. Costs stop being capitalised once the asset is ready for use, even if not yet operating at full capacity.

Worked example 1 - straight-line depreciation

The ₹11,00,000 machine has a 10-year life and ₹1,00,000 residual value. Annual charge = (Cost − Residual) ÷ Life = (11,00,000 − 1,00,000) ÷ 10 = ₹1,00,000/year.

Journal entry - Record annual depreciation
Account	Debit (₹)	Credit (₹)
Depreciation expense (P&L)	1,00,000
Accumulated depreciation		1,00,000

After 3 years, accumulated depreciation = ₹3,00,000 and carrying amount = ₹8,00,000. The charge hits profit each year though no cash leaves - it recognises that the machine is being 'used up'.

Worked example 2 - the component approach

An aircraft costs ₹100 crore. Its engines (₹30 crore) last 6 years but its body (₹70 crore) lasts 20 years. IAS 16 requires separate depreciation: engines over 6 years, body over 20. This prevents lumping everything into one life and mis-stating the charge.

Worked example 3 - revaluation model

A building bought for ₹50 lakh is later valued at ₹80 lakh. Under the revaluation model, the ₹30 lakh uplift goes to a revaluation surplus in equity via Other Comprehensive Income - not to profit - so companies cannot inflate earnings by revaluing. If the building later falls below cost, the loss first reduces the surplus, then hits profit.

Journal entry - Record a revaluation increase
Account	Debit (₹)	Credit (₹)
PPE - Building (asset)	30,00,000
Revaluation surplus (OCI/equity)		30,00,000

Common mistake: continuing to depreciate at the old rate after revaluing or re-estimating life. Depreciation is recalculated on the new carrying amount and remaining life.

Common mistake: capitalising repairs and maintenance. Only costs that enhance future benefits are capitalised; routine servicing is expensed. Land is generally not depreciated (indefinite life).

IND AS LINK

Ind AS 16 aligns closely with IAS 16 - both models allowed, both require component depreciation. In India, the Companies Act Schedule II prescribes indicative useful lives, which interact with the Ind AS estimate of useful life.

Further worked illustrations

Extra numeric example - reducing-balance depreciation

Not all assets wear out evenly. A ₹5,00,000 vehicle depreciated at 20% reducing balance: Year 1 = 20% × 5,00,000 = ₹1,00,000 (carrying ₹4,00,000); Year 2 = 20% × 4,00,000 = ₹80,000 (carrying ₹3,20,000); Year 3 = 20% × 3,20,000 = ₹64,000. The charge is higher early on, matching how vehicles lose value fastest when new - a better matching than straight-line for such assets.

INDIAN REGULATORY CONTEXT

The Companies Act Schedule II prescribes indicative useful lives (e.g., general plant & machinery 15 years, computers 3 years, motor vehicles 8 years). A company may use a different life if justified by technical evaluation, but must disclose the difference. So an Indian accountant sets depreciation with one eye on Ind AS 16 (the estimate of useful life) and one on Schedule II (the benchmark it must justify departing from).

TECHNICAL EDGE CASE

An airline must, by law, perform a major aircraft inspection every 3 years costing ₹2 crore. Rather than expense it as a lump when it happens, IAS 16 treats the inspection as a separate component: capitalise ₹2 crore and depreciate it over 3 years until the next inspection, when the process repeats. This spreads a big periodic cost instead of spiking one year's profit.

Extended technical analysis

Recognition, componentisation, revaluation and derecognition

IAS 16 recognises an item of PPE when it is probable that future economic benefits will flow to the entity and cost can be measured reliably. Beyond initial recognition the standard's technical weight sits in three areas: component accounting, the revaluation model mechanics, and derecognition.

Elements of cost

Capitalisation Boundary under IAS 16
Cost element	Capitalise?	Basis
Purchase price net of trade discounts and rebates	Yes	IAS 16.16(a)
Import duties and non-refundable purchase taxes	Yes	IAS 16.16(a)
Site preparation, delivery, handling, installation, assembly	Yes	IAS 16.17
Professional fees directly attributable	Yes	IAS 16.17
Costs of testing, net of proceeds from samples produced	Yes (proceeds from samples → P&L, per 2020 amendment)	IAS 16.17(e), 16.20A
Present value of dismantling and site restoration obligation	Yes	IAS 16.16(c) with IAS 37
Borrowing costs on a qualifying asset	Yes	IAS 23
Costs of opening a new facility; introducing a new product; advertising	No - expense	IAS 16.19
Administration and general overheads	No - expense	IAS 16.19(d)
Initial operating losses; relocation or reorganisation costs	No - expense	IAS 16.20-21
Day-to-day servicing, repairs and maintenance	No - expense	IAS 16.12

Component accounting

Where an item of PPE comprises parts with significantly different useful lives or patterns of consumption, each significant part must be depreciated separately. The classic application is an aircraft (airframe, engines, cabin interior) but the principle applies equally to a building (structure, roof, HVAC, lifts) and a vessel (hull, dry-docking component). Component accounting also governs major inspections: where a regulatory inspection is a condition of continued operation, its cost is capitalised as a separate component and depreciated to the next inspection date, and any remaining carrying amount of a previous inspection is derecognised.

Revaluation model mechanics

IAS 16 - Revaluation Accounting Decision Tree
■ Revalue the entire CLASS of PPE to fair value at the revaluation date
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◆ Is the revaluation an INCREASE or DECREASE?
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◆ INCREASE → Does it reverse a previous decrease charged to P&L for the same asset?
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✔ YES → Credit P&L up to the amount previously charged; excess to OCI (Revaluation Surplus)
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▸ NO → Credit entirely to OCI, accumulated in Revaluation Surplus
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◆ DECREASE → Is there an existing Revaluation Surplus for the SAME asset?
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✔ YES → Debit OCI to the extent of that surplus; any excess charged to P&L
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✖ NO → Charge the entire decrease to P&L
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■ On derecognition, transfer Revaluation Surplus DIRECTLY to Retained Earnings (never through P&L)

The asymmetry is deliberate and frequently examined: upward revaluations bypass profit or loss (preventing earnings management through asset appraisals), while downward revaluations beyond any existing surplus are charged to profit. The revaluation surplus is subsequently transferred to retained earnings either on derecognition, or progressively as the asset is used (the difference between depreciation on the revalued amount and on original cost) - but never recycled through profit or loss.

IFRS vs Ind AS - Comparative Analysis
Aspect	IFRS / IAS position	Ind AS position (carve-out / carve-in)
Measurement models	Cost model or revaluation model, by class.	Ind AS 16 - identical; both permitted.
Component accounting	Required for significant parts.	Mandatory in India and reinforced by Schedule II.
Useful lives	Determined by entity estimate.	Schedule II prescribes indicative lives; departure permitted with technical justification and disclosure - a distinctly Indian overlay.
Depreciation on revalued assets	Charged on revalued amount.	Same. Note: Indian companies cannot transfer the additional depreciation to retained earnings through P&L.
Decommissioning cost changes	IFRIC 1 governs changes in restoration liabilities.	Appendix A to Ind AS 16 carries IFRIC 1.