IAS 16: Property, Plant and Equipment Summary – IFRS Exam Notes for UNISA FAC3703, CUT ACCS6015, UJ FRK3000 and Other South African Accounting Courses

Property, Plant and Equipment (PPE) under IAS 16 is a core examinable standard in many South African university modules such as UNISA FAC3703 – Financial Accounting, CUT ACCS6015 – Advanced Corporate Accounting, UJ FRK3000 – Financial Accounting 3A, UKZN ACCT300, and similar IFRS-based courses. A strong command of IAS 16 is essential for passing mid-term tests, semester exams and professional qualifying assessments.

This study guide provides a detailed, exam-focused summary of IAS 16, including recognition, measurement, depreciation, derecognition, revaluation and disclosure. It is structured to mirror the style of typical UNISA past papers, CUT memoranda and SAICA APC pre-release tasks.

1. Scope, Objective and Core Definitions of IAS 16 (UNISA FAC3703 & UJ FRK3000 Focus)

1.1 Objective and Scope of IAS 16

Objective of IAS 16

IAS 16 prescribes the accounting treatment for Property, Plant and Equipment so that users of financial statements can understand:

How much an entity has invested in its tangible long-term assets.
How these assets are measured on initial recognition and subsequently.
How much of their cost is allocated (depreciated) to each reporting period.
How gains and losses from disposal or revaluation are reported.

Scope (What IAS 16 Applies To)

IAS 16 applies to tangible items that are:

Held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
Expected to be used during more than one period.

Typical PPE examples seen in UNISA FAC3703 and CUT ACCS6015 exams:

Land and buildings (head office, factory, retail store).
Plant and machinery (manufacturing equipment, assembly lines).
Motor vehicles (delivery vans, company cars).
Office equipment (computers, printers, furniture).
Fixtures and fittings (shop fittings, shelving, air conditioners).

Specific Exclusions from IAS 16

IAS 16 does not apply to:

Biological assets related to agricultural activity (IAS 41).
Exploration and evaluation assets (IFRS 6).
Investment property measured at fair value (IAS 40).
Non-current assets held for sale (IFRS 5).
Mineral rights and reserves (oil, natural gas and similar non-regenerative resources).

In exam questions for UJ FRK3000 and UNISA FAC3703, students often lose marks by misclassifying:

A building held to earn rentals and capital appreciation → normally IAS 40 Investment Property, not IAS 16, unless the entity uses the cost model under IAS 40 or the property is owner-occupied.
A machine held for sale in the ordinary course of business → that’s inventory, not PPE.

1.2 Key Definitions in IAS 16

These definitions are commonly required in definition questions or as part of discussing journal entries and calculations.

Property, Plant and Equipment

Tangible items that:

Are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
Are expected to be used during more than one period.

Carrying Amount

The amount at which an asset is recognised after deducting accumulated depreciation and accumulated impairment losses.

Formula:

Carrying amount = Cost (or revalued amount) − Accumulated depreciation − Accumulated impairment

Cost

The amount of cash or cash equivalents paid (or fair value of other consideration given) to acquire an asset at the time of acquisition or construction, including:

Purchase price (less discounts).
Import duties and non-refundable taxes.
Directly attributable costs to bring the asset to its location and condition for use.

Depreciable Amount

The cost of an asset, or another amount substituted for cost (e.g. revalued amount), less its residual value.

Depreciation

The systematic allocation of the depreciable amount of an asset over its useful life.

Residual Value

The estimated amount that an entity would currently obtain from disposal of the asset, after deducting estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.

In South African exam settings, often assumed to be zero unless given.

Useful Life

Either:

The period over which an asset is expected to be available for use; or
The number of production or similar units expected to be obtained from the asset.

Fair Value

The price that would be received to sell an asset in an orderly transaction between market participants at the measurement date (IFRS 13 definition – often referenced in IAS 16).

1.3 Initial Classification and Practical Examples

In UNISA FAC3703 and CUT ACCS6015 exam scenarios, classification questions might require deciding whether an item is PPE or something else:

Example 1 – Company vehicles

A delivery van used by a logistics company for courier services.
Held for use in the supply of services.
Expected to be used more than one year.
Classified as PPE under IAS 16.

Example 2 – Property for capital appreciation

A building purchased purely to earn rentals and expect capital gains.
Usually an investment property under IAS 40.
IAS 16 only if the entity classifies investment property under cost model and applies IAS 16 measurement principles.

Example 3 – Assets held for sale (IFRS 5)

A factory that is no longer needed and management has committed to a plan to sell.
Meets criteria of held for sale under IFRS 5.
Then it is measured at lower of carrying amount and fair value less costs to sell.
IAS 16 no longer applies to subsequent measurement (depreciation stops).

Students writing UJ FRK3000 and UKZN ACCT300 should clearly justify classification with reference to:

Intent of use (owner-occupied vs investment).
Expected period of use.
Applicable standard (IAS 16 vs IAS 40 vs IFRS 5).

1.4 Components Approach

IAS 16 requires significant components of an item of PPE, with different useful lives or depreciation methods, to be depreciated separately.

Example typical in South African textbooks:

An aircraft with:
- Airframe (20-year life).
- Engines (10-year life).
- Interior fittings (5-year life).

Separate depreciation schedules must be maintained for these components. Exam questions may give:

Total cost of asset and cost allocation to components.
Separate useful lives and residual values.
Requirement to calculate depreciation per component and total.

Neglecting the components approach is a frequent mistake in UNISA FAC3703 assignments and final exam questions.

2. Recognition, Initial Measurement and Cost Components (CUT ACCS6015 & UNISA FAC2601 Emphasis)

2.1 Recognition Criteria

An item of PPE is recognised as an asset if and only if:

Probable future economic benefits associated with the item will flow to the entity; and
The cost of the item can be measured reliably.

In exam settings (especially UNISA FAC2601 – Financial Accounting for Entities and CUT ACCS6015):

“Probable” is interpreted consistent with IFRS as “more likely than not”.
Items failing recognition are expensed to profit or loss.

Examples of recognition vs expense

Major machine purchase – meets criteria; capitalise.
Routine maintenance cost – usually does not extend useful life or enhance capacity significantly; expense.
Significant inspection costs necessary to continue operating a machine (e.g. 5-year safety inspection) – if they meet criteria and are identifiable, capitalise as a separate component and depreciate over the period until next inspection.

2.2 Elements of Cost on Initial Recognition

The cost of an item of PPE comprises:

Purchase price
- Including import duties and non-refundable purchase taxes.
- Less trade discounts and rebates.
Directly attributable costs to bring the asset to the location and condition necessary for it to be capable of operating as intended by management.
Initial estimate of dismantling and restoration costs (decommissioning), recognised as a provision under IAS 37 and added to the asset’s cost.

Examples of directly attributable costs

Employee benefits arising directly from construction or acquisition (e.g. site engineers’ salaries).
Site preparation (levelling land for a factory).
Initial delivery and handling costs.
Installation and assembly costs.
Testing whether an asset is functioning properly (less proceeds from selling items produced while testing).
Professional fees (architects, engineers).

Costs not included in the cost of PPE

These are usually expensed immediately:

Opening a new facility (advertising, staff training).
Introducing a new product or service (marketing costs).
Administrative and general overheads that do not directly bring the asset to the condition for use.
Initial operating losses incurred before the asset achieves planned performance.
Abnormal amounts of wasted material, labour or other resources during construction.

2.3 Example: Calculating Initial Cost (UNISA-Style Question)

Scenario – typical of UNISA FAC3703 exam

Mandla Ltd buys a machine for use in its manufacturing operations. The following information is provided (all amounts in Rands):

List price of machine: R1 200 000
Trade discount received: 10%
Import duties (non-refundable): R60 000
Transportation to factory: R25 000
Installation costs: R30 000
Testing costs: R15 000
Proceeds from sale of sample production during testing: R5 000
Cost of training factory staff: R20 000
Annual insurance for the machine: R12 000
General admin overhead allocated: R18 000
Present value of expected dismantling cost in 10 years: R40 000

Required: Calculate the cost of PPE to be capitalised under IAS 16.

Solution outline:

Purchase price net of discount
- List price: R1 200 000
- Less 10% discount: R120 000
- Net: R1 080 000
Import duties (non-refundable): + R60 000
Directly attributable costs:
- Transportation: + R25 000
- Installation: + R30 000
- Testing: + R15 000
- Less proceeds from testing: − R5 000
- Net directly attributable testing cost: R10 000
Dismantling provision (IAS 37): + R40 000
Excluded costs (expensed):
- Training factory staff – expensed.
- Annual insurance – period expense.
- General admin overhead – usually expensed unless strictly attributable.

Total capitalised cost:

Purchase price net: R1 080 000
Import duties: + R60 000
Transportation: + R25 000
Installation: + R30 000
Testing net: + R10 000
Dismantling provision: + R40 000

Total cost of PPE = R1 245 000

This R1 245 000 becomes the initial carrying amount before depreciation and impairment.

2.4 Self-Constructed Assets

For assets that an entity constructs for its own use, IAS 16 instructs:

Cost is determined using the same principles as for purchased assets.
Internal profits are eliminated (no mark-up recognised on construction).
Abnormal amounts of wasted material, labour or other resources are excluded from cost (expensed).
Borrowing costs meeting IAS 23 criteria may be capitalised.

Exam scenarios for CUT ACCS6015 and UJ FRK3000 often:

Provide labour, materials and overhead details.
Ask candidates to allocate only directly attributable costs to PPE.
Require exclusion of “abnormal” waste or general overheads.

2.5 Exchange of Assets (Non-Monetary Exchanges)

Sometimes PPE is acquired via exchanging another asset rather than for cash.

IAS 16 states:

Cost is measured at the fair value of the asset given up or the asset received, whichever is more clearly evident, unless:
- The transaction lacks commercial substance, or
- The fair value of neither asset is reliably measurable.

If the exchange lacks commercial substance or fair values are not reliable, the asset is measured at the carrying amount of the asset given up.

Indicators of commercial substance:

Configuration of future cash flows from the asset changes significantly (risk, timing, amount).
The difference in the entity’s economic position is significant.

Example

Entity A swaps a machine with a carrying amount of R200 000 (fair value R260 000) for another similar machine with fair value R260 000. The exchange has commercial substance.

Cost of new machine = R260 000 (fair value of asset given up / received).
Gain on disposal: R260 000 − R200 000 = R60 000 to be recognised in profit or loss.

In SA exam questions (UNISA/CUT), marks are awarded for:

Stating that there is commercial substance.
Using fair value rather than carrying amount.
Correctly calculating gain or loss.

2.6 Subsequent Expenditure (Repairs, Replacements, Inspections)

IAS 16 distinguishes between:

Day-to-day servicing (repairs and maintenance)
- Recognised in profit or loss as incurred.
Replacement of parts
- If the replacement meets recognition criteria, capitalise and derecognise the carrying amount of the replaced part.
Major inspections (mandatory overhauls)
- If necessary for continued operation and future economic benefits are expected, capitalise as part of the asset and depreciate over the period until the next inspection.
- Derecognise the previous inspection costs.

Exam tip for UNISA FAC3703 and UJ FRK3000:

When a “major overhaul” is capitalised, check if the original cost included a previous inspection component. If yes, remove old inspection carrying amount and recognise new inspection cost.

3. Subsequent Measurement Models, Depreciation and Revaluation (UJ FRK3000 & UKZN ACCT300 Focus)

3.1 Cost Model vs Revaluation Model

After initial recognition, IAS 16 allows two models:

Cost Model
- Asset carried at cost less accumulated depreciation and impairment losses.
- Most common model in South African SMEs and exam questions unless stated otherwise.
Revaluation Model
- Asset carried at revalued amount, being fair value at date of revaluation less subsequent depreciation and impairment.
- Revaluations must be carried out with sufficient regularity so that carrying amount does not differ materially from fair value at reporting date.
- Applied to a whole class of assets (e.g. all buildings, not just one building).

Classes of assets under IAS 16:

Land.
Land and buildings.
Machinery.
Ships, aircraft.
Motor vehicles.
Furniture and fixtures.
Office equipment.

In UJ FRK3000 and UKZN ACCT300 exams, students are often asked to:

Decide between cost and revaluation model.
Prepare revaluation journal entries.
Show impact of revaluation on OCI, equity (revaluation surplus), depreciation and profit.

3.2 Depreciation – Basic Principles

Depreciable amount = Cost (or revalued amount) − Residual value

Depreciation is charged:

On a systematic basis over the asset’s useful life.
Beginning when the asset is ready for use (not necessarily when actually used).
Ending at the earlier of:
- The date the asset is classified as held for sale (IFRS 5), or
- The date the asset is derecognised.

Methods commonly tested in SA exams:

Straight-line method (SL): equal amount each year.
Diminishing/Reducing balance method (RB).
Units of production method (UOP).

Example – Straight-line depreciation

Cost: R500 000
Residual value: R50 000
Useful life: 5 years

Depreciable amount = R500 000 − R50 000 = R450 000
Annual depreciation = R450 000 / 5 = R90 000

Example – Units of production

Cost: R600 000
Residual value: R0
Expected total units: 120 000
Actual units produced per year:

Year 1: 30 000
Year 2: 25 000
Year 3: 35 000
Year 4: 20 000
Year 5: 10 000

Depreciation per unit = R600 000 / 120 000 = R5 per unit

Year 1 depreciation: 30 000 × R5 = R150 000
Year 2 depreciation: 25 000 × R5 = R125 000, etc.

Exam scripts for UNISA FAC3703 and CUT ACCS6015 often have one question requiring:

Calculation of depreciation under two methods.
Justification of which method best reflects consumption of economic benefits.

3.3 Review of Useful Life, Residual Value and Depreciation Method

IAS 16 requires at least annual review of:

Useful life.
Residual value.
Depreciation method.

If expectations change, the changes are treated as changes in accounting estimates under IAS 8 (prospective application).

Illustrative example

Machine cost: R300 000
Residual value: R0
Useful life: 10 years
Depreciation method: straight-line

After 4 years, carrying amount:

Depreciation per year: R30 000
Accumulated depreciation: 4 × R30 000 = R120 000
Carrying amount = R300 000 − R120 000 = R180 000

At start of Year 5, management revises remaining useful life to 3 years (instead of 6) and residual value to R30 000.

New depreciable amount = R180 000 − R30 000 = R150 000
Remaining useful life = 3 years
New depreciation = R150 000 / 3 = R50 000 per year.

Past depreciation is not restated; only future charges are adjusted. Exam markers look for clear separation between old and new estimates.

3.4 Impairment of PPE

Although IAS 16 handles PPE, impairment is dealt with by IAS 36 Impairment of Assets.

Key points for exam purposes:

At each reporting date, assess whether there are indicators of impairment.
If yes, estimate recoverable amount (higher of fair value less costs of disposal and value in use).
If carrying amount > recoverable amount, recognise impairment loss.

Impairment loss:

For cost model assets: recognise in profit or loss.
For revalued assets: treat as a revaluation decrease.
- If there is a revaluation surplus for that asset, first reduce surplus in OCI, then any excess impairment loss goes to profit or loss.

Example – revalued asset impairment (UKZN ACCT300 style)

Building (revalued) carrying amount: R2 000 000.
Revaluation surplus in equity (related to building): R300 000.
Recoverable amount now: R1 700 000.

Impairment loss = R2 000 000 − R1 700 000 = R300 000.

Accounting:

Debit Revaluation surplus (equity) R300 000.
Credit Building R300 000.

No hit to profit or loss in this case as the impairment can be entirely offset against existing revaluation surplus.

3.5 Revaluation Surplus and Accounting Entries

Under the revaluation model:

Increase in carrying amount (upward revaluation) is credited to Other Comprehensive Income (OCI) and accumulated in equity as a revaluation surplus, unless it reverses a previous decrease in profit or loss.
Decrease in carrying amount (downward revaluation) is recognised in profit or loss, unless it reverses a previous surplus for that asset.

Example – First revaluation upward (UNISA-style)

Machine at cost: R400 000
Accumulated depreciation: R80 000
Carrying amount: R320 000

Fair value at revaluation date: R380 000
Increase: R60 000

Journal entry:

Dr PPE (Machine) R60 000
Cr Revaluation surplus (OCI) R60 000

After revaluation, new carrying amount = R380 000. Future depreciation is based on R380 000 (less residual value).

Example – Revaluation after prior decrease

Suppose in a previous year, a decrease of R30 000 was recognised in profit or loss. Current revaluation shows an increase of R50 000 relative to the carrying amount.

First, reverse the earlier decrease in profit or loss: Dr PPE R30 000; Cr Profit or loss R30 000.
Remaining R20 000 goes to revaluation surplus via OCI: Dr PPE R20 000; Cr Revaluation surplus R20 000.

3.6 Depreciation after Revaluation

When an asset is revalued, there are two ways (both acceptable) to handle accumulated depreciation:

Restate accumulated depreciation proportionately with the gross carrying amount.
Eliminate accumulated depreciation against the gross carrying amount and restate the net amount to the revalued amount.

After revaluation, depreciation is recalculated based on:

New revalued amount.
Revised residual value (if any).
Revised remaining useful life.

Example – typical exam computation

Cost of building: R1 000 000
Accumulated depreciation (SL over 40 years) after 10 years: R250 000
Carrying amount: R750 000

Fair value: R1 200 000
Revalued amount: R1 200 000

Remaining life: 30 years

New annual depreciation = R1 200 000 / 30 = R40 000.

Exam questions may ask for:

Journal entries for revaluation.
Depreciation charge before and after revaluation.
Impact on profit, OCI and equity.

3.7 Transfers from Revaluation Surplus to Retained Earnings

Revaluation surplus is not recycled through profit or loss upon disposal. However, IAS 16 allows transfer within equity:

Entity may transfer, as the asset is used, the difference between depreciation on revalued amount and depreciation on original cost from revaluation surplus to retained earnings.
Alternatively, transfer the entire surplus upon derecognition (disposal).

Illustration

Asset cost: R500 000, life 10 years.
Revalued at beginning of Year 4 to R620 000; remaining life 7 years.

Original depreciation: R500 000 / 10 = R50 000 p.a.
New depreciation: R620 000 / 7 ≈ R88 571 p.a. (rounded).

Excess depreciation due to revaluation:

= R88 571 − R50 000
≈ R38 571 per year.

Entry each year (if policy is to transfer annually):

Dr Revaluation surplus ~R38 571
Cr Retained earnings ~R38 571

This is a reserve transfer only – no impact on profit or loss.

4. Derecognition, Disposal and Special Issues (UNISA FAC3703 & CUT ACCS6015 Exam Style)

4.1 Derecognition of PPE

An item of PPE is derecognised when:

It is disposed of (sold, scrapped, donated, etc.); or
No future economic benefits are expected from its use or disposal.

On derecognition:

Remove the asset’s carrying amount (cost/revalued amount and accumulated depreciation).
Recognise any gain or loss in profit or loss.

Gain or loss:

Proceeds from disposal − Carrying amount of asset at date of disposal

This is a frequent calculation in UNISA FAC3703 exams.

4.2 Disposal Example – Cost Model

Scenario (UNISA-style):

Zodwa Ltd purchased a machine on 1 January 20X1 for R300 000. It is depreciated on a straight-line basis over 5 years with no residual value. On 30 June 20X3, the machine is sold for R120 000.

Required: Calculate the gain or loss on disposal and pass journal entries.

Solution:

Annual depreciation = R300 000 / 5 = R60 000.
Depreciation up to disposal date:

Yr 1 (20X1): R60 000
Yr 2 (20X2): R60 000
Yr 3 (6 months of 20X3): 6/12 × R60 000 = R30 000

Total accumulated depreciation = R150 000.

Carrying amount at disposal:

= Cost − Accumulated depreciation
= R300 000 − R150 000 = R150 000.

Gain or loss:

= Proceeds − Carrying amount
= R120 000 − R150 000 = R30 000 loss.

Journal entries on 30 June 20X3:

Record depreciation up to date of sale:

Dr Depreciation expense R30 000
Cr Accumulated depreciation – Machine R30 000

Record disposal (remove asset and accumulated depreciation):

Dr Cash/Bank R120 000
Dr Accumulated depreciation – Machine R150 000
Cr Machine (cost) R300 000
Dr Loss on disposal of machine (P/L) R30 000

4.3 Disposal Example – Revaluation Model

When a revalued asset is disposed of, any remaining revaluation surplus related to that asset is transferred directly to retained earnings (not through profit or loss).

Scenario (CUT ACCS6015-style):

Building cost: R1 000 000.
After several years, carrying amount (cost model) would be R700 000.
Revalued upwards to R900 000; revaluation surplus: R200 000.
One year later, building is sold for R950 000.

Depreciation after revaluation (for the one year) reduces carrying amount from R900 000 to, say, R880 000 (assuming R20 000 depreciation).

At disposal date:

Carrying amount: R880 000.
Proceeds: R950 000.
Gain: R70 000 (to profit or loss).

Revaluation surplus of R200 000 may now be transferred to retained earnings:

Dr Revaluation surplus R200 000
Cr Retained earnings R200 000

This is a movement within equity and does not appear in profit or loss.

4.4 Disposals Part-Way Through the Year

Exam questions often require calculation of partial year depreciation for the year of disposal.

Steps:

Calculate annual depreciation.
Pro-rate the depreciation for months used during the final year.
Add to accumulated depreciation.
Calculate carrying amount and compare with disposal proceeds.

Common pitfalls in UNISA and UJ scripts:

Forgetting to charge depreciation in the year of disposal.
Using full-year depreciation when only partial use occurred.
Applying wrong pro-rata basis (e.g. 6/12 vs 3/12).

4.5 PPE Classified as Held for Sale (IFRS 5 Interaction)

When an asset is classified as held for sale (IFRS 5), IAS 16 requires:

Stop depreciation from the date it is classified as held for sale.
Measure at the lower of carrying amount and fair value less costs to sell.
Present separately as “Non-current assets held for sale”.

Example

Machine carrying amount before classification: R200 000.
Fair value less costs to sell: R180 000.

Asset is written down by R20 000:

Dr Loss on remeasurement to fair value (P/L) R20 000
Cr PPE (or Non-current assets held for sale) R20 000

After classification as held for sale, no further depreciation is charged under IAS 16.

4.6 Major Overhauls and Replacement of Components

When parts of PPE are replaced or significant overhauls are performed:

Capitalise the cost of the new part/overhaul if recognition criteria are met.
Derecognise the carrying amount of the replaced part (even if not separately recognised previously; estimate it).
Depreciate the new capitalised amount over its own useful life.

Illustration – Factory furnace

Furnace total cost: R1 000 000.
Lining (component) cost estimated at R200 000 with useful life of 5 years.
After 5 years, lining is replaced at a cost of R250 000.

Accounting:

Derecognise old lining carrying amount (likely fully depreciated).
Capitalise new lining: Dr PPE (lining) R250 000; Cr Cash/Bank R250 000.
Depreciate R250 000 over new 5-year life.

Exams in CUT ACCS6015 often test whether students:

Correctly derecognise old components.
Avoid double-counting old and new parts.

4.7 Idle Assets and Temporarily Idle PPE

IAS 16 still applies to PPE that is idle or temporarily not in use, provided it is not classified as held for sale.

Implications:

Continue to depreciate unless residual value equals or exceeds carrying amount.
Consider impairment under IAS 36 if indicators exist (e.g. decline in demand, physical damage).

In South African industrial context (e.g. a plant in Rustenburg idle due to economic downturn):

Depreciation continues based on useful life.
Students must separate the concept of idle asset from “held for sale”.

5. Disclosure Requirements, Exam Techniques and South African University Course Integration

5.1 IAS 16 Disclosure Requirements

Entities must disclose, for each class of PPE, in the notes to financial statements:

Measurement bases used (cost or revaluation).
Depreciation methods used.
Useful lives or depreciation rates.
Gross carrying amount and accumulated depreciation (and accumulated impairment) at beginning and end of the period.
Reconciliation of carrying amount at beginning and end of the period showing:
- Additions.
- Assets classified as held for sale.
- Acquisitions through business combinations.
- Increases or decreases from revaluations and impairment.
- Depreciation charges.
- Other movements (e.g. exchange differences).
- Disposals.

For revalued assets:

Effective date of the revaluation.
Whether an independent valuer was involved.
Methods and significant assumptions applied in estimating fair values.
Extent of revaluation surplus, including movements during the period.

5.2 Typical Note Reconciliation (UNISA/CUT Exam Format)

Exam questions may give a table and ask to complete a reconciliation.

Example format (for buildings):

Movement in buildings (R’000)	Cost / Revalued amount	Accumulated depreciation / impairment	Carrying amount
Balance at 1 Jan 20X1	5 000	(1 000)	4 000
Additions	500	–	500
Disposals	(300)	200	(100)
Depreciation	–	(400)	(400)
Revaluation	800	–	800
Balance at 31 Dec 20X1	6 000	(1 200)	4 800

Students are expected to:

Clearly show opening and closing balances.
Separate cost from accumulated depreciation.
Cross-reference to profit or loss and OCI where appropriate.

5.3 Common Exam Traps in IAS 16 (UNISA FAC3703, CUT ACCS6015, UJ FRK3000)

Ignoring residual value
- Miscalculating depreciation by using full cost rather than cost minus residual.
Wrong depreciation period
- Failing to pro-rate for acquisition or disposal within the year.
Revaluation confusion
- Putting upward revaluation in profit or loss instead of OCI (unless reversing previous losses).
- Not adjusting depreciation after revaluation.
Not derecognising replaced components
- Keeping old part in PPE while also capitalising new part.
Misclassification
- Treating investment property as PPE or vice versa without justification.
Incorrect treatment of dismantling costs
- Ignoring or expensing decommissioning costs that should be capitalised.
Held-for-sale misunderstandings
- Continuing depreciation after classification as held for sale.

5.4 Exam Strategy for IAS 16 in South African Courses

UNISA FAC3703 – Financial Accounting

Exams are structured with scenario-based questions involving multiple IFRS standards.
IAS 16 often appears as:
- A PPE acquisition and depreciation question (calculation plus journal entries).
- A revaluation and disposal question.
- A mixed question with IAS 36 impairment and IAS 40 investment property.
Focus on:
- Extracting all relevant data.
- Setting out calculations clearly with headings.
- Referencing specific paragraphs of IAS 16 where theory marks are available.

CUT ACCS6015 – Advanced Corporate Accounting

Emphasis on:
- Complex PPE transactions (self-constructed assets, dismantling provisions).
- Componentisation, major inspections and decommissioning.
- Interaction with IAS 37 and IAS 23.
Answer structure:
- Start with a brief theory explanation (“In terms of IAS 16, cost includes…”).
- Then detailed numeric calculations.

UJ FRK3000 – Financial Accounting 3A

Case-study approach:
- Multi-step PPE problems.
- Integration with cash flow statement (investing activities).
Students must:
- Distinguish between capital expenditure (capex) and repairs.
- Prepare partial financial statement extracts and notes.

Other South African Universities (UKZN, UP, Wits, CPUT)

Though course codes differ, IAS 16 is similarly examinable.
Often linked with:
- IFRS 5 (held for sale).
- IAS 36 (impairment).
- IAS 40 (investment property).

5.5 Worked Comprehensive Case Study (Integrated Example)

Scenario

Ndlovu Ltd, a South African manufacturing company, uses the cost model for all PPE except its head office building, which is measured using the revaluation model. The entity has a December year-end.

Transactions for the year ended 31 December 20X5:

Machine purchase
- On 1 March 20X5, purchased a new machine.
- List price: R1 500 000; trade discount: R150 000.
- Import duties: R60 000.
- Transport: R25 000.
- Installation: R30 000.
- Testing: R20 000; proceeds from test production: R8 000.
- Training of staff: R15 000.
Useful life: 8 years, residual value: R80 000.
Replacement of major component
- Existing machine (cost R800 000, accumulated depreciation R320 000 at 1 Jan 20X5) includes a component originally costing R200 000 (useful life 5 years).
- On 1 July 20X5, the component is replaced at a cost of R260 000. The old component is scrapped (no proceeds).
Revaluation of head office building
- Cost of building: R4 000 000; accumulated depreciation at 1 Jan 20X5: R400 000 (remaining life 20 years).
- On 1 October 20X5, an independent valuer revalues the building to R5 500 000. Remaining useful life now estimated at 25 years total (i.e. 21 years left from 1 Jan 20X5; but revaluation occurs on 1 Oct).
Disposal of vehicle
- Delivery vehicle cost: R300 000; acquired 1 Jan 20X3.
- Depreciation method: straight-line over 5 years; residual value: R0.
- Sold on 30 September 20X5 for R120 000.

Required (similar to integrated exam question):

a) Calculate the cost of the new machine purchased on 1 March 20X5.
b) Calculate depreciation for each asset (new machine, component replacement, building, vehicle) for 20X5.
c) Calculate gain or loss on disposal of the vehicle.
d) Show the journal entries for the revaluation of the building.

Solution Outline

a) Cost of new machine

List price net of discount: R1 500 000 − R150 000 = R1 350 000
Import duties: + R60 000
Transport: + R25 000
Installation: + R30 000
Testing: R20 000 − R8 000 = R12 000
Training: expensed
Total cost: R1 350 000 + R60 000 + R25 000 + R30 000 + R12 000 = R1 477 000

b) Depreciation

(i) New machine – purchased 1 March 20X5

Cost: R1 477 000
Residual: R80 000
Useful life: 8 years

Depreciable amount = 1 477 000 − 80 000 = R1 397 000
Annual depreciation = 1 397 000 / 8 = R174 625

For 20X5, period from 1 March to 31 December = 10 months.
Depreciation = 10/12 × 174 625 ≈ R145 521.

(ii) Replacement component

Original component: cost R200 000, life 5 years.
By 1 Jan 20X5, assume it has been in use for full 5 years (typical exam assumption), so fully depreciated. Carrying amount = R0.

On 1 July 20X5, new component cost = R260 000.
Useful life (assume 5 years again unless otherwise stated).

Annual depreciation = 260 000 / 5 = R52 000.
20X5 depreciation from 1 July to 31 December (6 months):
= 6/12 × 52 000 = R26 000.

(iii) Building (revaluation model)

Before revaluation:

Cost: R4 000 000
Accumulated depreciation at 1 Jan 20X5: R400 000
Carrying amount = R3 600 000
Remaining life at 1 Jan 20X5 = 20 years

Annual depreciation (pre-revaluation) = 3 600 000 / 20 = R180 000.

Depreciation from 1 Jan to 30 Sep 20X5 (9 months):
= 9/12 × 180 000 = R135 000.

Carrying amount on 30 Sep 20X5 before revaluation:
= 3 600 000 − 135 000 = R3 465 000.

Revalued amount on 1 Oct 20X5: R5 500 000.
Revaluation surplus = 5 500 000 − 3 465 000 = R2 035 000.

After revaluation, remaining useful life is re-estimated to 25 years total. If at 1 Jan 20X5, total life was 25 years, then at 1 Oct 20X5, remaining life ≈ 24 years and 3 months; examiners typically simplify and say “remaining life from revaluation date is X years.” In absence of extra data, assume remaining life from 1 Oct 20X5 is 24 years (for illustration).

Annual depreciation after revaluation = 5 500 000 / 24 ≈ R229 167.

Depreciation from 1 Oct to 31 Dec (3 months):
= 3/12 × 229 167 ≈ R57 292.

Total depreciation for building in 20X5:
= Pre-revaluation (9 months): R135 000

Post-revaluation (3 months): ~R57 292
= ~R192 292.

(iv) Vehicle – disposed 30 Sep 20X5

Cost: R300 000
Useful life: 5 years, residual R0.

Annual depreciation = 300 000 / 5 = R60 000.

Accumulated depreciation at 1 Jan 20X5:

Year 20X3: R60 000
Year 20X4: R60 000
Total: R120 000.

For 20X5 (1 Jan–30 Sep = 9 months):

Depreciation = 9/12 × 60 000 = R45 000.

Total accumulated depreciation at disposal date:

= 120 000 + 45 000 = R165 000.

Carrying amount at 30 Sep 20X5:

= 300 000 − 165 000 = R135 000.

c) Gain or loss on disposal

Proceeds: R120 000
Carrying amount: R135 000

Loss = 120 000 − 135 000 = R15 000 loss.

d) Journal entries for revaluation of building

First, record depreciation to date (30 Sep):

Dr Depreciation expense R135 000
Cr Accumulated depreciation – Building R135 000

Then record revaluation surplus:

To bring carrying amount from R3 465 000 to R5 500 000:

Dr Building R2 035 000
Cr Revaluation surplus (OCI) R2 035 000

After revaluation, adjust depreciation prospectively.

This integrated example mirrors the complexity of questions that appear in UNISA FAC3703, CUT ACCS6015, and UJ FRK3000 past papers.

5.6 Quick IAS 16 Revision Checklist for Exams

For last-minute revision before exams at UNISA, CUT, UJ, UKZN, UP or Wits, use this checklist:

Can you define PPE, cost, carrying amount, residual value, useful life, depreciation?
Do you know the two recognition criteria for PPE?
Can you list cost components included and excluded from PPE?
Can you handle self-constructed assets and dismantling obligations?
Are you comfortable with cost model vs revaluation model?
Can you calculate straight-line, reducing balance and units-of-production depreciation, including partial-year?
Do you know how to account for revaluations (both upward and downward) and their effect on OCI and equity?
Can you explain how to treat major inspections and replacements?
Can you calculate gain or loss on disposal and prepare disposal entries?
Do you understand interaction with IFRS 5 (held for sale) and IAS 36 (impairment)?
Can you draft a basic PPE note with reconciliation of opening and closing balances?

Mastery of these points significantly increases your chances of achieving high marks in IAS 16-related questions in the International Financial Reporting Standards (IFRS) Guides cluster, especially for South African university courses like UNISA FAC3703, CUT ACCS6015 and UJ FRK3000.