Property, Plant and Equipment, Intangibles and Impairment
IAS 16 requires PPE to be recognised at cost, then measured under either the cost model or the revaluation model. Cost includes purchase price, directly attributable costs to bring the asset to the location and condition for intended use, and estimated dismantling costs. Depreciation is allocated over useful life, with residual value and useful life reviewed at least annually. Under the revaluation model, increases go to OCI and are accumulated in a revaluation surplus, while decreases go to profit or loss unless reversing a prior surplus. Candidates must also know IAS 38 (identifiability, control, future economic benefits; research expensed, development capitalised when criteria are met; no revaluation for intangibles without an active market) and IAS 36 (impairment testing, recoverable amount as the higher of fair value less costs of disposal and value in use).
Traps
Frequent traps include the treatment of a revaluation decrease that reverses a previous surplus (charge OCI first, then P&L), the depreciation of a revalued asset based on the revalued carrying amount, and the prohibition on revaluing goodwill or most intangibles. Watch for borrowing costs (IAS 23) capitalised on qualifying assets, government grants (IAS 20) and the choice between the gross and net presentation, and the annual impairment test for goodwill and indefinite-life intangibles regardless of indicators. Also know that compensation from third parties for impairment is recognised in P&L when receivable, and that value in use uses pre-tax cash flows and a pre-tax discount rate.
Worked example / rule of thumb
An asset carried at $500,000 is revalued to $450,000. If a revaluation surplus of $30,000 exists for that asset, debit the surplus $30,000 and recognise $20,000 in P&L. Rule of thumb: revaluation gains bypass P&L until they reverse prior losses; revaluation losses hit P&L until they reverse prior gains.