Property, plant, and equipment (PPE) play a significant role in the financial reporting of companies, representing tangible assets used in operations. Resource: https://www.mindcypress.com/blogs/finance-accounting/understanding-initial-recognition-of-property-plant-and-equipment-under-ifrs

1. Understanding Initial Recognition of Property, Plant,
and Equipment under IFRS

2. Introduction
Property, plant, and equipment (PPE) play a significant
role in the financial reporting of companies,
representing tangible assets used in operations. Initial
recognition of PPE is a crucial step in accounting for
these assets, governed by IAS 16: Property Plant &
Equipment. In this blog, we delve into the process of
initial recognition of PPE as per the provisions of IAS
16, outlining key principles and considerations in a
concise manner.

3. Definition of Property,
Plant, and Equipment
Property, plant, and equipment encompass tangible
assets held for use in production, supply of goods or
services, rental to others, or administrative
purposes. These assets are expected to generate
economic benefits over multiple periods and are
distinct from inventory or financial instruments.
Examples include land, buildings, machinery, and
vehicles.

4. Criteria for Recognition
According to IAS 16, PPE should be recognized in the
financial statements when:
It is probable that future economic benefits
associated with the asset will flow to the entity.
The cost of the asset can be reliably measured.

5. Measurement of Initial
Recognition
The initial recognition of PPE involves determining
the cost of the asset, which includes all expenditures
directly attributable to bringing the asset to its
intended condition and location for use. This may
include purchase price, delivery costs, installation
charges, and initial testing expenses.

6. Components of Cost
Initially a PPE will be recognized at cost. There are
three elements of cost:
1. Purchase Price: The amount paid to acquire the asset,
including import duties and non-refundable purchase
taxes, after deducting trade discounts and rebates.
2. Directly Attributable Costs: Costs directly associated with
bringing the asset to the location or condition necessary
for it be used as intended by the management. Such as
transportation and installation.
3. Initial Estimates: Any initial estimates of
decommissioning, dismantling, or restoration costs that
are included in the asset's cost.

7. Subsequent Recognition
Once initially recognized, PPE subsequently can be
carried at cost or a revaluation model. PPE is
measured at cost less accumulated IAS 16
depreciation and any accumulated impairment
losses. Depreciation is calculated systematically over
the asset's useful life to reflect its consumption of
economic benefits.

8. Disclosure Requirements
Entities are required to disclose significant
accounting policies related to PPE, including the
measurement basis used (e.g., cost model or
revaluation model), IAS 16 depreciation methods,
useful lives, and residual values. Additionally,
disclosures about the carrying amount, accumulated
depreciation, and any revaluation adjustments are
necessary.

9. Conclusion
The initial recognition of property, plant, and
equipment is a fundamental aspect of
financial reporting under IAS 16. By adhering
to the criteria outlined in IAS 16 and
accurately measuring the cost of PPE, entities
can provide transparent and reliable
information about their tangible assets to
stakeholders. Understanding the principles of
initial recognition ensures compliance with
accounting standards and facilitates informed
decision-making regarding capital
investments and asset management. Are you interested to know more about the Finance
Industry? Check the finance courses available on one of the
leading online learning platforms, MindCypress.

10. Closing Slide &
Resource:
https://www.mindcypress.com/blogs/finance-
accounting/understanding-initial-recognition-of-
property-plant-and-equipment-under-ifrs