IAS 16 (IAS 23) - Property, plant and equipment (including borrowing costs)

Publication date: 08 Jun 2020

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Latest developments

In June 2017, the IASB issued proposed amendments to IAS 16 regarding proceeds before intended use. The amendments would prohibit deducting from the cost of an item of property, plant and equipment any proceeds from selling items produced while bringing that asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Instead, an entity would recognise those sales proceeds in profit or loss. Comments are due 19 October 2017.

In December 2017, the IASB issued ‘Annual Improvements to IFRS Standards 2015 – 2017 Cycle’ in December 2017. These contain minor amendments affecting IAS 23,'Borrowing costs'. The amendments clarified that if a specific borrowing remains outstanding after the related qualifying asset is ready for its intended use or sale, it becomes part of general borrowings. These amendments should be applied prospectively for borrowing costs incurred on or after the beginning of annual periods beginning on or after 1 January 2019. Earlier application is permitted.

Topical issues

Requirement for annual review of useful economic lives and residual values of assets

IAS 16 requires that the depreciable amount of an asset should be allocated over the asset’s useful life (para 50). Where an asset is held at nil net book value, this implies that the asset is still being used in the business but that it has been written off over a period shorter than its useful life, therefore contradicting the standard’s requirements.

IAS 16 para 51 requires that the residual value and useful lives of property, plant and equipment should be reviewed at least at each year end and, if expectations are different from previous estimates, the change should be accounted for as a change in estimate in accordance with IAS 8.

IAS 8 requires that the effect of a change in estimated useful life should be accounted for by adjusting the depreciation charge for the current period insofar as the change affects the current period and by adjusting the charge for future periods to the extent that it affects the future periods.

This guidance would equally apply to intangible assets with finite useful lives capitalised under IAS 38.


Property, plant and equipment (PPE) is recognised when the cost of an asset can be reliably measured and it is probable that the entity will obtain future economic benefits from the asset.

PPE is measured initially at cost. Cost includes the fair value of the consideration given to acquire the asset (net of discounts and rebates) and any directly attributable cost of bringing the asset to working condition for its intended use (inclusive of import duties and non-refundable purchase taxes).

Directly attributable costs include the cost of site preparation, delivery, installation costs, relevant professional fees and the estimated cost of dismantling and removing the asset and restoring the site (to the extent that such a cost is recognised as a provision). Classes of PPE are carried at historical cost less accumulated depreciation and any accumulated impairment losses (the cost model), or at a revalued amount less any accumulated depreciation and subsequent accumulated impairment losses (the revaluation model). The depreciable amount of PPE (being the gross carrying value less the estimated residual value) is depreciated on a systematic basis over its useful life.

Subsequent expenditure relating to an item of PPE is capitalised if it meets the recognition criteria.

PPE may comprise parts with different useful lives. Depreciation is calculated based on each individual part's life. In case of replacement of one part, the new part is capitalised to the extent that it meets the recognition criteria of an asset, and the carrying amount of the parts replaced is derecognised.

The cost of a major inspection or overhaul of an item occurring at regular intervals over the useful life of the item is capitalised to the extent that it meets the recognition criteria of an asset. The carrying amounts of the parts replaced are derecognised.

Borrowing costs

Under IAS 23, 'Borrowing costs', entities are required to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset to be capitalised.

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