INTERMEDIATE ACCOUNTING 1 ASSET PAS 16 WHAT

FOR PPE STANDARD?

PLANT, PROPERTY, and EQUIPMENT RENTAL
Finance NO PFRS 16-
Lease Leases
 BASIC CONCEPTS Operating
Lease
DEFINITION
-Land or NO PAS 40-
-According to PAS 16, PPE are tangible Building Investment
assets: Property
-Equipment YES
a. Held for sale in the ordinary course of
business.
 SCOPE
b. Used in the process of production for
such sale The following items are excluded from the
scope of PAS 16, Property, Plant and
c. In the form of material or supplies to be Equipment:
consumed in the production process or in
the rendering of services. a. PPE held for sale (PFRS 5/ PAS 2)

-According to PAS 16, Property, Plant and b. Biological assets other than bearer
Equipment are tangible assets: plants (PAS 41)

a. Held for use in the production or c. Exploration and evaluation assets

supply of goods or services. (PFRS 6)

b. For rental to others. d. Mineral rights and mineral reserves

such as oil, natural gas, and similar non-
c. For administrative purposes. regenerative resources.
That are expected to be used for more than NOTE: PAS 16 applies to PPE used to
one year. develop or maintain the assets described
IMPORTANT NOTES: above.

Characteristics of Property, Plant and

Equipment:  RECOGNITION
a. Tangible items or with physical An item of property, plant and equipment
substance. shall be recognized as an asset when:
b. Used in business. a. It is probable that future economic
c. Long-term in nature. benefits associated with the asset will flow
to the entity.
Characteristics of Property, Plant and
Equipment in relation for rental to others: b. The cost of the asset to the entity can be
measured reliably.
a. The lease should be operating lease,
otherwise, if it is a finance lease, it is NOTES:
considered to be the asset of the lessee. a. Spare parts, stand-by equipment and
(PFRS 16, Leases) servicing equipment are recognized as
b. The item of PPE should not be land PPE if they are expected to be used for
and/or building (e.g. equipment). Land or more than one period otherwise they are
building rented out under operating lease is classified as inventory.
classified as an investment property. (PAS b. Safety and environmental equipment
40, Investment Property) are recognized as PPE although they do not
directly increase the economic benefit of
other existing ease the economic benefit of
other existing assets, they are necessary to
obtain the future economic benefits from
other assets.
TANGIBLE UNDER IF NO,
 INITIAL MEASUREMENT the bonds
Lump-sum or Allocated using
The initial measurement of property, plant Basket Purchase the Relative Fair
and equipment is at cost. Value method
The cost of an item of property, plant and Exchange (with (a) FV of asset
commercial given up ± cash
equipment comprises.
substance) consideration
a. Cost of Purchase (b) FV of the asset
received
b. Directly Attributable Costs (DACs) (c) CV of asset
c. Estimated cost of dismantling given up ± cash
consideration
(decommissioning costs)
Exchange (without (a) CV of asset
COST OF PURCHASE commercial given up ±
substance) cash consideration
Inclusions:
a. Purchase price / acquisition cost NOTES:
b. Import duties a. No gain or loss on exchange if without
c. Irrecoverable taxes commercial substance.

d. Freight costs b. An exchange has commercial substance

when:
Exclusions:
• The cash flows of the asset received differ
a. Trade discounts from the cash flows of the asset transferred
b. Rebates and other similar deductions and the difference is significant relative to
the fair value of the asset exchanged.
NOTES:
• The entity-specific value of the portion of
a. Generally, VAT is not capitalized since the entity's operations affected by the
it is a type of recoverable tax unless if the transaction changes as a result of the
entity is non-VAT registered, it is exchange and the change is significant
capitalized. relative to the fair value of the asset
exchanged.
b. Acquisition costs may vary depending
on the means of acquiring the property, plant MODE OF ACQUISITION
and equipment. ACQUISITION COST
Construction Direct Materials,
MODE OF ACQUISITION Direct Labor,
ACQUISITION COST Overhead and
Cash Basis Invoice price Borrowing
On Account Invoice price less Costs.
cash discounts Trade-In (a) Fair Value of
whether taken or the asset
not. given (Trade-in
Deferred (a) Cash price value) + cash
Settlement equivalent consideration
(b) Present Value (b) Fair Value of
of future cash the asset received
flows Donation FV of the asset
Issuance of Shares (a) Fair Value of received:
the asset (a) if the donor is
(b) Fair value of an unrelated
the shares party/government,
(c) Par value of credit to other
the shares income
Issuance of Bonds (a) Fair value of (b) if the donor is
the asset a related party,
(b) Fair value of credit to Donated
the bonds Capital
(c) Face value of
DIRECTLY ATTRIBUTABLE COSTS  CLASSES OF PPE
(DACs)
WHAT ARE THE DIFFERENT CLASSES
These are costs directly attributable to OF PPE?
bringing the asset to its present location
and its present condition necessary for its Property, Plant and Equipment is divided
intended use, or necessary for it to be into three classes:
capable of operating in the manner intended • Property (Land and Land
by the management. Improvements)
Inclusions: (T-I-P-S-I-E) • Plant (Building and Building
• Testing costs Improvements)

• Initial handling and delivery costs • Equipment (Vehicles, Aircrafts,

Machineries, Office and Factory
• Professional fees Equipment, Furniture and Fixtures,
Bearer Plants)
• Site preparation
COST OF LAND IMPROVEMENTS
• Installation and assembly
• Permanent fences, water systems and
• Employee benefits
sidewalks
Exclusions:
• Cost of trees and other landscaping
• Cost of opening a new facility.
• Streetlights and parking lots
• Cost of introducing a new product or
NOTES:
service, including cost of advertising and
promotion. • The above costs are chargeable as costs of
land improvements provided they are not
• Cost of conducting business in a new
part of the blueprint. Otherwise, it is
location or with a new class of customer,
included of the constructed building.
including cost of staff training.
• Land improvements are depreciable.
• Administration and other general overhead
Land is not depreciable.
cost.
COST OF LAND
• Cost incurred while an item capable of
operating in the manner intended by • Purchase price
management has yet to be brought into use
or is operated at less than full capacity • Legal fees and other expenditures for
establishing clean title.
• Initial operating loss
• Broker commission
• Cost of relocating or reorganizing part or
all of an entity's operations. • Escrow fees

• Income from incidental operations • Fees for registration and transfer of title

• Savings on self-constructed assets • Cost of relocation or reconstruction of

property belonging to others in order to
ESTIMATED DISMANTLING OR acquire possession.
DECOMMISSIONING COSTS
• Mortgages, encumbrances and interest on
It is the cost of dismantling and removing such mortgages assumed by the buyer.
the item and restoring the site on which it is
located, the present obligation for which an • Unpaid taxes up to date of acquisition
entity incurs either when the item is assumed by the buyer.
acquired or as a consequence of having used • Cost of survey
the item during a particular period for
purposes other than to produce inventories • Cost of clearing, grading and demolishing
during that period. It is measured at unwanted old building, less proceeds from
present value of future cash flows. salvage.
• Payments to tenants to induce them to
vacate the premises.
• Cost of permanent improvements, cost of • Expenditures incurred during the
grading, leveling, and landfill. construction period such as borrowing cost
and insurance.
• Cost of option to buy the acquired land. If
the land is not acquired, the cost of option is • Expenditures for service equipment and
expensed outright. fixtures made a permanent part of the
structure.
• Special assessment
• Cost of temporary safety fence around
COST OF BUILDING IMPROVEMENTS
construction site and cost of subsequent
• Cost of elevator, escalator and similar removal thereof. However, the construction
items. of a permanent fence after the completion of
the building is recognized as land
• Ventilation systems, plumbing and lighting improvement.
systems.
• Safety inspection fee
• Immovable fixtures attached to the
building. LAND AND BUILDING PURCHASED
ON A LUMP-SUM PRICE
NOTES:
• The acquisition cost of land and building
• The above costs are chargeable as costs of acquired on a lump-sum price is allocated
building improvements provided they are to both land and building based on their
not part of the blueprint. Otherwise, it is relative fair values at purchase date
included of the constructed building. regardless of the intention on the old
COST OF PURCHASED BUILDING building. If the building is unusable, the
acquisition cost is allocated to the land
• Purchase price only.
• Legal fees incurred in connection with the • What is to be allocated to the land and
purchase. building would be the cost of the land
(itemized in red).
• Unpaid taxes up to date of purchase
assumed by the buyer. • The cost of demolition shall be
capitalized as cost of the new building.
• Interest, liens and other encumbrances Only the demolition costs is capitalized. The
assumed by the buyer. allocated cost of the demolished building
• Payments to tenants to induce them to shall be recognized as expense.
vacate the building. COST OF EQUIPMENT
• Any renovating or remodeling costs • Purchase price
incurred to put the building purchased in a
condition suitable for the intended use. • Freight, handling, storage and other cost
related to the acquisition.
COST OF SELF-CONSTRUCTED
BUILDING • Irrecoverable taxes

• Material used, labor employed and • Insurance while in transit

overhead directly attributable to • Installation cost, including site preparation
construction. and assembling.
• Building permit or license. • Cost of testing and trial run, and other cost
• Architect fee necessary in preparing the machinery for
use.
• Superintendent fee
• Initial estimate of cost of dismantling and
• Cost of excavation removing the machinery and restoring the
• Cost of temporary building used as site on which it is located, for which the
construction office and tools or materials entity has a present obligation.
shed. • Fee paid to consultants for advice on the
acquisition of the machinery.
• Cost of safety rail and platform Depreciation of an item of PPE begins when
surrounding machine. it is available for use, meaning when the
asset is in the location and condition
• Cost of water device to keep machine cool.
necessary for intended use, and it ceases
If a machinery is moved to a new location when the it is derecognized or becomes
in order to increase the future service held for sale, whichever is earlier.
potential of the asset, the undepreciated
NOTE:
cost of the old installation cost is expensed
and the new installation cost is charged to Depreciation does not cease when the asset
the new asset. Cost of training the becomes temporarily idle.
employee who will operate the machine is
Factors of Depreciation:
not capitalized but expensed outright.
a. Depreciable amount
If a machinery is removed and retired to
make room for the installation of a new one, It is the cost of an asset or other amount
the removal cost not previously substituted for cost less its residual value.
recognized as a provision is charged to
expense on the theory that this is part of the b. Residual Value
service related to the retirement of the old It is the estimated amount that an entity
machinery. would currently obtain from disposal of the
The value-added tax or VAT on the asset.
purchase of machinery is not capitalizable c. Useful Life
but charged to input tax to be offset against
output tax unless the entity is non-VAT It is either the period of time over which an
registered. However, any irrecoverable asset is expected to be used by the entity
purchase tax is capitalized as cost of the or the number of production or similar
asset. units expected to be obtained from the
asset by the entity.
 SUBSEQUENT MEASUREMENT
NOTES:
After initial recognition, an entity can
choose its subsequent measurement either: a. Factors considered in determining useful
life:
• Cost Model
(a) Expected usage of the asset;
• Revaluation Model
(b) Expected physical wear and tear;
The model chosen applies to the entire
class of PPE. (c) Obsolescence;

COST MODEL (d) Legal limits for the use of the asset

Under the cost model, an entire class of PPE b. Residual value and useful life are based
is carried at its cost less any accumulated on estimation and must be reviewed
depreciation and less any accumulated annually.
impairment losses. c. If residual value is greater than
CONCEPT OF DEPRECIATION carrying amount, depreciation stops.

Depreciation is the systematic allocation of COMPUTATION OF DEPRECIATION

the depreciable amount of the property, Each part of an item of property, plant and
plant and equipment over the useful life. equipment with a cost that is significant in
NOTE: relation to the total cost of the item shall be
depreciated separately.
Depreciation focuses more on cost
allocation rather than valuation and its For example, it may be appropriate to
purpose is to have each period benefiting depreciate separately the airframe,
from the related asset an equitable share of engines, fittings (seats and floor
the asset's cost. coverings) and tires of an aircraft.