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IAS 16: Property, Plant and Equipment (Past Exam Question)

•When reading the accounting policies note in the consolidated financial statements I notice that we measure all of our freehold properties using a fair value model but that we measure our plant and equipment using a cost model. I further notice that both of these asset types are shown in the ‘property, plant and equipment’ figure which is a single component of non-current assets in the consolidated statement of financial position.

•It makes no sense to me that assets which are shown as property, plant and equipment are measured inconsistently. If it’s OK to measure different parts of property, plant and equipment using two different measurement models, why not use the fair value model for the more readily accessible properties and use the cost model for the properties in remote locations to save on time and cost? (6 marks)



Proposed Solution:


As per IAS 16, PPE should be measured at cost at time of recognition of the same in books of accounts.

But for subsequent recognition, IAS 16 gives an option to record the PPE either as per cost model

which means carry the asset at its cost less depreciation OR as per revaluation model which means Fair

Value less depreciation for subsequent periods. IAS 16 makes it very clear that revaluation model be implemented only if the fair market value of the items can be measured reliably.

For Land building, its market value represent the Fair Value. For P &L, market value can be used as fair Value . if the same is not available then replacement cost reduced by depreciation can be used as its fair value.


IAS 16 very clearly states that when an items of PPE is revalued , the whole class to which it belongs should be revalued which means that all the items within a class should be revalued at the same time Conclusion : it is very much ok to measure the different parts of PPE using two different measurement models.


For Land building, its market value represent the Fair Value. For P &L, market value can be used as fair Value. If the same is not available then replacement cost reduced by depreciation can be used as its fair value

Remote location with cost model.

Indeed remotely located properties needs to be recorded at fair value itself as it belongs to same class I.e. Land & buildings Or Properties.