Accounting for Property, Plant, and Equipment: A Guide to AASB 116

Introduction

AASB 116 Property, Plant and Equipment remains one of the most consequential standards for Australian entities — particularly in asset-heavy industries such as mining, manufacturing, infrastructure, agriculture, and the public sector. This compiled Standard applies to annual periods beginning on or after 1 January 2023 and takes into account amendments up to and including 15 December 2022. The standard applies broadly: entities required by the Corporations Act 2001 to prepare financial reports, governments preparing financial statements for the whole of government and the General Government Sector (GGS), and entities in the private or public for-profit or not-for-profit sectors that are reporting entities or that prepare general purpose financial statements are all captured.

Why Is AASB 116 Compliance Increasingly Scrutinised?

Several converging factors are driving greater attention to PPE accounting:

• Auditor focus on accounting estimates: Under ASA 540, depreciation of property and equipment and valuation of infrastructure assets are explicitly listed as examples of accounting estimates that attract audit scrutiny, including close examination of management’s key assumptions and potential bias.

• Review procedures specifically targeting PPE: Under ASRE 2410, auditors are directed to enquire about the accounting policy applied regarding residual values, provisions to allocate the cost of property, plant and equipment over their estimated useful lives, and whether there are any indicators of impairment. They are also required to discuss with management the additions and deletions to property, plant and equipment accounts, and accounting for gains and losses on disposals or derecognition.

• Insurance valuation linkages: Asset-heavy entities are frequently required to reconcile financial reporting values with insurance reinstatement cost estimates, heightening the need for consistent and well-documented PPE accounting.

• Public sector revaluation mandates: Under AASB 1049, assets within the scope of AASB 116 that are assets under the ABS GFS Manual are required to be measured at Fair Value because the Manual requires those assets to be measured at Market Value.

For CFOs and Finance Managers, AASB 116 is not merely a bookkeeping exercise — it directly impacts balance sheet integrity, profit and loss outcomes, tax positions, insurance adequacy, and the reliability of reported asset values.

1. Recognition and Measurement

The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if: (a) it is probable that future economic benefits associated with the item will flow to the entity; and (b) the cost of the item can be measured reliably.

The cost of an item of property, plant and equipment comprises: (a) its purchase price, including duties and taxes, less trade discounts and rebates; (b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management; and (c) the initial estimate of the costs of dismantling and removing the items and restoring the site on which it is located.

Key Judgement Area — Unit of Measure

This Standard does not prescribe the unit of measure for recognition — that is, what constitutes an item of property, plant and equipment. Judgement is therefore required in applying the recognition criteria to an entity’s specific circumstances. It may be appropriate to aggregate individually insignificant items, such as moulds, tools and dies, and to apply the criteria to the aggregate value.

Spare Parts and Stand-By Equipment

Items such as spare parts, stand-by equipment and servicing equipment are recognised in accordance with this Standard when they meet the definition of property, plant and equipment. Otherwise, such items are classified as inventory. This is a common area of error — many entities default to expensing strategic spare parts when they should be capitalised and depreciated.

Common Recognition Errors in Practice

• Expensing items that should be capitalised: Major spare parts that will be used over multiple periods (e.g., a replacement engine for a haul truck) are often expensed when purchased rather than recognised as PPE. If the part meets the definition — held for use in production or supply, and expected to be used during more than one period — it should be capitalised.

• Capitalising items that should be expensed: Conversely, some entities capitalise routine maintenance expenditure or minor parts that do not meet the recognition criteria, overstating asset values.

• Failing to include all directly attributable costs: The cost of PPE goes beyond the purchase price. Delivery, site preparation, installation, testing, and professional fees must be included. Costs of training staff to operate the asset, however, are not eligible for capitalisation.

• Ignoring dismantling and restoration obligations: The initial estimate of dismantling, removal, and site restoration costs is a component of cost at the recognition date. Entities in mining, oil and gas, or infrastructure frequently understate PPE costs by omitting these provisions.

Assets Acquired in a Group Purchase

When multiple assets are acquired in a single transaction (a “basket purchase”), the total consideration must be allocated to each individual asset. This allocation is typically performed in proportion to relative fair values at the date of acquisition. Where fair values are not readily determinable, independent valuation may be required. AASB 13 identifies the following widely used valuation approaches: the market approach, the cost approach, and the income approach. The approach selected must be appropriate to the nature of the assets.

2. Subsequent Costs

The standard draws a clear line between day-to-day servicing costs (expensed as incurred) and subsequent costs that meet the recognition criteria (capitalised). If, under the recognition principle, an entity recognises in the carrying amount of an item of property, plant and equipment the cost of a replacement for part of the item, then it derecognises the carrying amount of the replaced part regardless of whether the replaced part had been depreciated separately.

Practical Examples — Where the Line Blurs

• Major overhauls: In mining, infrastructure, and manufacturing, major plant overhauls (e.g., stripping and rebuilding an engine or replacing the lining of a furnace) are typically capitalised because they meet the recognition criteria. The key test is whether the overhaul restores or extends service potential beyond what existed prior to the expenditure.

• Refurbishments and fit-outs: Commercial property fit-outs present frequent challenges. A complete fit-out of a new tenancy should be capitalised; however, repainting, patching, and minor cosmetic upgrades are usually day-to-day servicing. The judgement turns on whether the work enhances the asset beyond its current condition or merely maintains it.

• Replacement components: Where a building roof is replaced, the cost of the new roof is capitalised and the carrying amount of the old roof must be derecognised — even if the old roof was never separately identified as a component.

Industry-Specific Considerations

• Mining: IFRIC 20 clarifies that the costs of removing mine waste materials to gain access to mineral ore deposits during the production phase must be capitalised as inventories under IAS 2 if the benefits are realised as inventory produced. If stripping activity provides improved access to ore, stripping costs must be capitalised as a non-current stripping activity asset if certain recognition criteria are met.

• Infrastructure (roads, bridges): Entities must determine whether subsequent spending constitutes maintenance (expense) or enhancement/renewal (capitalise). Condition-based depreciation methods may also be relevant.

• Manufacturing: Regular replacement of wear parts (dies, moulds, rollers) should be assessed against the componentisation principles discussed in the Depreciation section below.

3. Measurement of Cost

The cost of PPE is based on the cash price equivalent at the recognition date. Where payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognised as interest over the credit period.

Non-Monetary Exchanges and Contributed Assets

Where PPE is acquired in exchange for a non-monetary asset, the cost is measured at fair value unless the exchange transaction lacks commercial substance or the fair value of neither the asset received nor the asset given up is reliably measurable. Government grants of assets, or contributions of assets (common in the NFP and public sectors), are recognised at fair value at the date of acquisition.

Borrowing Costs (AASB 123)

Where an entity constructs a qualifying asset (one that necessarily takes a substantial period of time to get ready for its intended use), borrowing costs directly attributable to its acquisition, construction, or production must be capitalised as part of the cost under AASB 123. This is not optional — it is a mandatory requirement for qualifying assets. Common errors include failing to capitalise borrowing costs on self-constructed assets, or incorrectly capitalising borrowing costs on assets that do not take a substantial period to bring to working condition.

Fair Value vs. Cost Model — Election and Implications

After initial recognition, an entity may choose between the cost model and the revaluation model as its accounting policy. The policy chosen shall be applied to an entire class of property, plant and equipment.

• Cost model: The asset is carried at cost less accumulated depreciation and accumulated impairment losses.

• Revaluation model: The asset is carried at fair value at the date of revaluation, less any subsequent accumulated depreciation and impairment losses. Revaluations are to be made with sufficient regularity that the carrying amount does not differ materially from fair value at the end of the reporting period. If one item in a class is revalued, the entire class must be revalued.

Key practical implications:

• The cost model is simpler to administer but may result in carrying amounts that are materially different from fair value — particularly for long-lived assets such as land and buildings.

• The revaluation model requires regular independent valuations, typically every 3 to 5 years (more frequently if values are volatile), supported by desktop reviews in intervening periods.

• If items of property, plant and equipment are stated at revalued amounts, the entity must disclose the effective date of the revaluation, whether an independent valuer was involved, the carrying amount that would have been recognised under the cost model, and the revaluation surplus.

• For specialised assets, the market, cost, or income approaches could all be appropriate methodologies for valuations for financial reporting purposes, provided the value determined is consistent with the fair value definition.

4. Depreciation

Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. Depreciation of an asset begins when it is available for use — that is, when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. The method of depreciation used should reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity (methods include straight-line, diminishing balance, and units of production).

Residual Value Reviews

The residual value and the useful life of an asset shall be reviewed at least at the end of each annual reporting period and, if expectations differ from previous estimates, the changes shall be accounted for as a change in an accounting estimate in accordance with AASB 108.

The financial impact of getting residual values wrong is significant:

• Overstated residual values reduce the depreciable amount, understating annual depreciation expense and overstating both profit and the carrying amount. When the asset is eventually disposed of, a larger loss on disposal may be recognised.

• Understated residual values overstate depreciation, reducing reported profit in each period unnecessarily.

Triggers for reassessment include changes in market conditions for secondhand assets, technological obsolescence, physical condition changes, and shifts in the entity’s intended use of the asset. In accordance with AASB 108, an entity discloses the nature and effect of a change in an accounting estimate. For property, plant and equipment, such disclosure may arise from changes in estimates with respect to: (a) residual values; (b) the estimated costs of dismantling, removing or restoring items; (c) useful lives; and (d) depreciation methods.

Common Depreciation Method Errors

• Defaulting to straight-line without justification: Straight-line is appropriate only when the future economic benefits of the asset are consumed evenly over its life. For assets with higher productivity in early years (e.g., vehicles, some plant), diminishing balance or units of production may better reflect reality.

• Applying a single depreciation rate to the entire asset: Componentisation requires that significant components be identified and depreciated separately. Applying a single blended rate to an entire complex asset (e.g., a building with structure, roof, HVAC, and fit-out) systematically misstates depreciation.

• Failing to reassess useful life and method: The standard requires reassessment at least annually. Many entities set these at acquisition and never revisit them.

Componentisation Thresholds

Componentisation is required — not optional — where the cost of a component is significant relative to the total cost of the item. There is no bright-line percentage threshold prescribed in AASB 116; rather, professional judgement is applied. In practice, components are typically identified where they have materially different useful lives or depreciation patterns from the host asset and where the cost is material. Common examples include:

• Building structure vs. roof vs. mechanical services vs. fit-out

• Aircraft airframe vs. engines vs. landing gear

• Mining plant frame vs. engine vs. wear components

5. Impairment

To determine whether an item of property, plant and equipment is impaired, an entity applies AASB 136 Impairment of Assets. That Standard explains how an entity reviews the carrying amount of its assets, how it determines the recoverable amount of an asset, and when it recognises or reverses an impairment loss.

Indicators of Impairment Commonly Missed

AASB 136 requires entities to assess at each reporting date whether there is any indication that an asset may be impaired. Common indicators that are frequently overlooked include:

• Internal factors: Significant underperformance of the asset relative to expectations; changes in the manner or extent of use; physical damage or accelerated deterioration; internal restructuring plans affecting the asset’s deployment.

• External factors: Significant decline in market value; adverse changes in the technological, market, economic or legal environment; increases in market interest rates or discount rates that affect value in use calculations.

• Reversal indicators: Observable indications that the asset’s value has increased significantly; significant favourable changes in the technological, market, economic or legal environment; or market interest rates having decreased during the period.

Value in Use vs. Fair Value Less Costs of Disposal

The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs of disposal and its value in use.

• Fair value less costs of disposal: For impairment testing, recoverable amount may be measured at fair value (in general, equivalent to market value) less costs of disposal. Costs of disposal are incremental costs directly attributable to the disposal of an asset or cash-generating unit, excluding finance costs and income tax expense.

• Value in use: This is a specially defined basis of value relevant only to impairment testing. It effectively represents the specific value of the asset as used by the current owner under certain limited conditions — including the exclusion of cash flows arising from capacity expansions or other value improvements that have yet to be implemented.

When an Independent Valuation Is Required or Advisable

An independent valuation is strongly advisable when:

• The entity applies the revaluation model and valuations are due for periodic update

• Impairment indicators are present and the entity lacks internal expertise to determine recoverable amount

• The asset is specialised and there is limited observable market data

• Audit scrutiny requires third-party support for carrying amounts

A valuer should consider whether the valuation report prepared for financial reporting purposes includes sufficient information to enable the reporting entity to meet its disclosure requirements — for example, to enable the entity to classify the fair value measurement as Level 1, Level 2, or Level 3 in the Fair Value Hierarchy specified by AASB 13.

Interaction with the Revaluation Model

The only difference between an asset’s fair value and its fair value less costs of disposal is the direct incremental costs attributable to disposal. If the disposal costs are negligible, the recoverable amount of the revalued asset is necessarily close to, or greater than, its revalued amount — meaning impairment is unlikely. However, if the disposal costs are not negligible, the fair value less costs of disposal will be less than fair value, and the revalued asset will be impaired if its value in use is also less than its revalued amount. An impairment loss on a non-revalued asset is recognised in profit or loss. However, an impairment loss on a revalued asset is recognised in other comprehensive income to the extent that it does not exceed the revaluation surplus for that asset. After recognition of an impairment loss, the depreciation charge shall be adjusted to allocate the asset’s revised carrying amount over its remaining useful life.

6. Derecognition

The carrying amount of an item of property, plant and equipment shall be derecognised: (a) on disposal; or (b) when no future economic benefits are expected from its use or disposal. The gain or loss arising from derecognition shall be included in profit or loss when the item is derecognised (unless AASB 16 Leases requires otherwise on a sale and leaseback). Gains shall not be classified as revenue.

Partial Derecognition — Componentised Assets

If an entity recognises in the carrying amount of an item the cost of a replacement for part of that item, it must derecognise the carrying amount of the replaced part regardless of whether the replaced part had been depreciated separately. If it is not practicable to determine the carrying amount of the replaced part, the entity may use the cost of the replacement as an indication of what the cost of the replaced part was at the time it was acquired or constructed. This is a frequently misunderstood requirement. When a major component is replaced (e.g., a building roof, an engine in a piece of plant), the old component’s carrying amount must be removed from the books — even if it was never separately tracked. The practical implication is that entities need to maintain sufficient records to support the derecognition calculation, or be prepared to use the replacement cost proxy.

Timing of Derecognition

The disposal of an item of property, plant and equipment may occur in a variety of ways (e.g., by sale, by entering into a finance lease, or by donation). The date of disposal is the date the recipient obtains control of that item in accordance with the requirements for determining when a performance obligation is satisfied in AASB 15. Common errors include:

• Derecognising an asset before control has transferred (e.g., when a contract is signed but the asset has not yet been delivered)

• Failing to derecognise assets that have been physically disposed of but remain on the fixed asset register

• Continuing to depreciate assets that have been fully disposed of

Note on Rental Assets

An entity that routinely sells items of PPE that it has held for rental shall transfer such assets to inventories at their carrying amount when they cease to be rented and become held for sale. The proceeds from the sale of such assets shall be recognised as revenue in accordance with AASB 15. This is an important exception — the gain on disposal is treated as revenue, not a non-operating gain.

Tax Implications

The carrying amount for accounting purposes under AASB 116 will frequently differ from the tax written-down value. This creates temporary differences that give rise to deferred tax assets or liabilities under AASB 112 Income Taxes. On disposal, any difference between the tax base and the accounting carrying amount may result in a taxable gain or deductible loss that differs from the accounting gain or loss. Entities should engage their tax advisors when derecognising significant assets.

7. Disclosure Requirements

The financial statements shall disclose, for each class of property, plant and equipment: (a) the measurement bases used for determining the gross carrying amount; (b) the depreciation methods used; (c) the useful lives or depreciation rates used; (d) the gross carrying amount and accumulated depreciation at the beginning and end of the period; and (e) a reconciliation of the carrying amount at the beginning and end of the period. Additional mandatory disclosures include: the existence and amounts of restrictions on title, and property, plant and equipment pledged as security for liabilities; the amount of expenditures recognised in the carrying amount of an item in the course of its construction; and the amount of contractual commitments for the acquisition of property, plant and equipment.

Common Disclosure Deficiencies

• Incomplete reconciliation: Failing to separately disclose all line items in the carrying amount reconciliation (additions, disposals, impairments, revaluations, depreciation, reclassifications).

• Generic useful life disclosures: Stating “buildings: 25–50 years” without differentiating between structural, mechanical, and fit-out components. This lack of granularity does not meet the spirit of the standard.

• Omission of revaluation-specific disclosures: If items are stated at revalued amounts, the entity must disclose the effective date of the revaluation, whether an independent valuer was involved, the carrying amount that would have been recognised under the cost model, and the revaluation surplus including the change for the period and any restrictions on distribution.

• Failure to disclose changes in estimates: In accordance with AASB 108, an entity discloses the nature and effect of a change in an accounting estimate. For PPE, this includes changes in residual values, estimated costs of dismantling/removal/restoration, useful lives, and depreciation methods.

Good Practice Beyond Minimum Compliance

Users of financial statements may also find the following information relevant: (a) the carrying amount of temporarily idle property, plant and equipment; (b) the gross carrying amount of any fully depreciated PPE that is still in use; (c) the carrying amount of PPE retired from active use and not classified as held for sale; and (d) when the cost model is used, the fair value of PPE when this is materially different from the carrying amount. Entities are encouraged to disclose these amounts. Best-practice entities go beyond the minimum by:

• Providing narrative context for significant judgement areas (e.g., why particular useful lives were selected)

• Disclosing the valuation approach, method, and key inputs used in revaluations, with reference to the AASB 13 fair value hierarchy

• Separately identifying fully depreciated assets still in use — which often signals that useful lives were underestimated historically

• Providing sensitivity analysis on key depreciation or impairment assumptions where material

Regulatory Focus Areas

ASIC has periodically focused on the quality of non-financial asset valuations and disclosures in financial reports. Areas of focus typically include:

• The adequacy and regularity of revaluations for entities using the revaluation model

• Whether impairment indicators have been properly assessed and disclosed

• The sufficiency of disclosures regarding significant estimates and judgements related to PPE

• The consistency between asset register information and financial statement disclosures

Conclusion

AASB 116 is a deceptively complex standard. While its basic principles — recognise, measure, depreciate, impair, derecognise, disclose — are well understood, practical application demands significant professional judgement at every stage. The standard’s requirements interact with a web of other standards including AASB 13 (fair value measurement), AASB 136 (impairment), AASB 123 (borrowing costs), AASB 108 (changes in estimates), AASB 16 (leases), and AASB 112 (income taxes).

Several trends are intensifying the importance of getting PPE accounting right:

• Increased regulatory and audit scrutiny: Both ASIC and the AUASB have signalled ongoing focus on accounting estimates, asset impairment, and the quality of financial report disclosures. PPE is a perennial area of audit attention.

• The role of independent valuers: AASB 116 requires disclosure of whether an independent valuer was involved in revaluations. Beyond the disclosure requirement, independent valuations provide critical support for carrying amount assertions, impairment testing, and audit evidence. Valuers providing valuations of real property, plant, and equipment for use in Australian financial reports must do so to the standard of professionalism and skill required and consistent with membership of the Institute and in compliance with the law.

• Convergence of financial reporting and insurance valuations: Entities are increasingly expected to maintain consistent, defensible asset values across both financial reporting and insurance programmes. Misalignment between the two creates both financial reporting risk and insurance adequacy risk.

• NFP and public sector complexities: There is currently some variation in practice and interpretation in respect of the appropriate treatment of obsolescence and highest and best use in relation to valuations of real property, plant and equipment of NFP entities. These issues will continue to demand careful professional judgement.

For asset-heavy entities, investing in robust PPE accounting processes — including timely valuations, proper componentisation, annual estimate reviews, and comprehensive disclosures — is not merely a compliance exercise. It is an investment in the credibility and reliability of the financial statements on which stakeholders rely.