Difference Between IAS 16 and IAS 40

All companies make investments in non-current assets. Accounting for these non-current assets is subjected to a number of protocols where revaluation, depreciation, and disposal of them are also given consideration. IAS 16 – Property, Plant and Equipment and IAS 40 – Investment Property are very similar in nature and share certain common guidelines as well. However, IAS 16 is dedicated to treating non-current assets used for business operations whereas IAS 40 is predominantly concerned with non-current assets held for rental, capital appreciation or for both. This is the key difference between IAS 16 and IAS 40.

CONTENTS
1. Overview and Key Difference
2. What is IAS 16
3. What is IAS 40
4. Side by Side Comparison – IAS 16 vs IAS 40
5. Summary

What is IAS 16 – Property, Plant and Equipment?

IAS 16 governs the accounting treatment for long-term, non-current assets such as property, plant and equipment. Assets should be initially recognized at cost, and subsequent recognition can be done using either cost or revaluated amount. Revaluation of assets also refers to valuing them at ‘fair value’ (the price at which an asset is agreed to be bought and sold within the general market conditions). The standard excludes a certain type of assets that require different accounting treatments under other standards as per below.

• Assets classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
• Biological assets related to agricultural activity accounted for under IAS 41 Agriculture
• Exploration and evaluation assets recognized in accordance with IFRS 6 Exploration for and Evaluation of Mineral Resources

Recognition of Asset at Cost

Here the cost is regarded as all the expenses incurred to bring the asset into working condition to generate economic benefit. Thus, this includes costs such as delivery, installation in addition to the purchase price.

Recognition of Asset at Fair Value

Non-current assets increase in value with time as a result of demand, thus after a period of time, their value can be significantly different to the price at which they were acquired. Thus, some companies record this increase in value by revaluing assets, which is referred to as ‘revaluation surpluses’. This is recorded in the equity section of the balance sheet.

Depreciation

Non-current assets should be depreciated to reflect the decrease in their economic life. There are a number of methods available to allocate depreciation, straight line method and reducing balance method been the most commonly used ones. Depreciation policy should be reviewed at least annually and, if the pattern of consumption of benefits has changed, the policy should be changed prospectively as a change in estimate.

Disposal

At the end of the economic life, the non-current assets are disposed, resulting in a gain or loss. If the asset could be sold for a price exceeding the net book value (cost less accumulated depreciation), then it is a gain on disposal and vice versa.

What is IAS 40 – Investment Property?

This standard presents the accounting guidelines for recognition and treatment of property held with the intention of earning rentals and capital appreciation, or for both. Similar to IAS 16, initial recognition of the property in the balance sheet should be done at cost and the subsequent valuation will continue to be done based on cost or fair value.

Measurement of fair value cannot be done with complete accuracy. However, the current market prices of similar property can be considered in estimating the fair value. If the company cannot obtain a reasonable fair value, the investment property should be valued using the cost model in IAS 16, assuming that the resale value of the property is zero. IAS 16 will also be used to dispose the property. In 2008, the scope of IAS 40 was expanded to include property under construction or development for future use to be classified as investment property; which was previously governed by IAS 16.

What is the difference between IAS 16 and IAS 40?

Summary – IAS 16 vs IAS 40

While there is a difference between IAS 16 and IAS 40, it should be noted that these two standards often complement each other and share certain accounting treatment such as subsequent recognition of the asset value, depreciation, and disposal. To distinguish on what standard to use depends on whether the asset is used for conducting a usual business operation or as a means of generating an investment income.

Reference:
1. “IAS Plus.” IAS 16 – Property, Plant and Equipment. N.p., n.d. Web. 08 Feb. 2017.
2. “IAS Plus.” IAS 40 – Investment Property. N.p., n.d. Web. 08 Feb. 2017.
3. “Overview of Depreciation – AccountingTools.AccountingTools. N.p., n.d. Web. 09 Feb. 2017.
4. “Summary of IAS 40 Investment Property.” IFRSbox. N.p., 21 Oct. 2016. Web. 09 Feb. 2017.

Image Courtesy:
1. “UK house prices adjusted for inflation” By Goose – Own work (Public Domain) via Commons Wikimedia