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IAS 16

Property, Plant and Equipment

IAS 16 sets out how an entity recognises, measures and depreciates tangible items held for use in production, supply, rental or administration that are expected to be used for more than one period, and how it accounts for their subsequent revaluation and eventual derecognition. [S1]

Effective 2005-01-01Related: IAS 1 · IAS 8 · IAS 21 · IAS 36 · IAS 37

Overview

IAS 16 covers the full lifecycle of property, plant and equipment (PPE): what qualifies for recognition, what is included in cost, how subsequent expenditure and component replacement are treated, the choice between the cost model and the revaluation model for subsequent measurement, depreciation, and derecognition on disposal or retirement. [S1] It requires significant items with different useful lives within a single asset (e.g. an aircraft engine within an airframe, or a lift within a building) to be depreciated separately as components. [S2]

Why it matters

PPE is usually the largest, longest-lived asset class on the balance sheet of a manufacturing, logistics, or infrastructure business, and depreciation is one of the largest non-cash expenses in profit or loss. Getting recognition, componentisation and useful-life judgements wrong distorts profit for years, not just one period, and misstates both the balance sheet and the capital allowance reconciliation prepared for tax purposes.

Scope

Applies to all tangible items meeting the definition of PPE, except those specifically covered by another Standard (e.g. assets held for sale under IFRS 5, biological assets related to agricultural activity other than bearer plants under IAS 41, or exploration and evaluation assets under IFRS 6 to the extent they are not within IAS 16's scope). Investment property is instead accounted for under IAS 40, though an entity may still apply IAS 16's cost model guidance to owner-occupied elements.

Key definitions

term
Property, plant and equipment
definition
Tangible items held for use in production or supply of goods or services, for rental to others, or for administrative purposes, and expected to be used during more than one period.
term
Cost
definition
The amount of cash or cash equivalents paid, or the fair value of other consideration given, to acquire an asset at the time of its acquisition or construction.
term
Carrying amount
definition
The amount at which an asset is recognised after deducting accumulated depreciation and accumulated impairment losses.
term
Depreciable amount
definition
The cost of an asset (or other amount substituted for cost) less its residual value.
term
Residual value
definition
The estimated amount an entity would currently obtain from disposal of the asset, after deducting estimated disposal costs, if the asset were already of the age and condition expected at the end of its useful life.
term
Useful life
definition
The period over which an asset is expected to be available for use, or the number of production units expected to be obtained from it.
term
Recoverable amount
definition
The higher of an asset's fair value less costs of disposal and its value in use (relevant when assessing impairment under IAS 36).

Recognition

The cost of an item of PPE is recognised as an asset only if it is probable that future economic benefits associated with the item will flow to the entity, and the cost can be measured reliably. Spare parts and servicing equipment are usually expensed as incurred, but major spare parts and stand-by equipment qualify as PPE when an entity expects to use them for more than one period. Subsequent expenditure that meets the recognition criteria (e.g. a major overhaul or replacement of a significant component) is capitalised, with the carrying amount of any replaced part derecognised; day-to-day servicing and repairs are expensed as incurred.

Initial measurement

PPE is initially measured at cost, comprising the purchase price (net of trade discounts and rebates, plus import duties and non-refundable purchase taxes), all costs directly attributable to bringing the asset to the location and condition necessary for it to operate as intended (site preparation, delivery, installation, testing, and professional fees), and the initial estimate of the costs of dismantling, removing and restoring the site, to the extent a present obligation exists. Where payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognised as interest over the credit period unless capitalised under IAS 23.

Subsequent measurement

An entity chooses, as an accounting policy applied to an entire class of PPE, either the cost model (cost less accumulated depreciation and accumulated impairment losses) or the revaluation model (fair value at the date of revaluation less subsequent accumulated depreciation and impairment, with revaluations kept sufficiently up to date). Under the revaluation model, an increase is recognised in other comprehensive income and accumulated in equity as a revaluation surplus, unless it reverses a previous revaluation decrease recognised in profit or loss, in which case the increase is recognised in profit or loss to that extent; a decrease is recognised in profit or loss unless there is a credit balance in the revaluation surplus for that asset. Depreciation is charged systematically over the useful life, and each significant component with a materially different useful life is depreciated separately.

Presentation

PPE is presented in the statement of financial position at carrying amount, generally as non-current assets, with a reconciliation of the carrying amount at the beginning and end of the period (additions, disposals, depreciation, impairment, revaluation movements, and reclassifications) shown by class of asset in the notes. Revaluation surplus is presented within other comprehensive income and as a separate component of equity, and may be transferred directly to retained earnings as the asset is used or on derecognition, but never through profit or loss.

Disclosure checklist

  • Measurement bases used for determining the gross carrying amount, by class of PPE.
  • Depreciation methods used and the useful lives or depreciation rates applied, by class of PPE.
  • Gross carrying amount and accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period.
  • A reconciliation of the carrying amount at the beginning and end of the period, showing additions, disposals, acquisitions through business combinations, revaluation increases/decreases, impairment losses recognised or reversed, depreciation, and other movements.
  • Existence and amounts of restrictions on title, and PPE pledged as security for liabilities.
  • Amount of contractual commitments for the acquisition of PPE.
  • For revalued assets: the effective date of the revaluation, whether an independent valuer was involved, the methods and significant assumptions used, and the carrying amount that would have been recognised had the cost model been used.
  • The revaluation surplus, showing the movement for the period and any restrictions on distribution to shareholders.

Practical treatment

The most common practical issues are: (1) componentisation — failing to separately identify and depreciate significant components (e.g. a roof, generator, or major machine part) with a materially different useful life from the main asset; (2) distinguishing capital additions from repairs and maintenance, especially for irregular but recurring costs like major overhauls; (3) correctly capitalising directly attributable costs (installation, testing, professional fees) while excluding costs that are not directly attributable (general overheads, administration costs, and losses incurred before the asset reaches planned performance); (4) reassessing useful life and residual value at least at each financial year-end, as a change in accounting estimate under IAS 8, not a policy change. See nigeria_notes for the interaction with Nigeria's revised capital allowance regime and the FRCN valuation framework.

Common mistakes

  • Expensing a major component replacement in full without first derecognising the carrying amount of the replaced part.
  • Failing to componentise assets with significant parts of materially different useful lives, leading to an inaccurate depreciation charge.
  • Capitalising general administration overheads or start-up losses as part of the cost of an asset under construction.
  • Not reassessing useful life, residual value and depreciation method at least annually, particularly after an FX-driven change in replacement cost expectations.
  • Recognising a revaluation increase through profit or loss instead of other comprehensive income (except to the extent it reverses a previous decrease recognised in profit or loss).
  • Applying the accounting depreciation rate as if it were the tax capital allowance rate, when the two follow entirely different rules and rates.

CFO checklist

  • Maintain a fixed asset register that separately tracks components with materially different useful lives, not just whole assets.
  • Reassess useful life, residual value and depreciation method at each year-end and document the basis for any change.
  • Reconcile the accounting fixed asset register to the capital allowance computation each year; the two will diverge and the divergence should be explained, not treated as an error.
  • For any class of PPE carried under the revaluation model, ensure valuations are kept sufficiently up to date and performed by a suitably qualified valuer.
  • Confirm capitalisation policy thresholds and directly-attributable-cost criteria are applied consistently across sites and business units.
  • Track contractual capital commitments for PPE acquisition separately for the required note disclosure.

FAQs

q
Can we capitalise the cost of training staff to operate a new machine?
a
No. Training costs are not directly attributable to bringing the asset to its intended location and condition; they are operating costs and are expensed as incurred, even though they relate to a new asset.
q
We replaced the engine of a delivery truck — do we expense it or capitalise it?
a
If the engine is a significant component with its own identifiable cost and it meets the recognition criteria, the replacement cost is capitalised and the carrying amount of the old engine (if separately tracked) is derecognised; if the old engine's carrying amount cannot be determined, the cost of the replacement may be used as an indication of what the replaced part's cost was when it was itself acquired or constructed.
q
Does IAS 16 tell us what tax capital allowance rate to use?
a
No. IAS 16 governs accounting depreciation only; capital allowance rates are set by tax law and are a separate computation entirely, now restructured under the Nigeria Tax Act 2025 into three asset classes with uniform annual rates. See nigeria_notes.

Nigeria application notes

Regulatory overlay

IAS 16 applies in full to Nigerian public interest entities under the FRCN Act 2011 mandate. [S3] From 1 January 2026, entities using the revaluation model (or otherwise obtaining valuations for financial reporting purposes) should also have regard to the FRCN's Valuation Regulations for Financial Reporting, which set out a regulatory framework for valuers offering valuation services for financial reporting purposes in Nigeria; the Regulations were at exposure-draft stage when reviewed for this file and should be checked for their final, in-force form and commencement status before being relied on. [S4] Directors are also responsible under CAMA 2020 for keeping proper accounting records that disclose the company's financial position with reasonable accuracy, which in practice requires a fixed asset register capable of supporting the componentised carrying amounts and disposal history IAS 16 requires. [S9]

Tax interaction (Nigeria)

The Nigeria Tax Act 2025 substantially restructured capital allowances effective 1 January 2026: the previous initial-allowance-plus-annual-allowance structure has been replaced with uniform annual rates of 10%, 20% or 25% depending on a three-tier qualifying capital expenditure asset class, with a notional 1% of qualifying capital expenditure retained until the asset is disposed of. [S_TAX1][S6] Capital allowances are now only available where VAT (or, for imports, the applicable import duty or levy) was actually charged and paid on the asset, a stricter condition than under the previous law. [S_TAX1][S7] These capital allowance rates and rules are entirely independent of the accounting depreciation rates and useful lives used under IAS 16; the two should be reconciled, not conflated, in the deferred tax working papers (see IAS 12). [S_TAX2] Nigerian rates, thresholds, exemptions, incentives and filing rules referenced in this file (including CIT, VAT, capital allowance rates and the small-company threshold) should be independently verified against the Nigeria Tax Act 2025, the Nigeria Tax Administration Act 2025, and current NRS practice in force at the reporting or filing date, since thresholds, rates and reliefs are subject to periodic revision and to sector- or entity-specific qualifying conditions. This file does not constitute legal or tax advice. [S_TAX1][S_TAX2]

FX considerations

PPE acquired in a foreign currency is translated at the spot rate at the transaction date and, as a non-monetary asset measured at historical cost, is not retranslated at each reporting date; naira volatility therefore does not by itself change the carrying amount of cost-model PPE, though it can be a trigger for an impairment indicator review under IAS 36 if replacement cost or project economics have shifted materially. Import-dependent capital projects (plant and machinery imported and paid for in foreign currency) should capitalise the cost using the rate at the transaction date, not a year-end or budget rate.

SME practical note

Many Nigerian SME clients maintain a single fixed asset schedule that mixes accounting depreciation and tax capital allowance in one workbook; Outliers recommends separating these into two linked but distinct schedules from the outset of any IFRS conversion, given how far the two now diverge under the restructured capital allowance regime.

Common Nigerian pitfalls

  • Using the tax capital allowance rate (10%/20%/25% by class under the Nigeria Tax Act 2025) as the accounting depreciation rate, or vice versa.
  • Assuming capital allowances are available on an asset without first confirming VAT or import duty was actually charged and paid on it, per the stricter post-2026 qualifying conditions.
  • Treating a foreign-currency-denominated capital project's cost as subject to retranslation at each year-end, when historical-cost PPE is not a monetary item under IAS 21.
  • Relying on an internal or informally qualified valuation for a revalued class of PPE without considering the FRCN Valuation Regulations framework once it is confirmed to be in force.

FRC pronouncements

No FRCN pronouncement specific to PPE accounting under IAS 16 itself has been identified; the relevant FRCN instrument is the Valuation Regulations for Financial Reporting referenced above, which governs who may perform valuations used in applying the revaluation model, rather than the recognition and measurement principles of IAS 16 itself. [S4]

Worked examples

Componentised initial recognition of a factory production line

A manufacturer imports a production line for ₦180,000,000 (invoice price), pays ₦15,000,000 in shipping and insurance, ₦10,000,000 in installation and testing costs, and ₦5,000,000 in staff training on the new line. The line includes a control system component costing ₦30,000,000 with a 5-year useful life, while the rest of the line has a 15-year useful life.

Facts

Workings

Capitalisable cost = 180,000,000 + 15,000,000 + 10,000,000 = 205,000,000 (training cost of 5,000,000 excluded — not directly attributable to bringing the asset to its intended location and condition).

Control system component (separately depreciated over 5 years): 30,000,000

Remainder of the line (separately depreciated over 15 years): 205,000,000 - 30,000,000 = 175,000,000

Journal entries

Recognise the production line at cost, componentised between the control system and the remainder of the line; expense the training cost as incurred.

AccountDr (₦)Cr (₦)
Property, plant and equipment – control system component30,000,000
Property, plant and equipment – production line (remainder)175,000,000
Staff training expense (profit or loss)5,000,000
Cash / trade payables210,000,000

Revaluation increase recognised in other comprehensive income

An entity holds land under the revaluation model with a carrying amount of ₦50,000,000. An independent valuation, obtained in line with the entity's revaluation policy, determines fair value at ₦70,000,000 at the reporting date. The land has never previously been revalued downward.

Facts

Workings

Revaluation increase: 70,000,000 - 50,000,000 = 20,000,000

Since there is no prior revaluation decrease recognised in profit or loss for this asset, the entire increase is recognised in other comprehensive income and accumulated in equity as a revaluation surplus.

Journal entries

Recognise the revaluation increase on land in other comprehensive income.

AccountDr (₦)Cr (₦)
Land (property, plant and equipment)20,000,000
Revaluation surplus (other comprehensive income / equity)20,000,000

Sources & citations

  1. [S1]IAS 16 Property, Plant and Equipment — IFRS Foundationaccessed 2026-07-18
  2. [S2]IAS 16 — Property, Plant and Equipment (standard summary) — IAS Plus, Deloitteaccessed 2026-07-18
  3. [S3]IFRS - Use of IFRS Standards by jurisdiction: Nigeria — IFRS Foundationaccessed 2026-07-18
  4. [S4]Call for Comments: Exposure Draft on Valuation Regulations for Financial Reporting, 2024 — Financial Reporting Council of Nigeriaaccessed 2026-07-18
  5. [S_TAX1]Nigeria Tax Act, 2025 has been signed – highlights — EY Globalaccessed 2026-07-18
  6. [S6]Navigating Nigeria's new tax era: Key transitional provisions and compliance considerations for 2026 — Forvis Mazarsaccessed 2026-07-18
  7. [S7]Capital Allowance Under Nigeria's Tax Reform — Sunmola David & Coaccessed 2026-07-18
  8. [S_TAX2]Nigeria - Corporate - Deductions — PwC Worldwide Tax Summariesaccessed 2026-07-18
  9. [S9]Highlights of the provisions relating to financial statements, audit and annual returns in CAMA 2020 — Dentons ACAS-Lawaccessed 2026-07-18
Last reviewed 2026-07-18 · Reviewer: Rafiu Olawuyi, FCA (Author / Technical Reviewer)