IAS 16 vs ASC 360: Fixed Asset Accounting From Purchase to Impairment
How property, plant and equipment is capitalised, depreciated, revalued and tested for impairment under IFRS and US GAAP, with worked examples and practical scenarios.
Scope
IAS 16 Property, Plant and Equipment covers tangible items held for use in production, supply of goods or services, rental to others or administration, and expected to be used for more than one period. Impairment sits in a separate standard, IAS 36 Impairment of Assets. Under US GAAP, ASC 360 Property, Plant, and Equipment covers both measurement and impairment of long-lived assets.
Initial recognition and cost
An item is recognised when future economic benefits are probable and its cost can be measured reliably. Cost includes everything directly attributable to bringing the asset to the location and condition needed for it to operate as management intends.
| Capitalise | Expense |
|---|---|
| Purchase price, import duties, non-refundable taxes (less discounts) | Staff training |
| Site preparation, delivery and handling | Administration and general overheads |
| Installation, assembly and professional fees | Costs of opening a new facility or introducing a new product |
| Testing whether the asset functions properly | Initial operating losses while demand builds up |
| Estimated dismantling and restoration costs | Day-to-day repairs and maintenance |
| Borrowing costs on qualifying assets | Relocation or reorganisation costs |
Since a 2022 amendment to IAS 16, proceeds from selling items produced while an asset is being tested are recognised in profit or loss, not deducted from the asset's cost.
Worked example: cost of a machine
| Item | Amount | Treatment |
|---|---|---|
| Purchase price | 500,000 | Capitalise |
| Delivery | 10,000 | Capitalise |
| Installation | 15,000 | Capitalise |
| Testing | 5,000 | Capitalise |
| Operator training | 8,000 | Expense |
| Cost of the machine | 530,000 |
With a residual value of $30,000 and a useful life of 10 years, straight-line depreciation is ($530,000 − $30,000) ÷ 10 = $50,000 per year.
| Account | Debit | Credit |
|---|---|---|
| Plant and machinery | 530,000 | |
| Training expense | 8,000 | |
| Cash / payables | 538,000 |
Depreciation
Depreciation allocates the depreciable amount (cost less residual value) over the useful life, using a method that reflects how the asset's benefits are consumed: straight-line, diminishing balance or units of production. Revenue-based depreciation is presumed inappropriate under IFRS.
| Area | IAS 16 | ASC 360 |
|---|---|---|
| Component depreciation | Required for parts with a cost significant to the total and different useful lives | Permitted, not common in practice |
| Review of useful life, residual value and method | At least at each financial year end | When events or circumstances indicate a change |
| Changes in estimates | Prospective | Prospective |
| Depreciation start | When the asset is available for use | When the asset is placed in service |
Worked example: component depreciation
A company buys an office building for $2,000,000 (land is accounted for separately and not depreciated).
| Component | Cost | Useful life | Annual depreciation |
|---|---|---|---|
| Structure | 1,600,000 | 50 years | 32,000 |
| Roof | 250,000 | 20 years | 12,500 |
| Lifts | 150,000 | 15 years | 10,000 |
| Total | 2,000,000 | 54,500 |
Treating the building as a single asset with a 40-year life would give $50,000 a year, understating depreciation in the early years and leaving the roof and lifts overstated when they are replaced.
Subsequent costs
Costs that replace a part or extend the asset's capacity are capitalised, and the carrying amount of the replaced part is derecognised. Routine servicing is expensed. Major inspections or overhauls required for continued operation are capitalised as a separate component under IAS 16 and depreciated until the next inspection.
Revaluation model (IFRS only)
Under IAS 16, an entity may choose the revaluation model for an entire class of assets, such as land and buildings, provided fair value can be measured reliably. Revaluations must be kept up to date so the carrying amount does not differ materially from fair value.
- An increase goes to other comprehensive income (revaluation surplus), unless it reverses a previous decrease recognised in profit or loss.
- A decrease is charged first against any revaluation surplus for that asset, then to profit or loss.
Worked example: revaluing a building
A building carried at $1,800,000 is revalued to $2,100,000. The tax rate is 25%, and tax is based on historical cost.
| Account | Debit | Credit |
|---|---|---|
| Building | 300,000 | |
| Revaluation surplus (OCI) | 225,000 | |
| Deferred tax liability (OCI) | 75,000 |
US GAAP does not permit this upward revaluation. The building would stay at depreciated historical cost.
Impairment
This is one of the most significant differences between the two frameworks.
| Step | IAS 36 | ASC 360 (held and used) |
|---|---|---|
| Trigger | Assess indicators at each reporting date | Test when events indicate carrying amount may not be recoverable |
| Recoverability screen | None | Compare carrying amount with undiscounted future cash flows |
| Measurement | Carrying amount vs recoverable amount (higher of fair value less costs of disposal and value in use, which is discounted) | Carrying amount vs fair value, only if the screen fails |
| Reversal | Required if circumstances improve (not for goodwill) | Prohibited |
Worked example: same asset, different answer
A production line has a carrying amount of $400,000. Demand has fallen.
| Measure | Amount |
|---|---|
| Fair value less costs of disposal | 300,000 |
| Value in use (discounted cash flows) | 320,000 |
| Undiscounted future cash flows | 420,000 |
| Fair value | 305,000 |
IAS 36: recoverable amount is the higher of $300,000 and $320,000, so $320,000. Impairment loss = $400,000 − $320,000 = $80,000.
ASC 360: undiscounted cash flows of $420,000 exceed the carrying amount of $400,000, so the asset passes the recoverability screen. No impairment is recognised.
Because IFRS has no undiscounted cash flow screen, impairments tend to be recognised earlier under IFRS.
Application scenarios
Scenario 1: Ship dry-docking every five years
Situation. A shipping company must dry-dock a vessel every 5 years for a major inspection costing about $200,000.
Analysis. Under IAS 16, the inspection cost is capitalised as a separate component when performed and depreciated over the 5 years until the next dry-dock. On acquisition of a new vessel, an estimated inspection component is identified within the purchase price. Under US GAAP, entities choose an accounting policy for planned major maintenance, commonly the direct expensing method or the deferral method; accruing in advance is not permitted.
Scenario 2: Roof replacement versus repainting
Situation. A factory replaces its entire roof for $180,000 and repaints the interior for $25,000.
Analysis. The new roof replaces a significant part, so it is capitalised and the remaining carrying amount of the old roof is derecognised (a loss on derecognition is recognised). Repainting maintains the building's existing condition and is expensed.
Scenario 3: Self-built warehouse financed with a loan
Situation. A company borrows $1,000,000 specifically to build a warehouse over 18 months, paying 9% interest. Until the funds are spent, part of the loan is placed in a short-term deposit earning $12,000.
Analysis. The warehouse is a qualifying asset, so borrowing costs incurred during construction are capitalised under both frameworks. Under IAS 23, investment income earned on the temporary investment of specific borrowings ($12,000) is deducted from the amount capitalised. US GAAP generally does not allow that offset. Capitalisation stops when the asset is substantially complete and ready for use.
Scenario 4: Leased site that must be restored
Situation. A company installs a telecom tower on leased land and must remove it and restore the site after 15 years. Estimated cost in 15 years is $150,000.
Analysis. The present value of the obligation is added to the tower's cost and recognised as a provision, then the provision unwinds as a finance cost. Under IAS 37 the discount rate is a current pre-tax rate reflecting the risks of the liability, and the provision is remeasured when rates change. Under ASC 410 the rate is a credit-adjusted risk-free rate, and existing obligations are not remeasured for later changes in rates.
Derecognition and held for sale
An item of PP&E is derecognised on disposal or when no future benefits are expected. The gain or loss (proceeds less carrying amount) goes to profit or loss and is not classified as revenue. When an asset is expected to be sold rather than used, both frameworks move it to held for sale (IFRS 5 and ASC 360-10), stop depreciating it, and measure it at the lower of carrying amount and fair value less costs to sell.
Summary
The capitalisation rules under IAS 16 and ASC 360 are close. The differences that matter in practice are component depreciation, the IFRS revaluation option, and impairment: IFRS tests against discounted recoverable amounts and allows reversals, while US GAAP screens with undiscounted cash flows and never reverses. Companies reporting under both frameworks often keep separate fixed asset registers for exactly these reasons.
This article is for general educational purposes and reflects the author's understanding of the standards at the date shown. Always refer to the authoritative text of the standards and seek professional advice for specific situations.