ITSMAJGC37

CHAPTER 25: PROPERTY, PLANT AND EQUIPMENT (PPE)

PROPERTY, PLANT AND EQUIPMENT- Property, plant, and equipment are physical or tangible assets that are long-term assets that
typically have a life of more than one year.

I. CHARACTERISTICS OF PPE
1. PPE are tangible assets (it has physical substance).
2. PPE are used in business, is being used in production, supple goods or services, rental purpose or for administrative
purpose.
3. PPE is expected to be use over a period of more than one year.
4.
Example of PPE

 Land  Furniture and Fixtures

 Building  Office Equipment
 Machinery  Tools
 Transportation (Ship, truck, Aircraft)  Bearer Plants

II. MEASUREMENT OF PPE

Asset including PPE shall be measure at cost (amount of cash or cash equivalent paid, and the fair value of the other consideration
given to acquire an asset at the time of acquisition or consideration

Element of Cost:

a) Purchase Price including import duties, nonrefundable purchase taxes, deduction discounts and rebate
b) Directly attributed cost to bring asset to location necessary for it to be capable of operating in manner.
1. Directly Attributed cost qualify for recognition and added to the cost
 Cost of Employee benefits arising directly from the acquisition of PPE
 Cost of site preparation
 Initial delivery and handling cost
 Installation and assemble cost
 Professional Fees
 Cost of testing if the asset is functioning properly
2. Cost not qualify for recognition and consider as expense
 Cost of opening a new facility
 Cost of introducing a new product/ service (including advertising and promotion)
 Cost of conduction business in a new location or new class of customer (including cost for staff training)
 Administration and other general overhead costs
 Cost incurred while item capable of operating in the manner has brought in to use or is operated at less
than full capacity
 Initial operating losses
 Cost of relocating or reorganizing part or all of an entity’s operation
3. Initial estimate of cost of dismantling and removing the item and restoring the site on which is located, the
obligation for which an entity incurs.
III. MEASUREMENT AFTER RECOGNITION

Entity can choose either the cost model or revaluation model for the PPE. The entity shall apply the accounting
policy to an entire class of PPE.

Cost model- PPE are carried at COST less any accumulated depreciation and any accumulated impairment loss.

Revaluation model is carried at revaluated CARRYING AMOUNT. The revalued carrying amount is the fair value at the date of
revaluated less subsequent accumulated depreciation and subsequent accumulated implement loss.
IV. ACQUISITION OF PROPERTY

 Cash Basis  Exchange

 On account  Donation
 Installment basis  Government Grant
 Issuance of share capital  Construction
 Issuance of Bonds Payable

a. ACQUISITION BY CASH BASIS

Cost of an item is based on cash price equivalent at the recognition date. Includes cash paid plus directly attributable
cost such as freight, installation cost and other cost necessary in bringing the asset to the location and condition for the
intended use.

If the assets are acquired at a “basket price” or lump sum price it is necessary to apportion the single price to the asset
acquired on the basis of relative fair value.

EXAMPLE:

A land and building was bought for 6,000,000 at the time of acquisition the land cost 2,000,000 and building
3,000,000.

Fair Value Friction Allocated Cost

Land 2,000,000 2/5 2,400,000
Building 3,000,000 3/5 3,600,000
5,000,000 6,000,000

b. ACQUISITION ON ACCOUNT
Asset with a cash discount the asset is recorded in invoice price minus discount. Regardless if the discount was taken or
not. If the discount was not taken it is shown as other expense.
Cash discount is recorded as reduction of cost and not as income. The business can choose if they want to record as gross
method or net method.
Example:
An equipment was purchase for P200, 000, 3/10, n/30.
GROSS METHOD

1. To record the acquisition 3. To record the payment beyond the discount

Equipment 200,000 period
Accounts Payable200,000 Accounts payable 200,000
2. To record the payment within the discount Purchase Discount Lost 6,000
period Cash 200,000
Accounts Payable 200,000 Equipment 6,000
Cash 194,000
Equipment (200k x 3%) 6,000

NET METHOD To record the payment beyond the discount

To record the acquisition period
Equipment 200,000 Accounts payable 194,000
Accounts Payable 200,000 Purchase Discount Lost 6,000
Cash 200,000

To record the payment within the discount

 period
Accounts Payable 194,000
c. ACQUISITION ON INSTALLMENT BASIS

When the payment for the item for PPE is deferred beyond normal credit term. The cost is the CASH PRICE equivalent. If
the excess of the installment price over the cash price then it’s treated as an interest to be amortized over the credit period.
Example:
Machinery was purchase in an installment price of 350,000. The terms are 50,000 down and the palace is paid in three equal
installment. The cash price of the machinery is 290,000. A promissory note is issued for the installment basis of 300,000.

To record the acquisition To record the first installment payment

Machinery 290,000 Notes Payable 100,000
Discount on notes Payable 290,000 Accounts Payable 100,000

Note payable 60,000 To record the acquisition

Note payable 300,000 Interest Expense 200,000
Cash 50,000 Discount on Note Payable 200,000

NOTES PAYABLE FRICTION INTEREST EXPENSE

FIRST YEAR 300,000 3/6 30,000
SECOND YEAR 200,000 2/6 20,000
THIRD YEAR 100,000 1/6 10,000
600,000 60,000

d. ISSUANCE OF SHARE CAPITAL

Philippine GAAP provides that if share issued for consideration other than actual cash, proceeds shall be measured at fair value
of the consideration received.
The issuance is measure at an amount equal to the following in order of priority:
1. Fair Value of the PROPERTY RECEIVED
2. Fair Value of the SHARE CAPITAL
3. Fair value or STATEDED VALUE OF THE SHARE CAPITAL
ILLUSTRATION:
A piece of land is acquired by issuing P20, 000 share with pare value of P50. At the time of acquisition, the fair value of the
land is P1, 000,000 and the share is quoted at P90 per share.

1. The fair value of the land is used 3. The par value of the share capital is used
Land 1,600,000 Land 1,000,000
Share Capital (20,000 x 50) 1,000,000 Share Capital 1,000,000
Share Premium 600,000
2. Fair value of the share capital used The measurement of the land using the FAIR VALUE OF THE
Land (20,000 x 90) 1,800,000 LAND is preferable
Share Capital 1,000,000
Share Premium 800,000

e. ISSUANCE OF BONDS PAYABLE

The entity will measure the asset at FAIR VALUE PLUS TRANSACTION COST that are directly attribute to the issue of the
financial liability. Accordingly, the asset acquired by issuing bonds payable is measure in the following order:

a. Fair Value of BONDS PAYABLE

b. Fair Value of ASSET RECEIVED
c. Face amount of BONDS PAYABLE

ILLUSTRATION:
A building is acquired by issuing bonds payable with face amount of P 5,000,000. At the time of acquisition, the fair value of the
building is P 6,000,000 and a quoted price of the bonds is P 5, 800,000.

The fair value of the bonds payable is used The face amount of the bonds payable is used
Building 5,800,000 Building 5,000,000
Bonds Payable 5,000,000 Bonds Payable 5,000,000
Premium on Bonds Payable 800,000
The fair value of the building is used The measurement of the building using the FAIR VALUE OF
Building 6,000,000 BONDS PAYABLE IS PREFERABLE
Bonds Payable 5,000,000
Premium on Bonds Payable 1,000,000

f. EXCHANGE
PAS 16 par 24, cost of an item of PPE acquired in exchange for a nonmonetary asset or combination of monetary and
nonmonetary asset is measured at FAIR VALUE. However, the exchange is recognized at CARRYING VALUE under following
circumstances:
 Exchange LACKS COMMERCIAL SUBSTANCE
 The fair value of the asset given r the value of the asset received is NOT RELIABLY MEASURABLE

COMMERCIAL SUBSTANCE- is anew notation and is defined as the event or transaction causing the cash flows of the entity
to change significant by reason of exchange.

 EXCHANGE WITH COMMERCIAL SUBSTANCE- the cost of the property is equal to the following
i. Fair value of asset given PLUS any cash payment on the account of the PAYOR
ii. Fair value of asset given MINUS any cash received on the account of the RECIPIENT.

TRADE-IN- form on an exchange where the property is acquired by exchanging another property as part of payment and
the balance payable in cash or any other form of payment in accordance with agreed terms. It involves a no dealer
acquiring asset from a dealer. The asset is recorded in the order of priority

 Fair value of an asset plus cash payment

 Trade in value of asset plus cash payment (in effect this is the fair value of the asset received.

g. DONATION
Philippine GAAP provided that contribution received from SHAREHOLDERS is recorded as FAIR VALUE with the credit going
to donated capital. EXPENSE incurred in connection with the donation is charged to the donated capital account. However
DIRECTLY ATTRIBUTABLE COST INCURRED SUBSEQUENTLY shall be CAPITALIZED.
Donation received form NONSTAKEHOLDERS is recorded as FAIR VALUE and recognized as INCOME.

h. CONSTRUCTION
The cost of self-constructed asset is determine principles as for an acquired asset and shall include:
 Direct cost of MATERIALS
 Direct cost of LABOR
 Indirect cost and incremental overhead especially identifiable or traceable to the construction

V. DERECOGNITION
PAS 16 par 67, CARRYING AMOUNT of an item of PPE shall be derecognized on disposal or when no future economic
benefits are expected from the use or disposal. The gain or loss from derecognized of PPE shall be included in Profit or loss.
FULLY DEPRECIATED PROPERTY
The property said to be fully depreciated when the carrying amount is equal to zero, or the carrying amount is equal to the
residual value.
PROPERTY CLASSIFIED AS HELD FOR SALE
PRFS 5 PAR 7, provides PPE classified “HELD FOR SALE” if the asset is available for immediate sale WITHIN ONE YEAR from
the date of classification as held for sale. It is included from PPE but classified as CURRENT ASSET. Property classified as held for sale
SHALL NOT BE DEPRECIATED