PAS 16- PROPERTY, PLANT, & EQUIPMENT

1. Objective, Scope, and Definition

Objective: prescribe the accounting treatment of PPE Measurement
Why? Allows users to discern information about: 2. Initial Measurement:
- entity’s investment in property, plant and equipment 1. Cost (cash price equivalent at recognition date)
- changes in investment Cost= Purchase price + Directly attributable costs + Removal
Accounting Issues: costs
(1) Recognition of assets Purchase price- import duties, non-refundable purchase taxes,
(2) Determination of carrying amounts after deducting trade discounts and rebates
(3) Depreciation charges Directly attributable costs- bringing the asset to the location
(4) Impairment losses and condition necessary for the intended use of the manager
Beyond the scope: ○ Cost of employee benefits (construction and acquisition
(1) Property, plant and equipment classified as held for of the item of PPE)
sale in accordance to PFRS 5 ○ Cost of site preparation
(2) Biological asset related to agricultural activity other ○ Initial delivery and handling costs
than bearer plants ○ Installation and assembly costs
(3) The recognition and measurement of exploration and ○ Cost of testing functionality
evaluation of assets (PFRS 6) ○ Professional fees
(4) Mineral rights and mineral reserves (oil, natural gas, Removal costs-costs of dismantling and removing the item
and similar non-regenerative resources) and restoring the site
● Property, plant and equipment that is used to develop
or maintain the assets listed above are within the Cost that do NOT form part of PPE:
scope of PAS 16 ○ Cost of opening new facility
○ Cost of introducing a new product or service (advertising
● Property, Plant, and Equipment- tangible items that and promotional activities)
are: ○ Cost of conducting business in a new location and
a. Held for use in the production or supply of goods or customers (staff training)
services, for rental to others, or for administrative ○ Administration and other general overhead costs
purposes, ○ Cost incurred while an item capable of operating in the
b. Are expected to be used during more than one period manner intended by management has yet to be bought or
is operating at less than full capacity
Recognition ○ Initial operating losses
When to recognize? ○ Cost of relocating or reorganizing
The cost of PPE shall be recognized if, and only if: ○ Cost of any abnormal amounts of wasted material, labor,
a. Is it probable for future economic benefits associated other resources
with the item will flow to the entity (company will
gain rewards from using the assets as well as risks ● You do NOT offset the cost of PPE - some operations
associated with it) occur in connection with the construction or development
b. Cost of the item can be measured reliably of PPE, but are not necessary to bring the item to the
Classification of spare parts, stand-by equipment and location or as intended by management (income and
servicing equipment: related expenses will be recognized in profit or loss and
either: included in their respective classifications of income and
a. PPE: if it meets the definition and recognition expense)
criteria ● Internal profits are eliminated in arriving at costs of PPE
b. Inventory: if it doesn’t meet the definition and (deduction of the cost of PPE due to savings, or internal
recognition criteria profits is not allowed)
*standard does not prescribe the unit of measure for ● Bearer plants are within the scope of PAS 16 and are
recognition, therefore judgement is required treated the same way as self-constructed items of PPE
before they are in location and condition necessary to be
capable in operating in the manner intended by the
management
● If payment is deferred, difference between the cash price orderly transaction between market
equivalent and the total payment is recognized as interest participants at the measurement date
over the period of credit
● Cost of PPE is measured at (1) fair value UNLESS: Frequency of revaluation depends upon the changes in fair
○ The exchange lacks commercial substance, values of the items of PPE (revaluation shall be made with
Commercial substance: sufficient regularity to ensure that the carrying amount foes
1. The configuration (risk, timing and not differ materially from from that which would be
amount) of the cash flows of the asset received differs from determined using the fair value at the end of the reporting
the configuration of the cash flows of the asset transferred period)
2. The entity-specific value of the portion of
the entity’s operations affected by the transaction changes as a 4. Treatment on the revalued asset: (at the date of
result of the exchange revaluation)
3. Difference in 1 or 2 is significant relative 1. Gross carrying amount is adjusted in a manner that is
to the fair value of the asset exchanged consistent with the revaluation of the carrying
○ Fair value of neither assets received nor assets amount of the asset
given up is reliably measurable The accumulated depreciation is adjusted to equal the
difference between the gross carrying amount and the
Fair value is reliably measurable;
carrying amount of the asset after taking into account
1. Variability in the range of reasonable fair
the accumulated impairment losses
value measurement is not significant for the asset
2. The accumulated depreciation is eliminated against
2. The probabilities of the various estimates
the gross carrying amount of the asset
within the range can be reasonably assessed and used when
-treatment depends whether the carrying amount of an asset
measuring fair value.
increases or decreases:
(2) carrying amount of given
Increase in carrying amount due to revaluation: the
up asset (if both instances above happened)
increase will be reported in other comprehensive income
under equity- revaluation surplus
3. Subsequent Measurement: Decrease in carrying amount due to revaluation: reported
● The entity may choose between cost model or
in profit or loss
revaluation model as it’s accounting policy (should If carrying amount has previously increased but
be applied to the entire class of PPE)
subsequently decreased: the decrease will be recognized in
○ Class of PPE- grouping of assets of similar other comprehensive income to the extent of any credit
nature and use in an entity’s operations
balance existing in the revaluation surplus
- The entire class of PPE is to be revalued despite only If carrying amount has previously decreased but
one item being revalued (to avoid selective
subsequently increased: recognized in profit or loss to the
revaluation of assets- rolling basis of revaluation is extent it reverses a revaluation decrease of the same asset
allowed, but must be completed within a short
period)
○ Carrying amount- at which an asset is
recognized in the financial statement after
deducting any accumulated depreciation and
accumulated impairment losses

1. Cost model:
- The PPE is carried at cost less accumulated
deprecated and any accumulated impairment losses

2. Revaluation model:
- The PPE is carried at revalued amount (fair value at
the date of revaluation less any subsequent
accumulated depreciation less subsequent impairment
losses)

○ Fair value- price that would be received to

sell an asset or paid to transfer liability in an
5. Depreciation
● Depreciation- a systematic allocation of the 7. Disposal of assets
depreciable amount of an asset over its useful life ● Residual value- estimated amount that an entity
-it may be appropriate to separately depreciate each part of would currently obtain from disposal of the asset
an item of property if the cost of the part if significant in -if the residual value equals or exceeds the assets carrying
relation to the total cost of the item amount, the depreciation will be zero unless the residual value
- the remainder of the items that are individually subsequently decreases to an amount below carrying amount
insignificant are subjected to depreciation (if there is varying ● Useful life-
expectations, approximation techniques may be necessary to a. The period over which the asset is expected to
depreciate the remainder in a manner that faithfully be available for use by an entity
represents the consumption pattern and/or useful life of the b. The number of production or similar units
parts expected to be obtained from the asset
○ Depreciation charge- may be determined by Factors to be considered in determining the useful
grouping together the significant parts of an item life:
of PPE having the same useful life and - Expected usage of the asset
depreciation method (presented in the profit or - Expected physical wear and tear
loss unless it is included in the carrying amount - Technical or commercial obsolescence
of another asset) arising from change or improvements in the
-depreciation of PPE is necessary even if the fair value of the production OR change in the market demand
asset exceeds its carrying amount (As long as the residual from the product or service output of the
value does not exceed the carrying amount) asset
- Legal or similar limits on the use of the asset
Begin to depreciate: when it is available for use (when the
asset is in the location and condition necessary for it to be ● The residual value and useful life of an asset shall be
capable of operating in the manner intended by management) reviewed at least at each financial year and if the
Cease the depreciation: at the earlier date that the asset is expectations differ from the previous estimates, the
classified as held for sale and the date that the asset is change is accounted for as a change in accounting
derecognized (NOT when the asset is idle or retired from estimates
active use)
-Land may be subject to depreciated if it has a limited useful 8. Impairment and Derecognition
life Impairment
● Depreciable amount- cost of an asset, or other (in PAS 36)
amount substituted for cost, less residual value ● The compensation from third parties for items of PPE
that were impaired, lost of given up shall be included
6. Depreciation Methods: in profit or loss when the compensation becomes
-the entity chooses the method depending on whichever receivable
closely reflects the expected pattern of consumption of the - Impairment of items of PPE retired or disposed are
future economic benefits embodied in the asset (should be recognized in PA S36
applied constantly) - Derecognition of items of PPE that were impaired,
1. Straight line depreciation- results in constant lost, or given up is included in determining the profit
charge over the useful life if the asset;s residual value or loss when it becomes receivable
does not change - The cost of items of PPE restored, purchased or
2. Diminishing balance method- results in a constructed as replacements is determined in
decreasing charge over the useful life accordance with the standard.
3. Units of production method- results in a charge
based on the expected use or output (no output=no Derecognition
depreciation) ● Derecognition:
-shall be recognized in the profit or loss (gains shall NOT be
recognized as revenue unless the sale of the PPE is in the
course of the ordinary business
 a. On disposal a. Depreciation (whether recognized in profit or loss or
b. When no future economic benefits are expected as part of the cost of other assets during the period)
from its use or disposal b. accumulated depreciation at the end of the period
● Date of disposal is the date the recipient obtains
control of that item
● Gain or loss is the difference between the net 10. Disclosures (pt. 2)
disposals and the carrying amount of the item Items that need to be disclosed if the change in accounting
estimates affects the nature and effect in the current
period or subsequent periods:
9. Disclosures:
a. Residual changes
Requirements: (for each class of PPE)
b. Estimated costs of dismantling, removing or restoring
1. measurement bases used for determining the gross
items of PPE
carrying amount
c. Useful lives
2. Depreciation method
d. Depreciation methods
3. Useful lives or the depreciation rates used
4. The gross carrying amount and accumulated
Disclosure requirements for revalued items:
depreciation at the beginning and end of the period
a. The effective date of the revaluation
5. Reconciliation of the carrying amount at the
b. Whether an independent valuer was involved
beginning and end of the period showing:
c. For each revalued class of PPE, the carrying amount
a. Additions
that would have been recognized has the assets been
b. Assets classified as held for sale or included
carried under the cost model
in a disposal group classified as held for sale
d. The revaluation surplus (indicating the change for the
(PFRS 5)
period and any restriction on the distribution of the
c. Acquisitions through business combinations
balance to the shareholders)
d. Increases or decreases resulting from
evaluations and from impairment losses
Additional disclosures that the users of financial statements
recognized or reversed in other
may find relevant:
comprehensive income (PAS 36)
a. Carrying amount of the temporary idle PPE
e. Impairment losses recognized in profit or
b. The gross carrying amount of any fully depreciated
loss
PPE that is still in use
f. impairment losses reversed in profit or loss
c. The carrying amount of PPE retired from active use
g. Depreciation
and not classified as held for sale
h. Net exchange difference arising on the
d. When the cost model is used, the fair value of the
translation of the financial statements from
PPE when this is materially different from the
the functional currency into a different
carrying amount
presentation currency, including the
translation of a forgein operation into the
presentation currency of the entity
i. Other charges

Financial statement disclosures:

a. Existence and mount of restrictions on title,
and PPE pledged as a security for liabilities
b. Amount of expenditures recognized in the
carrying amount of an item of PPE in the
course of construction
c. The amount of contractual commitments for
the acquisition of PPE
d. Amount of compensation from third parties
for PPE items that were impaired, lost of
given up (unless it was disclosed separately)

Additional disclosures related to depreciation: