IAS 16 PPE & depreciation (SLM & WDV)
IAS 16 is about property, plant and equipment — the long-term assets you use in the business (buildings, machines, vehicles, furniture). In FA you need the everyday parts: what goes into cost, how depreciation works, and what happens on disposal. Read this like a class note, then practise with the calculator.
What you must be able to do in the exam
- Decide what is included in the cost of PPE
- Calculate depreciation using straight line (SLM) and reducing balance / WDV
- Apply full-year or pro-rata rules when the question states a policy
- Show cost, accumulated depreciation, and carrying amount
- Account for a simple disposal (and a basic gain or loss)
1. What is PPE under IAS 16? (simple words)
PPE are tangible items held for use in production or supply of goods and services, for rental to others, or for administration, and expected to be used for more than one period.
Examples: delivery van, factory machine, office furniture, building used by the business.
Not PPE: inventory held for sale (IAS 2), or land held only as investment property under other rules — stick to what the FA question describes.
Land vs buildings
Land usually has an unlimited life and is not depreciated. Buildings on land are depreciated. If a question gives “land and buildings” as one figure, split them if the information allows.
2. Initial cost — what do we capitalise?
Cost is the amount to purchase the asset and get it ready for its intended use.
Often included: purchase price, import duties, non-refundable taxes, delivery and handling, installation, testing costs to the extent needed to get ready for use, professional fees linked to bringing the asset to location and condition.
Often expensed (not added to PPE cost): training costs for staff, costs of opening a new facility that are not directly getting the asset ready, abnormal waste, general admin overhead.
Capital vs revenue expenditure (classic FA language):
- Capital: buys a new asset or improves it beyond original performance (add to PPE).
- Revenue: day-to-day repairs and maintenance (expense in SoPL).
3. Depreciation — the core idea
Depreciation spreads the cost of the asset over the periods that benefit from its use. It is an allocation, not a cash payment and not a valuation of what you could sell the asset for tomorrow.
Depreciable amount = cost − residual value (scrap value expected at the end of useful life).
Carrying amount (net book value) = cost − accumulated depreciation.
Journal every period:
Debit Depreciation expense (SoPL)
Credit Accumulated depreciation (contra-asset on SFP)
4. Straight line method (SLM)
Same depreciation charge each full year (before pro-rata).
Formula: (Cost − residual value) ÷ useful life in years
or: % × (Cost − residual value) if a straight-line % is given on cost net of residual.
Example: Cost Rs. 120,000, residual Rs. 20,000, life 5 years.
Depreciable amount = 100,000. Annual depreciation = Rs. 20,000.
After 2 full years: accumulated depreciation 40,000; carrying amount 80,000.
5. Reducing balance / written down value (WDV)
A fixed percentage is applied to the carrying amount at the start of the period (not usually to cost minus residual every year in the basic FA style).
Example: Cost Rs. 50,000, 20% reducing balance, residual ignored in the % calculation as per typical exam style.
- Year 1: 20% × 50,000 = 10,000. Carrying amount 40,000.
- Year 2: 20% × 40,000 = 8,000. Carrying amount 32,000.
Trap
Do not apply residual value under reducing balance the same way as straight line unless the question tells you to. Follow the method stated in the question.
6. Pro-rata (time apportionment)
If the asset is bought part-way through the year, and policy is to charge depreciation from the date of purchase, only charge for the months owned.
Example: Annual SLM charge would be 24,000. Bought 1 October; year end 31 December; charge 3/12 × 24,000 = 6,000.
Some entities use a “full year in year of purchase, none in year of disposal” policy. Always follow the policy in the question.
Interactive calculator
SLM and WDV with schedule and pro-rata / full-year style options. Keep this page open and test the examples.
Open Depreciation Calculator ↗7. Disposal — gain or loss
When you sell or scrap PPE:
- Update depreciation up to the disposal date if the policy requires it.
- Remove cost and accumulated depreciation from the books.
- Compare proceeds with carrying amount.
- Proceeds > carrying amount → gain (SoPL)
- Proceeds < carrying amount → loss (SoPL)
Simple example: Cost 100,000; accumulated depreciation 60,000; carrying amount 40,000; sold for 35,000 cash → loss 5,000.
Idea of entries: debit cash 35,000; debit accumulated depreciation 60,000; debit loss 5,000; credit asset cost 100,000 (balancing the removal).
8. SFP presentation (what markers expect to see)
| Cost | XXX |
| Less: Accumulated depreciation | (XXX) |
| Carrying amount | XXX |
Workings for each class of asset (e.g. plant, vehicles) should stay clear in your answer booklet or CBE workings.
Exam traps checklist
- Depreciating land
- Charging a full year when the policy is pro-rata (or the opposite)
- Using residual value incorrectly under reducing balance
- Forgetting to depreciate in the year of disposal when policy requires it
- Treating repairs as capital expenditure (or capital as repairs)
- Calculating gain/loss on cost instead of on carrying amount
9. Quick memory sheet
| Topic | Remember |
|---|---|
| Cost | Price + costs to get ready for use |
| SLM | (Cost − residual) ÷ life |
| WDV | % × carrying amount at start of period |
| Carrying amount | Cost − accumulated depreciation |
| Disposal | Proceeds vs carrying amount = gain/loss |
| Land | Usually no depreciation |
Practice quiz
Important references
- ACCA FA syllabus & study guide
- IAS 16 Property, Plant and Equipment
- Depreciation calculator on this site
- FA Study Hub
Tutor habit: write cost, accumulated depreciation, and carrying amount in one small working every time. Most disposal mistakes disappear when that triangle is clear.