Full explanation
Overview
IAS 16, Part two. In Part one, the asset went on the books at cost, and depreciated year by year. Now we go further: the asset can be revalued upward, it eventually gets sold, and it all lands on the financial statements. Let's dive back in.
So far we've held the asset at cost, less depreciation. But IAS 16 offers a bolder route — one where an asset can actually go up in value. That's the revaluation model.
Part three. When assets are revalued — and where the gains and losses land.
Cost model — or fair value
After recognition, you pick a model for each class of asset. The cost model: carry it at cost, less depreciation, less any impairment — simple, and what most use for machines. Or the revaluation model: carry it at fair value — today's market value — less later depreciation. Popular for land and buildings, which can rise. Choose it for a class, and you must keep it up to date, and revalue the whole class, not just the winners.
Meridian owns its factory building — cost one million, carried at eight hundred thousand after depreciation. A valuer says it's now worth nine hundred and fifty thousand. That's a one hundred and fifty thousand gain. But here's the key: a revaluation gain usually does not touch profit. It goes to other comprehensive income and sits in a revaluation surplus inside equity. Why? It's unrealised — you haven't sold. So it's kept out of profit, parked in reserves.
A loss claws back reserves first
Now the mirror. Next year the building falls to eight hundred and eighty thousand — a seventy thousand drop. A revaluation loss first eats back any surplus you built in other comprehensive income — no profit hit. Only once that cushion is gone does the loss fall into profit and loss. Gains up through reserves; losses claw back through reserves first, then bite profit. That asymmetry is the bit exam-sitters and analysts both misread.
OCI & the revaluation surplus
Quick plain-English check. Other comprehensive income — OCI — is just a holding area for gains not yet earned through trading, kept out of profit so profit isn't flattered by paper value. A revaluation surplus is the running total of those parked property gains, sitting in equity until the asset is sold or retired.
A loss claws back reserves first
Cost or revaluation, the asset keeps living — you fix it, upgrade it, and one day let it go. So let's handle the repairs, the replacements, and the moment you finally sell.
Part four. Repairs, write-downs — and the day you sell.
Expense — or capitalise ?
Spend money on an asset you already own — does it go on the balance sheet, or straight to expense? The test is the same recognition rule. Day-to-day repairs and servicing — a five thousand euro maintenance — bring no new benefit, so they're expensed. But replacing a major part — a new cutting head — adds future benefit, so you capitalise the new part and derecognise the old one's remaining book value. Major inspections that let the asset keep running get capitalised too.
SICs & IFRICs — folded into the standard
A quick word on the interpretations behind IAS 16 — most are now folded right into the standard. IFRIC 1 handles a change in your decommissioning estimate: if the restoration cost shifts, you adjust the asset. SIC 23 put major inspection and overhaul costs into the asset, exactly as we just saw. IFRIC 20 covers stripping costs once a surface mine is producing. And SIC 14, compensation when an asset is impaired or lost. One standard — the fine print built in.
Impairment — the IAS 36 handoff
There's also a floor. If an asset's carrying amount climbs above what it could actually earn or fetch — its recoverable amount — it's impaired, and written down immediately. The full mechanics live in a neighbour standard, IAS 36, a future episode — but IAS 16 hands off to it here. Depreciation spreads cost; impairment catches a sudden fall.
Carrying amount → gain
Now the moment you asked about — disposal. Meridian sells the machine after five years for two hundred and eighty thousand euros. Step one: its carrying amount. Five years of straight-line at forty-five thousand is two hundred and twenty-five thousand of depreciation, so four hundred and seventy thousand minus two hundred and twenty-five thousand leaves a book value of two hundred and forty-five thousand. Step two: the gain — two hundred and eighty thousand received minus two hundred and forty-five thousand book value — a thirty-five thousand gain.
Gain on disposal — not revenue
The journal: debit cash two hundred and eighty thousand, debit accumulated depreciation two hundred and twenty-five thousand; credit the asset four hundred and seventy thousand, and credit a gain on disposal of thirty-five thousand. And here's the trap that catches even seasoned people: that thirty-five thousand gain is not revenue. Selling a machine isn't Meridian's business — it makes products, not machines. So the gain sits as other income, not sales. Recognise it in profit, yes — but never as turnover.
Four entries, the entire lifecycle
Let's line up the whole life of the asset in journal entries — the debit-credit arc. Day one, you buy it: debit property, plant and equipment four hundred and seventy thousand; credit cash. Each year, you depreciate: debit depreciation expense forty-five thousand; credit accumulated depreciation. Revalue the building up: debit the asset one hundred and fifty thousand; credit the revaluation surplus in equity. And finally, disposal: debit cash and the accumulated depreciation; credit the asset and the gain. Buy, depreciate, revalue, dispose — four entries, the entire lifecycle.
Carrying amount → gain
We've recognised it, measured it, depreciated it, revalued it, and disposed of it. The last job is to show it — cleanly — so anyone reading the accounts sees exactly what happened.
Part five. Where it all lands on the statements — and what investors read.
Three statements, three homes
So where does IAS 16 actually appear? The net book value of every asset sits in non-current assets on the balance sheet. The year's depreciation and any impairment hit the income statement — and under the new IFRS 18, they land in the operating category, the heart of the results. Revaluation gains show in other comprehensive income. Recognise, Measure — and now Present.
Four jobs to close the year
So what actually lands on your desk at year-end? Four jobs. One — review each asset's useful life, residual value and method; if they've changed, adjust going forward. Two — scan for impairment indicators, and if any bite, test under IAS 36. Three — if you use the revaluation model, refresh your fair values so they stay current. Four — build the reconciliation note that ties opening to closing. Do those four, and your property, plant and equipment is year-end ready.
The story of the year
Then Disclose. For each class, IAS 16 wants a reconciliation — a story of the year: opening balance, plus additions, minus disposals, plus or minus revaluations, minus depreciation, to the closing balance. Add the measurement basis, useful lives or rates, and the methods. This note is where an analyst reads how hard a company is investing — and how fast its assets are ageing.
IAS 16 — the anchor
And IAS 16 never stands alone. It's the anchor of the asset family. No physical substance? IAS 38. Held to sell? IAS 2. Held to rent or for gain? IAS 40. A sudden value fall? IAS 36. The dismantling promise? IAS 37. Leased in? IFRS 16. And a few threads we've deliberately parked for their own future episodes — borrowing costs under IAS 23, the full impairment mechanics of IAS 36, and government grants under IAS 20. Learn IAS 16 well and half the asset side of the balance sheet opens up.
What analysts actually read
What do investors actually do with this? Four moves. They watch capital expenditure — is the company renewing its assets or running them into the ground? They probe the depreciation policy — long lives flatter today's profit. They check whether assets are revalued or held at old cost. And they eye asset age — accumulated depreciation against cost — to guess the next big spend.
Every number, where it lands
Let's land it all on Meridian's own accounts. The balance sheet: the machine and building in non-current assets, at net book value. The income statement: the year's depreciation as an operating cost, and — in the year of sale — the thirty-five thousand gain as other income. Other comprehensive income: the one hundred and fifty thousand revaluation surplus on the building. Every number we built, now sitting exactly where a reader expects it.
Recognise → Measure → Present → Disclose
Four things to carry out. Recognise — probable benefit, reliable cost. Measure — at full cost, then cost or revaluation, less depreciation over useful life, by components. Present — net book value on the balance sheet, depreciation in operating profit, revaluation in other comprehensive income. Disclose — the reconciliation that tells the year's story. That's IAS 16.
So — same machine, two profits, explained. You now know what an asset costs, why the method shapes profit, how revaluation works, and what happens when you sell. Next: IAS 38, intangibles. See you there.