An asset's carrying amount must be derecognised when no further economic benefits are expected from its use or disposal. For instance, under the cost model, if a significant component of machinery is replaced, the carrying amount of the old component should be removed from the books. Assume an original component cost $1,200,000 and accumulated depreciation is $840,000, the derecognition involves debiting accumulated depreciation $840,000 and recording a loss on disposal of $360,000, which is the remaining carrying amount. The old component is then replaced and the new component is capitalised at its cost .

IAS 16 outlines several key disclosure requirements for property, plant, and equipment: 1) the measurement bases (cost or revaluation) for determining the gross carrying amount must be disclosed; 2) the depreciation methods and useful lives or rates used for each asset class must be specified; 3) a reconciliation of the carrying amount at the beginning and end of the period is required, detailing additions, disposals, revaluations, depreciation, and impairment losses/reversals; 4) the gross carrying amount and accumulated depreciation, including impairment losses, must be presented; and 5) any restrictions on title, PPE pledged as security, and contractual commitments for acquiring PPE should be disclosed .

For a damaged factory initially costing $5,000,000 and with accumulated depreciation of $2,000,000, the carrying amount is calculated as $3,000,000. If the recoverable amount is only $1,500,000 due to significant damage, the impairment loss is the difference between the carrying amount and the recoverable amount, which is $1,500,000. This loss is recorded by debiting impairment loss and crediting accumulated impairment. If the insurance company agrees to pay $1,600,000, this compensation is recognised separately as other income in profit or loss when it becomes receivable .

The cost model records property, plant, and equipment at their historical cost minus any accumulated depreciation and impairment losses, whereas the revaluation model allows for these assets to be measured at a revalued amount, reflecting fair value at the date of revaluation minus subsequent accumulated depreciation and impairment losses. Under the revaluation model, any increases in the value of an asset are credited as revaluation surplus in equity unless they reverse a previous decrease recognised in profit or loss, thus impacting financial statements and requiring more frequent valuations to reflect true market conditions .

Once a revalued asset is disposed of, the revaluation surplus, which was recorded in OCI, can be transferred directly to retained earnings as opposed to passing through profit or loss. This transfer reflects the realization of gains from the asset's increased valuation and ensures that the surplus is not perpetually reflected in OCI without eventual recognition in retained earnings. This practice does not affect profit or loss but enhances the transparency and accuracy of equity balances in the entity's financial position, aligning with IAS 16's provisions for revaluation surplus handling .

Under IAS 16, when a significant part of an asset is replaced, the carrying amount of the old part is derecognised, meaning it is removed from the books, and the cost of the new part is capitalised. For example, if Component A, initially costing $1,200,000 with an accumulated depreciation of $840,000, is replaced at a cost of $1,500,000, the old component is derecognised by removing its carrying amount ($360,000) and the accumulated depreciation ($840,000). The new component is then capitalised at its cost ($1,500,000). This brings the new total carrying amount of the machine to $2,020,000 when combined with other components still in use .

After revaluation, the depreciation calculation changes because the depreciable amount is now based on the revalued amount rather than the original cost. Using the revalued amount requires reassessment of both the residual value and the useful life. For instance, if a building revalued to $3,800,000 has a remaining useful life of 45 years and a residual value unchanged at $200,000, the new depreciable amount is $3,600,000. Annual depreciation would then be calculated at $80,000, using the formula: ($3,800,000 - $200,000) / 45 years, compared to the pre-revaluation depreciation based on the original cost and useful life .

IAS 16 requires that the chosen measurement model, whether cost or revaluation, be applied consistently to all items within a class of property, plant, and equipment, with a class being defined by the nature and use of the assets, rather than their location. Selectively revaluing only urban properties would constitute 'cherry picking,' as it introduces inconsistency in the treatment of assets within the same class, which is not permitted. Therefore, all properties within the same class must be measured using the same model to ensure consistency and reliability of the financial statements .

IAS 16 allows different classes of property, plant, and equipment to be measured using different models (cost or revaluation), provided these classes are defined based on the nature and use of the assets. Using fair value for buildings and cost for plant and equipment is permissible as these are distinct classes. The implication is that financial statements must reflect a consistent policy within each class, ensuring comparability and transparency for users of the financial statements. It obligates management to ensure that each class accurately reflects the chosen measurement model's relevance and reliability .

The carrying amount before revaluation is determined by subtracting accumulated depreciation from the initial cost. For a building initially costing $3,000,000 with a residual value of $200,000 and a useful life of 50 years, the depreciable amount is $2,800,000. With an annual depreciation of $56,000, accumulated over 5 years, the total depreciation is $280,000. Thus, the carrying amount before revaluation is $2,720,000. If the building is revalued to $3,800,000, the revaluation surplus is $1,080,000, calculated as the difference between the revalued amount and the carrying amount before revaluation .