Note: This article provides a focused explanation and extended discussion on a specific standard. If you’d like to see the full list of articles and short summaries for this standard, please visit the “Series Overview” page.
Since 2025, most standard‑related articles on this site have been available in both Chinese and English versions. If you’d like to read the Chinese explanation, please visit the 「系列總覽」 page and look for the corresponding article.
Plain‑English explainer of HKAS 16 / IAS 16 for students, junior accountants and non‑specialists who find official standards too dense to read.
This article is based on Hong Kong Accounting Standards (HKAS / HKFRS), which are fully aligned with IAS / IFRS except for minor local tweaks, so the same principles generally apply under IAS / IFRS unless noted otherwise. The goal is to unpack HKAS 16 Property, Plant and Equipment (equivalent to IAS 16) using plain English and practical, real‑life examples instead of technical jargon. It is written for students, junior accountants, audit juniors and finance professionals who want to understand not just “what the standard says” but how to actually read and prepare financial statements in line with it.
When you see “the company” or “the entity” below, you can think of any entity that prepares general purpose financial statements under HKFRS / IFRS.
Selling machines, planting orchards, doing test runs
Picture a listed food group in Hong Kong. It runs large factories, owns orchards in Mainland China or Southeast Asia, and has just gone through a busy year. In the same year:
- The company disposes of a batch of old machinery.
- It plants a large area of fruit trees to harvest fruit over many years.
- A new factory starts trial production and sells some products during the testing phase.
Suddenly the finance team must answer some uncomfortable questions:
- Can the gain on selling those machines be booked as revenue to “polish” this year’s performance?
- Should the new fruit trees be accounted for under HKAS 16 or HKAS 41 Agriculture?
- Can revenue from selling products during the testing phase be used to reduce the cost of the new plant?
You cannot solve these questions by memorising a few paragraphs. You have to understand what problem the standard is trying to solve and why it draws the line where it does. In this article, we follow three main threads—derecognition, bearer plants and testing revenue—and connect the rules to the basis for conclusions.
What You Should Be Able To Do After Reading?
By the end, you should be able to:
- State clearly when PPE should be derecognised and explain how the “date of disposal” is linked to transfer of control.
- Calculate disposal gains and losses, explain why they cannot be classified as revenue, and distinguish them from ordinary revenue under HKFRS 15.
- Describe what bearer plants are, how they are accounted for under HKAS 16 (cost model / revaluation model), and how this differs from the old HKAS 41 fair value approach.
- Summarise the main arguments for and against moving bearer plants into HKAS 16, and understand the trade‑off between information and volatility.
- Explain why testing‑phase revenue and related costs must go through profit or loss instead of reducing PPE cost, and how this improves faithful representation and comparability.
1. Derecognition: when should PPE come off the balance sheet?
HKAS 16 says that an item of PPE should be derecognised when, and only when, one of these conditions is met:
- The asset is disposed of (for example sold, scrapped, seized by government).
- No future economic benefits are expected from its use or disposal.
In other words, once an asset no longer brings benefits to the entity—whether because it has been sold or has turned into scrap—it should not remain on the statement of financial position.
Determining the disposal date: follow transfer of control
For a sale of PPE, the key question is not “When did we collect the cash?” but “When did the buyer obtain control of the asset?”.
This echoes HKFRS 15 Revenue from Contracts with Customers:
- If risks and rewards, and the ability to direct the use of the asset, have passed to the buyer, the entity normally derecognises the asset at that point.
- Even if some consideration is still outstanding, as long as the revenue recognition and collectability criteria are met, the disposal gain is recognised at the time control transfers.
A common scenario is where the asset has been delivered and the buyer has started using it, but the final instalment is still within credit terms. In that case, you should not wait until full cash is collected to derecognise the asset.
Common forms of disposal: sale, scrapping and loss of control
Typical derecognition situations include:
- Sale: the asset is exchanged for cash or receivables.
- Scrapping / dismantling: the asset has no further use and is dismantled or abandoned.
- Loss of control: for example compulsory acquisition by government or surrender without consideration.
Sometimes the “use” changes but control stays within the entity. For example, when property is transferred from owner‑occupied (HKAS 16) to investment property (HKAS 40), this is a change in classification rather than derecognition.
2. Disposal gains and losses: why they are not revenue
HKAS 16 states that any gain or loss arising from derecognition of PPE is recognised in profit or loss. But it adds a very important sentence: the gain shall not be classified as revenue.
How to calculate disposal gains or losses
The basic formula is straightforward:
Disposal gain or loss = Disposal proceeds − Carrying amount
Disposal proceeds are determined using HKFRS 15 concepts of transaction price, which includes variable consideration and discounts.
Example:
- Carrying amount of the machine: 500,000
- Agreed selling price with the buyer: 600,000
- Early settlement discount granted: 10,000
- Cash received: 590,000
The disposal gain is 90,000 (590,000 − 500,000). It appears in profit or loss, typically under “other gains / loss on disposal of property, plant and equipment” or a similar line—not within “revenue”.
Why disposal gains cannot be reported as revenue
Under HKFRS 15, “revenue” is defined as an inflow arising from the entity’s ordinary activities. Selling PPE is usually not an ordinary activity; it is a one‑off disposal of a long‑term capital asset.
If disposal gains were included within revenue, several problems arise:
- Misleading users: readers might think the company’s sales performance is strong when in reality it simply sold assets.
- Damaged comparability: if one company includes disposal gains in revenue and another does not, their revenue figures are not comparable.
- Blurring business performance vs capital transactions: standard‑setters want to clearly separate “profit from doing business” from “profit from selling assets”.
This is why HKAS 16 explicitly blocks the flexibility to call disposal gains “revenue”.
3. Bearer plants: from “agriculture” back to “equipment”
Bearer plants are a key advanced topic in HKAS 16. In simple terms, bearer plants are plants that:
- Are held to produce agricultural produce over many years.
- Are not themselves primarily intended for sale (except perhaps as scrap).
- Can produce agricultural products repeatedly across multiple periods—for example fruit trees, grape vines, rubber trees.
Before the 2014 amendments, such plants were accounted for under HKAS 41 Agriculture at fair value less costs to sell, with fair value changes recognised directly in profit or loss.
Why move bearer plants into HKAS 16?
When the IASB reviewed this area, it noticed that:
- Economically, bearer plants behave more like “production equipment” than like typical biological assets held for sale.
- Grouping them with land, irrigation systems and machinery under HKAS 16 gives a more consistent classification by nature.
The 2014 amendments therefore redefined bearer plants to be scoped into HKAS 16:
- Initially measured at cost.
- Subsequently measured using either the cost model or the revaluation model.
- Depreciated and tested for impairment in the same way as other PPE.
By contrast, the harvested agricultural produce (for example fruit picked from the trees) remains within HKAS 41 and is measured at fair value less costs to sell.
Before maturity vs after maturity
In practice, you can think of bearer plant accounting in two stages:
- Pre‑maturity stage:
- Planting and cultivation costs are capitalised, often within an “immature bearer plants” or “bearer plants under development” line.
- When the plants reach a stage where they can bear produce on a sustained basis, the balance is transferred into the main PPE category for bearer plants.
- Post‑maturity stage:
- The plants are presented like other PPE: cost (or revalued amount) less accumulated depreciation and impairment.
- They are depreciated over their productive lives—for example, a fruit tree may bear fruit for 15–20 years.
This approach puts bearer plants into a familiar PPE framework, which most preparers and auditors already understand.
4. Bearer plants debates: information vs stability
Although most stakeholders supported bringing bearer plants into HKAS 16, there was considerable debate during the project.
Arguments in favour
Supporters highlighted that:
- Role is closer to equipment: bearer plants are used repeatedly to produce other items; they are not held primarily for sale, so their economics resemble machinery and factories.
- More stable and predictable accounting: shifting from a fair value‑through‑profit‑or‑loss model to a cost/revaluation model reduces earnings volatility, especially where fair value estimates are difficult or costly to obtain.
- Revaluation option preserves useful information: if management believes fair value is decision‑useful, it can still use the revaluation model and reflect value changes in OCI, rather than forcing all movements into profit or loss.
Concerns and reservations
Those with concerns focused on possible information loss or delayed recognition:
- Loss of timely information: moving from immediate fair‑value‑through‑profit‑or‑loss to cost model means users lose a direct line in the income statement showing current changes in the value of bearer plants.
- Cost and subjectivity of valuation: for large orchards or plantations, fair value can be costly and subjective; however, dropping fair value entirely might hide significant biological growth in some cases.
- How to present volatility: some argued that even if fair value information is kept, maybe changes should be presented in OCI instead of profit or loss to balance volatility and informativeness.
The final position of the standard‑setters can be summarised as:
- Treat bearer plants themselves as PPE under HKAS 16.
- If fair value information is important, use the revaluation model and note disclosures to supplement cost; do not force all fair value movements into profit or loss each period.
5. Testing‑phase revenue and the 2022 amendments: why no more “offsetting cost”?
Another hot advanced topic is the HKAS 16 amendment effective from 2022, dealing with “proceeds before intended use”—particularly revenue from selling products or services during the testing phase. The revised standard states that such proceeds can no longer be used to reduce the cost of PPE; they must go to the income statement.
Old practice: using testing revenue to “push down” asset cost
Before the amendment, two main practices existed:
- Some entities netted testing‑phase revenue against related costs and used the net amount to reduce the cost of PPE.
- Others recognised both the revenue and the costs directly in profit or loss.
The result was:
- Large differences in reported asset costs between companies with similar projects, making PPE less comparable.
- Opportunities to manage earnings by “hiding” part of the project’s operating results inside the asset cost, which then lowers future depreciation and inflates later profits.
The IASB and HKICPA concluded that this diversity needed to be removed, so the amended standard explicitly prohibits using such revenue to reduce PPE cost.
New requirement: revenue and related costs go through profit or loss
The revised HKAS 16 requires that:
- Before an asset is “available for its intended use”, any products produced or services provided while testing takes place are treated as normal sales.
- The related revenue and related costs are recognised in profit or loss in accordance with HKFRS 15 and HKAS 2 (or other relevant standards).
- They must not be used to reduce the cost of PPE.
The standard also requires clear disclosures, including:
- The amount of revenue from such testing‑phase sales.
- The amount of related costs.
- Where these amounts are presented in the income statement.
This improves:
- Transparency: users can see how much “testing operations” contribute to performance.
- Comparability of PPE cost: asset cost is no longer influenced by incidental sales strategies during construction.
The objections and how the standard‑setters responded
Some respondents raised objections, including:
- Testing‑phase revenue feels closely linked to acquiring the asset, so using it to offset cost “feels natural”.
- Separating testing‑related costs from other costs in practice may not be easy.
The standard‑setters’ responses included:
- The cost allocation framework in HKAS 2 Inventories already provides a workable basis for attributing costs to testing‑phase inventory; this is not a new, untested idea.
- Over the long run, putting this revenue in profit or loss improves consistency in revenue reporting—regardless of when the revenue arises—and reduces incentives to “massage” asset cost to manage future earnings.
6. Pulling it together: FAQs that connect rules to intent
To tie the three threads together, let’s use a few “frequently asked” exam and workplace questions.
FAQ 1: Why can’t disposal gains be treated as revenue?
- Rule: HKAS 16 requires gains or losses on derecognition of PPE to be recognised in profit or loss, but explicitly says such gains must not be classified as revenue.
- Reason: Under HKFRS 15, revenue arises from ordinary activities; PPE disposals are capital transactions, not core trading. Separating “business performance” from “asset disposals” improves comparability and avoids giving a misleading impression of operating success.
FAQ 2: Why are bearer plants moved into HKAS 16?
- Rule: Bearer plants fall under HKAS 16 as PPE and may use the cost or revaluation model, while the harvested agricultural produce remains under HKAS 41 at fair value less costs to sell.
- Reason: Bearer plants function like production equipment rather than inventory; bringing them into HKAS 16 allows the use of familiar depreciation and impairment frameworks and reduces profit volatility caused by fair value estimates, while still allowing fair value information through the revaluation model and disclosures.
FAQ 3: Why can’t testing‑phase revenue reduce PPE cost anymore?
- Rule: Proceeds from selling items produced during testing, and related costs, must be recognised in profit or loss and cannot be used to reduce PPE cost.
- Reason: This avoids hiding part of operational performance inside asset balances, keeps PPE cost more comparable across entities, and ensures all revenue—no matter when it arises—is presented in the income statement, improving faithful representation and transparency.
Key takeaways for students and junior accountants
- When you see a PPE disposal, always separate three questions: (1) Has control passed so that derecognition is appropriate? (2) What are the disposal proceeds under HKFRS 15? (3) How much gain or loss goes to profit or loss, clearly outside revenue.
- For bearer plants, ask whether the asset behaves like inventory or like equipment; if it is used repeatedly to produce agricultural produce, treat it as PPE and apply the HKAS 16 toolkit (cost vs revaluation, depreciation, impairment).
- For testing‑phase sales, resist the intuition to “offset cost”: treat all such revenue and costs as normal income statement items, and make sure your working papers clearly show how amounts were allocated under HKAS 2.
- In exams and in client files, always explain the logic behind the rule: does the treatment improve comparability, reduce earnings management, or better reflect the asset’s role? This kind of explanation stands out to markers and reviewers.
- When reading contracts, project budgets or board papers, flag items like asset sales, planting programmes and trial‑production sales early; they are classic areas where HKAS 16 interacts with HKFRS 15, HKAS 41 and HKAS 2, and they are exactly where junior staff can add value by spotting the issues.
If this article was helpful, you’re very welcome to subscribe to my Substack for free:
- All full articles are published on my website first.
- Whenever I finish a mini‑series on a standard, I’ll send one email that pulls the whole series together and links everything in one place, so you can revise without hunting around.
- I occasionally share small, practical tips from real‑life accounting work.
- When I release new PDF notes, in‑depth case studies or paid content in the future, email subscribers will be the first to know.
If you’d like to ask me questions or chat about your learning, you can follow me on Threads / IG and send me a DM — I’ll reply as far as I can.
And if you feel these resources have helped you, you can also buy me a coffee to support me in writing more.
罔相心室: https://chinese.iamdelusionman.com/
Zero-to-Acct Substack: https://zerotoacct.substack.com/
Thread: https://www.threads.com/@yickki_mong
IG: https://www.instagram.com/yickki_mong/
