Recognise and measure property, plant and equipment under IAS 16
Apply the asset recognition test, distinguish capitalised costs from expenses and connect carrying amounts with depreciation and impairment.
Section 3.2 · Regulatory and ethical considerations
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These lessons cover the nine named IAS at the main-provisions level described in Cambridge teacher guidance, the stated ethical principles, audit and stewardship. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use the Topic 1.5 and 3.1 statement skills: identify the reporting period, distinguish profit from cash, and explain how a reporting choice affects users of financial statements.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A new machine is expected to be used for several years and its cost is reliable. Which additional recognition condition is needed?
What you will learn
- Apply the IAS 16 recognition criteria
- Classify directly attributable costs and subsequent expenditure
- Explain cost or revaluation measurement, depreciation and impairment
Recognise an asset only when the criteria are met
Property, plant and equipment are tangible assets held for production or supply, rental or administration and expected to be used for more than one period. Recognise an item when future economic benefits are probable and its cost can be measured reliably.
Initial cost may include the purchase price after discounts, import duties, delivery, installation, testing and professional fees needed to bring the asset to the location and condition for use. General overhead, training, advertising and start-up costs are normally expensed rather than added merely because they occurred near the purchase.
Carry cost systematically over useful life
After recognition, the cost model carries cost less accumulated depreciation and impairment. The revaluation model uses a revalued amount less later depreciation and impairment, with the class treated consistently under the standard. Depreciation allocates the depreciable amount over useful life; it does not directly measure market value or set aside cash.
Day-to-day repairs are usually expenses. A replacement component or major inspection may be capitalised if recognition criteria are met, while the carrying amount of the replaced component or previous inspection is removed as appropriate. The syllabus also connects IAS 16 with IAS 36 impairment.
Pause and explain
A company pays for routine servicing of an existing machine. What is the usual treatment?
Worked example
A company buys a machine for $50,000, pays $2,000 delivery and $3,000 installation, and spends $1,500 training operators. It depreciates the machine over five years with no residual value. Calculate initial cost and annual straight-line depreciation.
Show the worked solution
- Capitalize purchase, delivery and installation needed to bring the machine to use: $50,000 + $2,000 + $3,000 = $55,000.
- Training is expensed rather than included in PPE cost under this syllabus-level treatment.
- Depreciable amount is $55,000; straight-line depreciation is $55,000 ÷ 5 = $11,000 a year.
Answer Initial PPE cost is $55,000. Annual straight-line depreciation is $11,000; the $1,500 training cost is an expense.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
An item costs $32,000. Delivery is $1,200, installation $800, staff training $900 and routine maintenance $600. Identify the initial PPE cost and the costs expensed under the basic treatment.
Give me a hint
Include costs needed to bring the asset to location and condition for use; separate training and routine servicing.
Compare my reasoning
- Purchase, delivery and installation qualify: $32,000 + $1,200 + $800 = $34,000.
- Training of $900 is expensed; routine maintenance of $600 is also an expense.
- Check that the asset recognition criteria are met before recognizing the $34,000 as PPE.
Initial PPE cost is $34,000. Training $900 and routine maintenance $600 are expenses, assuming no special facts change the treatment.
Look for these in your work
- Direct cost total correct
- Training excluded
- Maintenance excluded
A machine costs $72,000, has residual value $7,000 and useful life five years. Calculate annual straight-line depreciation and its carrying amount after two full years, before any impairment.
Give me a hint
Calculate depreciable amount, then allocate it evenly over the useful life.
Compare my reasoning
- Depreciable amount = $72,000 − $7,000 = $65,000.
- Annual depreciation = $65,000 ÷ 5 = $13,000.
- After two years, accumulated depreciation is $26,000 and carrying amount is $72,000 − $26,000 = $46,000.
Annual depreciation $13,000; carrying amount after two years $46,000 before impairment.
Look for these in your work
- Residual value deducted
- Annual charge correct
- Accumulated depreciation applied
A company replaces the motor in a production line and also pays for routine cleaning. Explain why the two costs may receive different treatments, and name one related accounting check.
Give me a hint
Compare whether expenditure creates a separately useful future benefit or merely maintains current operating condition.
Compare my reasoning
- A replacement component may meet the asset recognition criteria if it provides future benefits and cost is measurable.
- Routine cleaning maintains the asset and is normally expensed as incurred.
- If the motor is capitalised, consider derecognising the replaced component; then depreciate the new component over its useful life and consider impairment indicators.
The replacement motor may be capitalised when recognition criteria are met, while routine cleaning is normally expensed. Check the carrying amount of the replaced motor and depreciate the new component appropriately.
Look for these in your work
- Recognition test applied
- Maintenance distinguished
- Replacement component considered
Common mistakes
- Capitalising every cost that happens near an asset purchase
- Calling depreciation a valuation or cash reserve
- Ignoring the asset recognition test for a replacement part
What can you explain now?
What does depreciation systematically allocate?
Compare with the explanation
The depreciable amount over the asset's useful life
Depreciation allocates cost less residual value over useful life; it does not itself measure current market value.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
State the two IAS 16 recognition conditions and explain what depreciation does.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.