Chapter 7 Inventories

Inventories
Inventories are assets that are:
a. Held for sale in the ordinary course of business (Finished Goods);
b. In the process of production for such sale (Work In Process); or
c. In the form of materials or supplies to be consumed in the production process or in the
rendering of services (Raw materials and manufacturing supplies).
Recognition

 Inventories are recognized when they meet the definition of inventory and they qualify
for recognition as assets, such as when legal title is obtained by the buyer from the
seller.
 Legal title normally passes when possession over of the goods is transferred.
 However, there may be cases where the transfer of control (ownership) does not
coincide with the transfer of physical possession.
Goods in transit

 FOB Shipping Point - ownership over the goods is transferred upon shipment. Therefore,
the goods in transit form part of the buyer’s inventories.
 FOB Destination - ownership over the goods is transferred only when the goods are
received by the buyer. Therefore, the goods in transit still form part of the seller’s
inventories.
Consigned goods

 Consigned goods are included in the consignor’s inventory.

 The consignee records the consigned goods received through memo entry only.
 Freight and other incidental costs of transferring consigned goods to the consignee form
part of the cost of the consigned goods. Repair costs for damages during shipment and
storage and other maintenance costs are charged as expense.
Inventory held or sold under financing agreements

 Ownership is normally not transferred when inventories are used

as collateral security for a loan. Therefore, the inventory remains in
the borrower’s (pledgor’s) inventory.
Retention of legal title under installment sale
A seller is not precluded from transferring ownership over an inventory sold in an installment
sale where possession is transferred to the customer but the seller retains legal title solely to
protect the collectability of the amount of consideration. In such case, the inventory is excluded
from the seller’s inventory and included in the buyer’s inventory.
Bill & hold arrangement
• A bill-and-hold arrangement is a contract (of sale) under which the seller
bills the buyer for goods sold but the seller retains physical possession until
the goods are transferred to the buyer at a future date.
• The goods sold under a bill and hold sale are excluded from the seller’s
inventory and included in the buyer’s inventory at the time of sale
when title passes to the buyer and he accepts billing, provided:
a. the reason for the bill-and-hold arrangement must be substantive (for
example, the buyer has requested the arrangement);
b. the product must be identified separately as belonging to the buyer;
c. the product currently must be ready for physical transfer to the buyer;
and
d. the seller does not have the ability to use the goods or to direct them to
another customer.
Lay away sale
• Lay away sale is a type of sale in which goods are delivered only
when the buyer makes the final payment in a series of installments.
This is different from a regular installment sale wherein goods are
delivered to the buyer at the time of sale.
• The goods sold under a lay away sale are included in the seller’s
inventory until the goods are delivered to the buyer. Delivery is
made after the final installment payment is paid. However, when
significant payments have already been made, the goods may be
included in the buyer’s inventory, provided delivery is probable.
Financial statement presentation
• All items that meet the definition of inventory are
presented on the statement of financial position as one
line item under the caption “Inventories.” The
breakdown (as finished goods, WIP and Raw materials)
is disclosed in the notes.
Inventory systems
1. Perpetual inventory system – All transactions involving the
acquisition, purchase returns, incurrence of freight-in, sales and
sales returns are recorded in the “Inventory” account (real account)
and the “Cost of sales” account, as appropriate.
2. Periodic inventory system – Uses the “Purchases,” “Purchase
returns,” and “Freight-in” accounts (nominal accounts). Cost of
sales is determined only after a physical count is performed.
Inventory systems - continuation
• Under the periodic inventory system, cost of sales is
determined using the following formula:

Beg. Inventory xx
Add: Net purchases xx
Total goods available for sale xx
Less: End. Inventory (Physical count) (xx)
Cost of sales xx

Inventory errors under the periodic system

• Ending inventory : Profit ------ Direct relationship
If ending inventory is overstated, Profit is also overstated.
Measurement
• Inventories are measured at the lower of cost and net
realizable value (NRV).
• The cost of inventories comprises all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories
to their present location and condition.
• Net realizable value (NRV) is the estimated selling price in the
ordinary course of business less the estimated costs of completion
and the estimated costs necessary to make the sale.
Costs that are EXPENSED when incurred
1. Abnormal amounts of wasted materials, labor or other
production costs.
2. Selling costs, for example, advertising and promotion costs and
delivery expense or freight out.
3. Administrative overheads that do not contribute to bringing
inventories to their present location and condition.
4. Storage costs, unless those costs are necessary in the production
process before a further production stage.
Recording the acquisition of inventory
• Trade discounts and Cash discounts
• Gross method vs. Net method
Cost of inventories purchased in lump sum
• The cost of different inventories having different values purchased
on a lump sum basis is allocated to such inventories using their
relative sales prices.
Cost Formulas
1. Specific identification - is used for inventories that are not
ordinarily interchangeable (i.e., inventories that are unique). Cost
of sales is the cost of the specific inventory that was sold.
2. FIFO – cost of sales is based on the cost of inventories that were
purchased first. Consequently, ending inventory represents the cost
of the latest purchases.
3. Weighted Average Cost – cost of sales is based on the average
cost of all inventories purchased during the period.
 Wtd. Ave. Cost = (TGAS in pesos ÷ TGAS in units)
Write down of inventories
• Inventories are usually written down to net realizable value on an
item by item basis.
• If the cost of an inventory exceeds its NRV, the inventory is written
down to NRV, the lower amount. The excess of cost over NRV
represents the amount of write-down.
Reversal of write-downs
• The amount of reversal to be recognized should not
exceed the amount of the original write-down
previously recognized.

The Inventory T-account

Accounts payable Inventory

xx beg. beg. xx
Payments xx xx Net purchases Net purchases xx xx COGS
end. xx xx end.
Chapter 8 INVENTORY ESTIMATION
Inventory estimation
1. Gross profit method
a. GPR based on sales
b. GPR based on cost
2. Retail method
a. Average cost method
b. FIFO cost method
GROSS PROFIT METHOD
Gross profit rate based on sales is computed by dividing
gross profit by the net sales.
Gross profit rate based on cost is computed by dividing
gross profit by the cost of goods sold.

COST RATIO
• GPR based on sales
Example: GPR based on sales is 25%.
Cost ratio = (100% - 25%) = 75%
• GPR based on cost
Example: GPR based on cost is 25%.
Cost ratio = (100% ÷ 125%) = 80%
RETAIL METHOD
• The cost ratio is computed directly without regard to
the gross profit rate, unlike in gross profit method.
• Net mark-ups and net mark-downs are considered.
DEFINITION OF TERMS
• Net markups (markups less markup cancellations) are net increases
above the original retail price, which are generally caused by changes in
supply and demand.
• Markup refers to increase above the original retail price.
• Original retail price refers to the selling price at which the goods are first
offered for sale.
• Markup cancellation refers to decrease in selling price that does not reduce
the selling price below the original retail price.
• Net markdowns (markdowns less markdown cancellations) are net
decreases below the original retail price.
• Mark-down refers to the decrease below the original retail price.
• Markdown cancellation refers to increase in selling price that does not
raise the selling price above the original retail price.
APPLICATIONS OF THE RETAIL METHOD
1. Average cost method

2. FIFO cost method

Chapter 9 INVESTMENTS
Financial instruments
• Financial instrument is “any contract that gives rise to
a financial asset of one entity and a financial liability or
equity instrument of another entity.” (PAS 32)
• Financial instruments include both financial assets and
financial liabilities.
• Financial instruments include equity instruments of
another entity but exclude an entity’s own equity
instruments. An entity’s own equity instruments are
neither assets nor liabilities, but rather equity.
Financial assets
A financial asset is any asset that is:
a. Cash;
b. Equity instrument of another entity; or
c. Contractual right to receive cash or another financial
asset or to exchange financial instruments with another
entity under conditions that are potentially favorable.
Financial liabilities
INTERMEDIATE ACCTG 1A (by:
MILLAN)
A financial liability is any liability that is:
a. a contractual obligation to deliver cash or another
financial asset to another entity; or
b. a contractual obligation to exchange financial
instruments with another entity under conditions that
are potentially unfavorable
initial recognition and Classification
• Financial assets are recognized only when the entity
becomes a party to the contractual provisions of the
instrument.
Basis of classification
Financial assets are classified based on:
1. the entity’s business model for managing the financial assets;
and
2. the contractual cash flow characteristics of the financial asset.
Equity vs. Debt instruments
• Only debt instruments can be classified under the
Amortized Cost or FVOCI (mandatory) measurement
categories.
• Equity instruments are measured at FVPL, unless the
entity makes an irrevocable election on initial
recognition to measure them at FVOCI.
• A debt instrument that is not measured at amortized cost
or at FVOCI is measured at FVPL.
Business models
Fair Value Measurement
• Fair value is “the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date.” (PFRS 13)
• Fair value is based on the market price of the asset in a:
a. principal market; or
b. the most advantageous market (in the absence of a principal
market)
• The market price used in measuring fair value is not adjusted
for any transaction costs, but is adjusted for any transport
costs.
Formula
Market price (in ‘principal’ or ‘most advantageous’ market) xx

Less: Transport costs (xx)

Fair value xx

Fair value hierarchy

Level 1 Observable inputs that reflect quoted prices for identical assets or  
liabilities in active markets.
Most reliable
 
 
 
Level 2 Inputs other than quoted prices included in Level 1 that are  
observable for the asset or liability either directly or through
corroboration with observable data.  

   
 
Least reliable

Level 3 Unobservable inputs (for example, an entity’s own data or

assumptions).
 
Chapter 10 INVESTMENTS IN DEBT
SECURITIES
Bonds
• Bonds are long-term debt instruments similar to term
loans except that they are usually offered to the public
and sold to many investors.
• Bond indenture is the contractual arrangement between
the issuer and the bondholders. It contains restrictive
covenants intended to prevent the issuer from taking
actions contrary to the interests of the bondholders. A
trustee, often a bank, is appointed to ensure compliance.
Types of bonds
• Term bonds – bonds that mature on a single date.
• Serial bonds – bonds that mature in a series of maturity dates.
• Registered bonds – bonds issued in the name of the holder (owner).
Interest payments are sent directly to the holder.
• Coupon (bearer) bonds – bonds that can be freely transferred and have
a detachable coupon for each interest payment.
• Zero-coupon bonds (strip bonds) – bonds that do not pay periodic
interests. Principal and compounded interest are due only at maturity date.
• Callable bonds – bonds containing call provisions giving the issuer
thereof the right to redeem the bonds prior to their maturity date.
• Convertible bonds – bonds giving the holder thereof the option of
exchanging the bonds for shares of stocks of the issuer.
Accounting for investments measured at amortized cost
• The accounting for investments in bonds that are measured
at amortized cost is similar to the accounting for notes and
loans receivables, in the sense that it also involves the
following:
a. Present value computations
b. Preparation of amortization table (Effective interest
method)
Discount vs. Premium
• If the carrying amount is less than the face amount, the
difference represents a discount.
• If the carrying amount is more than the face amount,
the difference represents a premium.
• If there is a discount, the EIR is higher than the NIR.
• If there is a premium, the EIR is lower than the NIR.
• Discount or premium is amortized using the effective
interest method.

Effect of discount amortization

You have acquired a bond with face amount of ₱5,000 for ₱4,000.
Would this be favorable or an unfavorable on your part?
Favorable. Why? --- You will be collecting ₱5,000 (excldg. interest)
while your cash outflow is only ₱4,000.
On acquisition date, it seems you have earned a “gain” of ₱1,000 right?
Yes; however, the PFRSs prohibit you from recognizing this “gain”
outright. You need to amortize it over the term of the bond.
The “gain” represents the discount (Carrying amt. less than Face amt.).
The effect of the amortization is an increase in interest income.
Over the term of the bonds, total interest income will be greater than
total collections of interests by ₱1,000.
Transaction costs
• Transaction costs incurred in the acquisition of bonds to be
measured at amortized cost are included as part of the cost of the
investment.
Sale of bonds prior to maturity
• When bonds are sold prior to maturity, the difference between the
net disposal proceeds and the carrying amount of the bonds,
adjusted for any discount or premium amortization up to date of
disposal, is recognized as gain or loss in profit or loss.
Serial bonds
• Serial bonds are bonds with series of maturity dates. Serial bonds
are accounted for similar to term bonds. However, the periodic
collections on serial bonds include not only collections for interests
but also collections for principal.
Zero-coupon bonds
• Zero-coupon bonds are bonds that do not pay periodic interests.
Both principal and interest are due only at maturity date.

Financial assets measured at FVOCI (mandatory)

• Initial measurement: Fair value + Transaction costs.
• Subsequent measurement: Fair value
o Changes in fair value are recognized in OCI.
o Impairment losses and gains are recognized in profit or loss.
o Interest revenue is computed using the effective interest method and is
recognized in profit or loss.
• Derecognition: When the asset is derecognized, the cumulative balance of
gains and losses in equity are transferred to profit or loss as a
reclassification adjustment.
• The amounts recognized in profit or loss for a debt instrument measured at
FVOCI are the same as the amounts that would have been recognized in
profit or loss if the debt instrument had been measured at amortized cost.
Chapter 11 INVESTMENTS – ADDITIONAL
CONCEPTS
Regular way purchase or sale of financial assets
• A regular way purchase or sale is a purchase or sale of a financial
asset under a contract whose terms require delivery of the asset
within the time frame established generally by regulation or
convention in the marketplace concerned.
• Trade date accounting vs. Settlement date accounting
a. Under trade date accounting, the financial asset purchased (s0ld) is
recognized (derecognized) at the trade date (i.e., the date the entity
commits to purchase or sell the financial asset).
b. Under settlement date accounting, the financial asset purchased
(s0ld) is recognized (derecognized) at the settlement date (i.e., the
date the ownership of the financial asset is transferred).
Fair value change between trade date & settlement date
• For purchases of FVPL and FVOCI assets (but not
amortized cost), the buyer recognizes the change in fair
value between the trade date and the settlement date.
• For sale transactions, the seller does not recognize the
change in fair value between the trade date and the
settlement date.

Reclassification
• After initial recognition, financial assets are reclassified only when
the entity changes its business model for managing financial assets.
• Reclassification date is the first day of the first reporting period
following the change in business model that results in an entity
reclassifying financial assets.
Reclassification of debt-type financial assets
Notes on reclassification
• Only debt instruments can be reclassified. Equity instruments
(e.g., investments in shares of stocks) cannot be reclassified.
• Financial assets cannot be reclassified into or out of the “designated
at FVPL” and “FVOCI - election” classifications.
• The initial measurement is fair value at reclassification date,
except for a reclassification from FVOCI to Amortized cost where the
fair value on reclassification date is adjusted for the cumulative
balance of gains and losses previously recognized in OCI
Impairment
• The impairment requirements of PFRS 9 apply equally to debt-type
financial assets that are measured either at amortized cost or at
FVOCI.
• Impairment gains or losses on debt instruments measured at FVOCI
are recognized in profit or loss. However, the loss allowance is
recognized in OCI and does not reduce the carrying amount of the
financial asset in the statement of financial position.
Dividends
• Only cash and property dividends received from equity securities
may be recognized as dividend revenue.
Stock rights
• Stock rights, being equity instruments, are measured at fair value
Disclosure of Risks on financial instruments
1. Credit risk - The risk that one party to a financial instrument will cause a
financial loss for the other party by failing to discharge an obligation.
2. Liquidity risk - The risk that an entity will encounter difficulty in meeting
obligations associated with financial liabilities that are settled by delivering cash or
another financial asset.
3. Market risk - The risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in market prices. Market risk
comprises the following.
a) Interest rate risk
b) Currency risk
c) Other price risk

Chapter 14 Investments in Associates

Definition of terms
• Associate – an entity, including an unincorporated
entity such as a partnership, over which the investor has
significant influence.
• Significant influence – the power to participate in
the financial and operating policy decisions of the
investee but is not control or joint control over those
policies. PAS 28)
Significant influence
• Significant influence is presumed to exist if the investor holds,
directly or indirectly (e.g. through subsidiaries), 20% or more
of the voting power of the investee, unless it can be clearly
demonstrated that this is not the case.
• For significant influence to exist, the investment should provide
the investor voting rights. Thus, investment in preference
shares, regardless of the percentage of ownership, is not
accounted for under PAS 28 because preference shares do not
give the investor voting rights.
Evidence of existence of significant influence by
an investor
The following may provide evidence of significant influence even if
the percentage of ownership interest is less than 20%.
a) Representation on the board of directors or equivalent governing
body of the investee;
b) Participation in policy-making processes, including participation
in decisions about dividends or other distributions;
c) Material transactions between the investor and the investee;
d) Interchange of managerial personnel; or
e) Provision of essential technical information

Equity method
• Investments in associates or joint ventures are accounted
for using the equity method. Under this method, the
investment is initially recognized at cost and
subsequently adjusted for the investor’s share in the
changes in the EQUITY of the investee.

T-accounts
 Investment in associate Sh. In P/L of associate
beg. xx
Sh. in profit xx xx Sh. in loss Sh. in loss xx xx Sh. in profit
Sh. in (Cr.) OCI xx xx Sh. in (Dr.) OCI
xx Sh. in dividends
Undervaluation of Undervaluation of
xx asset asset xx
xx end. xx

Preference share is Preference share is Preference share is

cumulative noncumulative redeemable

 Deduct one-year  Deduct dividends only  No dividend is

dividend, whether when declared before deducted when
declared or not computing share in computing share in
before computing associate’s profit or loss. associate’s profit or
share in associate’s loss.
profit or loss.

Preference shares issued by an associate

If an associate has outstanding preference shares that are held by
parties other than the investor, the investor computes its share of
profits or losses after making the following adjustments.

Discontinuance of the use of equity method

• An investor starts to apply the equity method on the date it obtains
significant influence and ceases to apply the equity method on the
date it loses significant influence.
• On the loss of significant influence, the investor shall measure at
fair value any investment the investor retains in the former
associate. The investor shall recognize in profit or loss any
difference between:
a. The fair value of any retained investment and any proceeds
from disposing of the part interest in the associate; and
b. The carrying amount of the investment at the date when
significant influence is lost.
Classification of retained interest
Following the discontinuance of equity method, the retained interest
shall be classified as follows:

Loss of significant influence due to Accounting treatment

 Decrease of ownership interest  Financial asset at fair value

below 20%. under PFRS 9

 Increase of ownership above  Investment in subsidiary under

50% PFRS 3 and PFRS 10

Reclassification of cumulative OCI

• If an investor loses significant influence over an associate, all
amounts recognized in other comprehensive income in relation to
the associate shall be accounted on the same basis as would be
required if the associate had directly disposed of the related assets or
liabilities.
Change to equity method - Gain of significant
influence
• Significant influence may be achieved from additional purchase of shares
resulting to an increase in ownership interest. Although, not specifically
addressed in PAS 28, this type of acquisition may be accounted for by
reference to PFRS 3 Business Combinations particularly on the accounting
for business combination achieved in stages.
• “In a business combination achieved in stages, the acquirer shall remeasure
its previously held equity interest in the acquiree at its acquisition-date
fair value and recognize the resulting gain or loss, if any, in profit or
loss or other comprehensive income, as appropriate.” (PFRS 3.42 )

Share in losses of associate

If an investor’s share of losses of an associate equals or exceeds its
interest in the associate, the investor discontinues recognizing
its share of further losses.

Interest in the associate includes the following:

1. Investment in associate measured under equity method
2. Investment in preference shares of the associate
3. Unsecured long-term receivables or loans
Interest in the associate does not include the following:
1. Trade receivables and payables
2. Secured long-term receivables or loans

After the investor’s interest in the associate is reduced to zero,

additional losses are provided for, and a liability is recognized, only to
the extent that the investor has incurred
a. Legal or constructive obligations or
b. Made payments on behalf of the associate.
• Any other losses are not recognized.

• If the associate subsequently reports profits, the investor resumes

recognizing its share of those profits only after its share of the
profits equals the share of losses not recognized.
Chapter 15
PROPERTY, PLANT & EQUIPMENT

Overview on the topic:

Chapter Title Sub-topics___
15 PPE –Part 1 Initial recognition & measurement
16 PPE –Part 2 Subsequent measurement

Related standard:
• PFRS 16: Property, Plant and Equipment
Characteristics of PPE
a. Tangible assets – items of PPE have physical substance
b. Used in normal operations – items of PPE are used in
the production or supply of goods or services, for rental,
or for administrative purposes
c. Long-term in nature – items of PPE are expected to be
used for more than a year
Recognition
The cost of an item of property, plant and equipment shall be
recognized as an asset only if:
a. it is probable that future economic benefits associated with
the item will flow to the entity; and
b. the cost of the item can be measured reliably.

Initial measurement
• An item of PPE is initially measured at its cost.
Elements of Cost
1. Purchase price, including non-refundable purchase
taxes, after deducting trade discounts and rebates.
2. Costs directly attributable to bringing the asset to the
location and condition necessary for it to be capable of
operating in the manner intended by the management.
3. Present value of decommissioning and restoration
costs to the extent that they are recognized as obligation

Cessation of capitalizing costs to PPE

• Recognition of costs in the carrying amount of an item of
PPE ceases when the item is in the location and
condition necessary for it to be capable of operating in
the manner intended by management.

Measurement of Cost
• The cost of an item of PPE is the cash price equivalent at the
recognition date. If payment is deferred beyond normal credit
terms, the difference between the cash price equivalent and the total
payment is recognized as interest over the period of credit unless
such interest is capitalized in accordance with PAS 23 Borrowing
Costs.
Cost of Land (Property)
1. Purchase price including other necessary costs such as broker’s commissions.
2. Closing costs, such as titling costs, attorney’s fees, and recording fees.
3. Costs incurred in getting the land in the condition for its intended use, such as
surveying, grading, filling, draining, and clearing.
4. Unpaid taxes prior to date of acquisition assumed by the buyer.
5. Assumption of any liens, mortgages, or encumbrances on the property
6. Special assessments for local government-maintained improvements, such as
pavements, street lights, sewers, and drainage systems.
7. Option paid to acquire the land.
8. Costs incurred to induce tenants to vacate premises and costs of relocating and
reconstructing property belonging to others.
9. Initial estimate of restoration costs for which the entity has a present obligation
10. Any additional land improvements that have indefinite useful life such as costs of
draining, clearing, grading, leveling and filling, surveying, subdividing, and other
permanent improvements.
Land improvement
• Land improvements are enhancements to the land which have
definite useful life, such as private driveways, walks, fences,
parking lots, drainages and water systems, and cost of trees, shrubs,
plants and other landscaping.
Cost of purchased Building (Plant)
1. Purchase price including other necessary costs such as broker’s
commissions and legal fees.
2. Assumption of any liens, mortgages, or encumbrances on the
property
3. Option paid to acquire the building.
4. Unpaid taxes prior to date of acquisition assumed by the buyer.
5. Costs incurred to induce tenants to vacate premises.
6. Costs of getting the building in the condition for its intended
use, such as remodeling, renovation, and other repairs prior to
occupancy.
Cost of self-constructed Building (Plant)
1. Materials, labor, and overhead costs incurred during construction.
2. Architectural costs, supervision costs, and costs of building permit
3. Excavation costs
4. Insurance costs and safety inspection fees
5. Costs of temporary structures built during construction
6. Interest on borrowings made to finance construction (Borrowing
costs are discussed in Chapter 18)
Cost of self-constructed Building - continuation
The following costs are not included in the cost of a self-constructed
building:
1. Internal profits or savings on self-construction
2. Cost of abnormal amounts of wasted material, labor, or other
resources due to inefficiencies
3. Costs of uninsured hazards or claims for uninsured accidents
4. Costs of private driveways, walks, permanent fences, parking lots,
and drainages and water systems that are not included in the
building’s blueprint
Building improvement
• Building improvements refer to costs incurred subsequent to
occupancy of a purchased building or subsequent to completion of a self-constructed building
that either increase the useful life of the building or improve its current state.

Cost of equipment
1. Purchase price including other necessary costs such as broker’s
commissions and non-refundable purchase taxes.
2. Freight, handling charges, and insurance on the equipment while in
transit
3. Cost of necessary special foundations or platform,
4. Assembling and installation costs
5. Costs of testing and conducting trial runs
6. The initial estimate of decommissioning and restoration costs for
which the entity has a present obligation
• The following costs are not included in the cost of an equipment:
1. Cost of relocating the equipment after it has been put to the
location and condition originally intended by management.
2. Cost of training personnel who will be responsible in operating the
equipment.
3. Cost of dismantling and removing an old equipment belonging to
the entity prior to the installation of a new equipment.
Lump-sum purchase
• The acquisition cost of a group of items of PPE acquired on a lump-
sum price (basket price) is allocated to the individual assets
based on their relative fair values at the date of purchase.
Demolition costs
• The accounting treatment for demolition costs depends on the reason for the
demolition.
Example:
Case: An old structure is demolished to make way for the construction of a new
building.
Accounting: The demolition costs are considered as costs of site preparation
under PAS 16.; and therefore, capitalized as cost of the new building.
Any proceeds from sale of salvaged materials from the demolition are
deducted from the demolition cost that is capitalized to the new
building.
Acquisition through exchange
• If the exchange has commercial substance, the asset received from
the exchange is measured using the following order of priority:
a. Fair value of asset Given up Plus cash Paid/ minus cash received
b. Fair value of asset Received
c. Carrying amount of asset Given up Plus cash Paid/ minus cash received
• If the exchange lacks commercial substance, the asset received from
the exchange is measured at (c) above.

Acquisition through issuance of own equity

instrument or debt instrument
The assets acquired is measured using the following order of priority:
1. Fair value of asset Received
2. Fair value of instrument Issued
Acquisition by donation
Items of PPE received as donation are measured at fair value and
accounted for as:
a. Income – if the donor is an unrelated party.
b. Donated capital – if the donor is an owner (shareholder).
c. Government grant, in accordance with PAS 20 Accounting for
Government Grants and Disclosure of Government Assistance.
Accounting (see Chapter 17) – if the donor is the government.