IAS 16 sets out the principles for the recognition, measurement, and depreciation of tangible fixed assets, commonly referred to as Property, Plant, and Equipment (PPE). This standard ensures that the accounting treatment of such assets accurately reflects their use and value in a business's operations. For example, an organization may own buildings or machinery that are used to manufacture products or deliver services. The cost of these assets is initially recognized, and subsequently, their value is systematically allocated over their useful life through depreciation.

An important aspect of IAS 16 is distinguishing capital expenditures from revenue expenditures. Only the costs related to acquiring or preparing the asset for use are capitalized, while other expenses are expensed in the period they are incurred. For instance, the installation and initial testing of equipment are capitalized, while the routine maintenance of that equipment is recorded as a period expense.

In practice, this standard helps organizations maintain accurate financial records, supporting activities like financial planning or preparing financial statements. For example, adherence to IAS 16 enables the accurate reporting of fixed asset values on the Balance Sheet and ensures Income Statements reflect reasonable depreciation expenses over time.