When a business invests in equipment, land, or buildings, it does more than acquire an asset - it makes a statement about its strategy and future direction. That is why IAS 16 and IAS 40 matter: these two accounting standards provide the framework for presenting tangible assets and investment property in a way that reflects their true economic role.

IAS 16 governs Property, Plant and Equipment (PPE) - the physical assets that power operations, from machinery and vehicles to office buildings. To recognise PPE on the balance sheet, two conditions must be met: the asset is expected to generate future economic benefits, and its cost can be measured reliably. That cost includes purchase price, transport, installation, and even dismantling obligations, but excludes training costs, start-up losses, or inefficiencies.

Once recognised, businesses must decide how to measure PPE going forward. The cost model allows assets to be carried at their depreciated historical cost, while the revaluation model updates them to fair value when reliable measures exist. Revaluations can flow through equity or profit and loss, depending on the circumstances. Just as important is impairment testing, assets must never be carried at more than their recoverable amount.

IAS 40 addresses Investment Property: land or buildings held to earn rentals or for capital appreciation, rather than for production or administration. If a property serves multiple purposes, businesses may need to separate components or determine which use is predominant. Recognition principles are similar to IAS 16, but measurement frequently uses the fair value model, with fair value changes typically taken to profit and loss under IFRS (or to equity under GAPSME).

Reclassifications are also an essential feature of these standards. When a property’s use changes, such as converting a rental property into a company office, it must be reclassified between IAS 40 and IAS 16, using fair value at the date of change as its new “deemed cost.” When an asset is eventually sold or retired, any gain or loss is recognised directly in profit and loss.

Although these standards can appear highly technical, they are rooted in day-to-day business decisions. Whether capitalising factory fit-out costs, deciding when to replace equipment, or considering a revaluation, these rules ensure that financial statements tell a consistent and meaningful story to stakeholders.

Clear reporting on tangible assets and investment property is not merely about compliance; it is about credibility. By applying IAS 16 and IAS 40 thoughtfully, businesses give investors, lenders, and boards a transparent view of the resources they control and the value they are creating. In a climate where trust in numbers matters more than ever, that clarity is a strategic advantage.

Article written by Rachel Mamo, Manager - Outsourcing