The first three parts of this series covered recognition and initial measurement, subsequent measurement under the cost and revaluation models, and the three depreciation methods IAS 16 recognizes. This final content part closes out the standard: how significant parts of an asset are depreciated separately, what happens when an asset is disposed of, what IAS 16 requires you to disclose, and the mistakes that show up most often when the standard is applied in practice.

Component Depreciation for Significant Parts

When an item of PP&E has parts with a cost that is significant relative to the total cost of the item, and those parts have useful lives or consumption patterns that differ from the asset as a whole, IAS 16 requires each such part to be depreciated separately. A commonly cited example is an aircraft: the airframe, engines, and interior fittings typically have different useful lives and are depreciated as separate components rather than as one blended asset, since replacing an engine partway through the airframe’s life is a normal, planned event rather than an impairment.

Component accounting also applies to major inspection and overhaul costs. When a major inspection is performed, its cost is recognized in the carrying amount of the asset as a replacement, provided the recognition criteria are satisfied, and any remaining carrying amount of the cost of the previous inspection is derecognized — regardless of whether that previous inspection cost was identified as a separate component at the time of the original purchase.

Derecognition and Disposal of PP&E

The carrying amount of an item of PP&E is derecognized on disposal, or when no future economic benefits are expected from its use or disposal. The gain or loss arising from derecognition is the difference between the net disposal proceeds, if any, and the asset’s carrying amount at that date, and it is recognized in profit or loss when the item is derecognized — importantly, such gains are not classified as revenue, even for a company whose ordinary business involves regularly disposing of used equipment. The date of disposal is determined by applying the criteria in IFRS 15 for recognizing revenue from the sale of goods, or, for a sale-and-leaseback arrangement, in accordance with IFRS 16.

Disclosure Requirements Under IAS 16

For each class of PP&E, the financial statements must disclose the measurement bases used to determine gross carrying amount, the depreciation methods used, the useful lives or depreciation rates applied, and the gross carrying amount and accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period. A full reconciliation of the carrying amount at the beginning and end of the period is also required, showing additions, disposals, acquisitions through business combinations, revaluation increases or decreases, impairment losses, depreciation charged for the period, and any other movements.

Entities must also disclose the existence and amounts of restrictions on title and PP&E pledged as security for liabilities, the amount of expenditure recognized in the carrying amount of an item in the course of construction, and the amount of contractual commitments for the acquisition of PP&E. Where the revaluation model is used, additional disclosures apply: the effective date of the revaluation, whether an independent valuer was involved, the methods and significant assumptions used in estimating fair values, and the revaluation surplus, including movements during the period and any restrictions on its distribution to shareholders.

Common IAS 16 Implementation Mistakes

A handful of errors show up repeatedly in practice. Capitalizing costs that should be expensed — training costs, relocation costs, and general administrative overhead are frequently and incorrectly bundled into asset cost, inflating the balance sheet and understating current-period expenses. Failing to review useful life and residual value annually, which lets depreciation charges quietly drift out of line with how the asset is actually being consumed. Applying one blended useful life to an asset that clearly has significant components with different lives, instead of depreciating those components separately as required. Continuing to depreciate an asset past its residual value, or conversely stopping depreciation simply because an asset is temporarily idle — neither is correct under IAS 16. And treating a change in depreciation method or useful life as a prior-period error requiring restatement, when IAS 8 requires it to be treated prospectively as a change in accounting estimate, with no restatement of prior periods at all.

Frequently Asked Questions

Does depreciation start on the purchase date or the date the asset is used? Depreciation starts when the asset is available for use — in the location and condition necessary to operate as management intends — which can be before it is actually put into service.

Can a company switch from straight-line to declining balance mid-life? Yes, if the change better reflects the expected pattern of consumption of economic benefits. It is applied prospectively as a change in accounting estimate under IAS 8, not restated retrospectively.

Is land depreciated? Land normally has an unlimited useful life and is not depreciated, unless it is subject to depletion (such as a quarry) or has a limited useful life due to specific circumstances. Buildings, however, do have a limited useful life and are depreciated even though the land they sit on is not — which is why a purchase price for land and buildings together must be allocated between the two components.

Ready to put these rules into practice? Part 5 of this series is a free, interactive Fixed Asset Schedule Generator — enter your own asset cost, salvage value, useful life, purchase date, and financial year end, and it builds a complete, correctly prorated depreciation schedule instantly.