Property, Plant and Equipment
Treatment under IFRS
Property, plant and equipment is measured either at cost or under the revaluation model. It is depreciated systematically over its useful life.
- Accounting policy choice: the cost model or the revaluation model (fair value).
- Component approach: significant parts of an asset are depreciated separately.
- Impairment write-downs only where the asset is impaired (IAS 36 impairment test).
- Subsequent costs are capitalised when future economic benefits are probable.
- Decommissioning (asset retirement) obligations are included in the cost of the asset (IAS 37).
Treatment under German GAAP (HGB)
Property, plant and equipment is carried at acquisition or production cost less depreciation. No upward revaluation above cost is permitted.
- § 253 (1) HGB: acquisition/production cost is the measurement ceiling.
- § 253 (3) HGB: systematic depreciation over the useful life.
- § 255 HGB: mandatory components of production cost.
- § 268 (2) HGB: a fixed-asset movement schedule (Anlagenspiegel) is a required disclosure.
Key differences
- The revaluation model (fair value above cost) is not permitted under German GAAP.
- The component approach is not mandatory; HGB allows the whole asset to be depreciated as a single unit.
- For non-current assets, an impairment write-down is required only where the impairment is expected to be permanent (§ 253 (3) sentence 5 HGB).
- Tax depreciation periods (AfA tables) carry greater practical weight than under IFRS.
Example
Worked example
Assumptions: Machine, cost €1,000,000 at the start of Year 1, useful life 10 years, straight-line, no residual value. IFRS: the revaluation model is elected (an option, IAS 16.31). HGB: the cost model (the only permitted method). At the end of Year 4 the fair value is €900,000, above the carrying amount. Simplification: no transfer of the revaluation surplus to retained earnings, no deferred tax. All amounts in euros; due to rounding, figures may differ by ±€1.
Step 1 – Carrying amount to the end of Year 4 (identical in both systems)
Up to the revaluation, IFRS (cost basis) and HGB are identical: straight-line depreciation of €100,000 p.a.
| Year | Depreciation | Carrying amount |
|---|---|---|
| Addition | — | 1,000,000 |
| 1 | 100,000 | 900,000 |
| 2 | 100,000 | 800,000 |
| 3 | 100,000 | 700,000 |
| 4 | 100,000 | 600,000 |
Step 2 – Revaluation at the end of Year 4 (IFRS only)
- Fair value €900,000 − carrying amount €600,000 = revaluation surplus €300,000
- The write-up is recognised in other comprehensive income (OCI) and accumulated in equity as a revaluation surplus (IAS 16.39) – not in profit or loss.
- HGB: no write-up above cost (§ 253 (1) HGB) → carrying amount stays at €600,000.
Step 3 – Depreciation Years 5–10
Under IFRS the new carrying amount of €900,000 is depreciated over the remaining useful life of 6 years (€150,000 p.a.); under HGB unchanged at €100,000 p.a.
| Year | IFRS depr. | IFRS carrying amt | HGB depr. | HGB carrying amt |
|---|---|---|---|---|
| 5 | 150,000 | 750,000 | 100,000 | 500,000 |
| 6 | 150,000 | 600,000 | 100,000 | 400,000 |
| 7 | 150,000 | 450,000 | 100,000 | 300,000 |
| 8 | 150,000 | 300,000 | 100,000 | 200,000 |
| 9 | 150,000 | 150,000 | 100,000 | 100,000 |
| 10 | 150,000 | 0 | 100,000 | 0 |
| Σ 5–10 | 900,000 | — | 600,000 | — |
Step 4 – Balance-sheet effect (carrying amount and equity)
The difference in carrying amounts equals the not-yet-depreciated revaluation surplus in equity.
| Year-end | IFRS carrying amt | HGB carrying amt | Difference (reval. surplus) |
|---|---|---|---|
| 4 | 900,000 | 600,000 | 300,000 |
| 5 | 750,000 | 500,000 | 250,000 |
| 6 | 600,000 | 400,000 | 200,000 |
| 7 | 450,000 | 300,000 | 150,000 |
| 8 | 300,000 | 200,000 | 100,000 |
| 9 | 150,000 | 100,000 | 50,000 |
| 10 | 0 | 0 | 0 |
Step 5 – Effect on profit and equity
The €300,000 write-up increases equity without affecting profit (OCI). In Years 5–10 IFRS depreciation is €50,000 p.a. higher than under HGB (€300,000 in total), reducing profit accordingly. Over the entire useful life the total effect on equity is the same in both systems; IFRS merely shifts it in time and into OCI.
| IFRS | HGB | |
|---|---|---|
| Depreciation over 10 years (P&L) | −1,300,000 | −1,000,000 |
| Revaluation in OCI | +300,000 | 0 |
| Total effect on equity | −1,000,000 | −1,000,000 |
Step 6 – Journal entries
IFRS – revaluation at the end of Year 4:
| Account | Debit | Credit |
|---|---|---|
| Property, plant and equipment (machine) | 300,000 | |
| Revaluation surplus (OCI / equity) | 300,000 |
IFRS – depreciation Year 5:
| Account | Debit | Credit |
|---|---|---|
| Depreciation expense | 150,000 | |
| Property, plant and equipment | 150,000 |
HGB: no revaluation entry (cost ceiling). Depreciation Year 5:
| Account | Debit | Credit |
|---|---|---|
| Depreciation expense | 100,000 | |
| Property, plant and equipment | 100,000 |
Key takeaway
HGB treats cost as an absolute ceiling (§ 253 (1) HGB) – a write-up above historical cost is not permitted. IFRS offers the revaluation model as an option: the write-up to fair value is recognised in OCI (revaluation surplus) and subsequently leads to higher depreciation. Over the whole useful life the total effect on equity is identical (−€1,000,000); IFRS, however, shows higher carrying amounts in the interim and a separate revaluation surplus in equity.