Property, Plant

and Equipment
Definition
Property, plant and equipment are
"tangible assets that are held for
use in production or supply of
goods or services, for rental to
others, or for administrative
purposes, and are expected to be
used during more than one period.
Major Chracteristics of PPE:
1.Tangible Assets
2.Used in Business*
3.Expected to be used over a period
of “more than one year”
Note: Assets that are held for sale, including land, or held for investment
are not included in property, plant and equipment
Recognition of PPE:
1.It is probable that future economic
benefits associated with the asset
will flow to the entity
2.The cost of the asset can be
measured reliably
Cost of PPE:
1.Costs incurred initially to acquire or
construct an item of property, plant
and equipment
2.Costs incurred subsequently to
add to, replace part of, or service
the property, plant and equipment
 Spare Parts & Servicing Equipment
 Major spare parts and stand-by equipment qualify as
property, plant and equipment when the entity expects
to use them during more than one period.

 If the spare parts and servicing equipment can be

used only in connection with an item of PPE, they
are accounted for as PPE and are depreciated
over a time period not exceeding the useful life of
the related asset.
 Safety and Environmental Equipment
 Property, plant and equipment may be acquired for safety
or environmental reasons.
 The acquisition of such PPE, while not directly
increasing the future economic benefits of any particular
existing item of PPE, may be necessary in order for the
entity to obtain the future economic benefits from other
assets in excess of what it could obtain if such
equipment had not been acquired.
Measurement

Initial Measured @
Recognition Cost
Measurement
of PPE Revaluation
Model
Subsequent
Measurement
Cost Model
Definition of Cost
Cost is the 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 construction.
 Elements of Cost
 Purchase price, including import duties and
nonrefundable purchase taxes, after deducting “trade”
discounts and rebates.
 Cost directly attributable to bringing the asset to the
location and condition necessary for it to be capable of
operating in the manner intended by management
 Initial estimate of the cost of dismantling and removing
the item and restoring the site on which it is located, the
obligation for which an entity incurs.
 Directly Attributable Cost
 Costs of employee benefits arising directly from the
construction or acquisition of the item of property, plant
and equipment
 Cost of site preparation
 Initial delivery and handling cost
 Installation and assembly cost
 Professional fees
 Costs of testing whether the asset is functioning properly, after deducting
the net proceeds from selling any items produced while bringing the
asset to that location and condition, such as samples produced when
testing equipment.
Cost NOT Qualifying for Recognition
Examples of costs that are expensed rather than recognized as element
of cost of property, plant and equipment are:

a. Costs of opening a new facility

b. Costs of introducing a new product or service, including costs of
advertising and promotion
c. Costs of conducting business in a new location or with a new class of
customer, including costs of staff training
d. Administration and other general overhead costs
e. Costs incurred while an item capable of operating in the manner
intended by management has yet to be brought into use or is
operated at less than full capacity
f. Initial operating losses
g. Costs of relocating or reorganizing part or all of an entity's operations.
Subsequent Measurement
Cost Model - property, plant and equipment are carried at
cost less any accumulated depreciation and any
accumulated impairment loss.
Revaluation Model - property, plant and equipment are
carried at revalued amount, being the fair value at the date
of revaluation less any subsequent accumulated
depreciation and subsequent accumulated impairment loss.

Note: The entity shall apply such accounting policy to an

entire class of PPE
Ways of Acquiring of PPE
1.Cash basis
2.On account subject to cash discount
3.Installment basis
4.Issuance of share capital
5.Issuance of bonds payable
6.Exchange
7.Donation
8.Government grant
9.Construction
Cash Basis
The cost of asset acquired on a cash basis simply includes
the cash paid plus directly attributable costs such as
freight, installation cost and other cost necessary in
bringing the asset to the location and condition for the
intended use.

Moreover, when several assets are acquired at a "basket

price" or "lump sum price", it is necessary to apportion the
single price to the assets acquired on the basis of relative
fair value.
Illustration:
Land and building are acquired at a single cost of
P6,500,000. At the time of acquisition, the land
has a fair value of P2,000,000 and the building,
P4,000,000. Assessor’s fee amounted to
P500,000.
Acquisition on Account
When an asset is acquired on account subject to a cash
discount, the cost of the asset is equal to the invoice price
minus the discount, regardless of whether the discount is
taken or not.

Illustration:

An equipment is purchased for Php200,000, 2 / 10, n / 30.

Acquisition on Installment Basis
If an asset is offered at a cash price and at an installment
price and is purchased at the installment price, the asset
shall be recorded at the cash price.

The excess of the installment price over the cash price is

treated as an interest to be amortized over the credit
period.
Illustration:
A machinery is purchased at an installment price
of P620,000. The terms are P20,000 down and the
balance payable in three equal annual
installments. The cash price of the machinery is
P570,000. A promissory note is issued for the
installment balance of P600,000.
 No Available Cash Price
If an asset is acquired by installment and there is no available cash
price, the asset is recorded at an amount equal to present value of
all payments using an implied interest rate.

Illustration:

A machinery is acquired at an installment price of P1,000,000. The

terms are P100,000 down and the balance payable in three equal
annual installments. A note is issued for the balance of P900,000.
There is no available cash price for the machinery. However, the
implied interest rate for this type of note is 10%.
 Issuance of Share Capital
Under Philippine GAAP, the Accounting Standards Council
concluded that it shares are issued for consideration other than
actual cash, the proceeds shall be measured by the fair value of
the consideration received.

Where a property is acquired through the issuance of share capital,

the property shall be measured at an amount equal to the following
in the order of priority:
a. Fair value of the property received
b. Fair value of the share capital
c. Par value or stated value of the share capital
Illustration:
A machinery is acquired by issuing 10,000
shares with par value of P30. At the time of
acquisition, the fair value of the machinery is
P500,000 and the share is quoted at P40
per share.
 Issuance of Bonds Payable
When an entity acquires an asset by issuing bonds payable, PFRS
9, paragraph 5.1.1, provides that the entity shall measure the
financial liability at its fair value plus transaction costs that are
directly attributable to the issue of the financial liability.

Accordingly, the asset acquired by issuing bonds payable is

measured in the following order:
a. Fair value of bonds payable
b. Fair value of asset received
c. Face value of bonds payable
 Exchange
PAS 16, paragraph 24, provides that "the cost of an
item of property, plant and equipment acquired in
exchange for a nonmonetary asset or a combination
of monetary and nonmonetary asset is measured at
fair value, unless the exchange transaction lacks
commercial substance or the fair value of neither the
asset received nor the asset given up is reliably
measurable”
 Exchange
If a property is acquired in an exchange with
commercial substance and there is no cash involved,
the cost is measured at the following in the order of
priority:

a.Fair value of property given

b.Fair value of property received
c.Carrying amount of property given
Illustration:
ABC Company exchanged an old machinery
with carrying amount of P800,000 for
another machinery with a fair value of
P890,000. At the time of exchange, the new
machinery has a fair value of P870,000.
 Exchange
Cost is Measured at the following order
of Priority:
a. FV of property given
With Commercial b. FV of property received
Substance c. CV of property given
Plus / minus cash Considerations

Without Cost is measured at the Carrying

Exchange Commercial
Amount of the asset given

Substance* Plus / minus cash Considerations

Cost is Measured at the following order

of Priority:
a. FV of property given + cash
Trade - in payment
b. Trade in Value of property given +
cash payment

*No gain or loss is recognized when the exchange lacks commercial substance
Illustration:
 Trade In
 Trade in is a form of exchange

 This means that a property is acquired by

exchanging another property as part payment and
the balance payable in cash or any other form of
payment in accordance with agreed terms.
 Trade In
Trade in usually involves a significant amount of cash and
therefore, the transaction has commercial substance. As
an exchange with commercial substance, the new asset is
recorded at the following in the order of priority:

a. Fair value of asset given plus cash payment

b. Trade in value of asset given plus cash payment (in
effect, this is the fair value of the asset received)
Illustration:
An entity traded an old equipment with a dealer for newer
model:
 Donations from Shareholders
Philippine GAAP provides that “contributions, including stock
of an entity, received from shareholders shall be recorded at
fair value of the items received, with credit going to donated
capital”

Expenses incurred in connection with the donation (ex.

registration fees and legal fees) is charged to donated capital.

Directly attributable cost incurred subsequently (ex.

installation and testing cost) shall be capitalized.
 Donations from Non-shareholders
Capital gifts and grants shall be recorded at their fair value
when they are received or receivable.

Recognized as
Subsidy
Income
Donations from
Non-
Considered liability until the
shareholders initial restrictions are met.
Not a Subsidy
Once conditions are met, liability
is transferred to income.
 Construction
The cost of self-constructed PPE shall
include:
1.Direct cost of materials
2.Direct cost of labor
3.Indirect cost and incremental overhead
specifically identifiable and traceable to the
construction
Illustration:
Japan Company constructed equipment for office use
during the current year. The following data were taken from
the accounting records.

Factory overhead amounted to P2,000,000. What is the

total cost of office equipment if factory overhead is
allocated based on direct labor?
 Savings or loss on Construction
Difference is materially
excessive = Loss
chargeable against
Construction management
cost > Purchase
Price
Difference is
Constructions immaterial = Not
Cost vs. a loss
Purchase Price
Construction
cost < Purchase Not an income
Price
Savings or loss on Construction
PAS 16, paragraph 22, provides that
"the cost of abnormal amount of
wasted material, labor or overhead
incurred in the production of self-
constructed asset is not included in
the cost of the asset
 Intervening Operations

Incidental operations are not necessary

to bring the item to the location or
condition intended for use, therefore, the
income and related expense of incidental
operations are recognized in profit and
loss.
 Derecognition
PAS 16, paragraph 67, provides that the carrying
amount of the item of PPE shall be derecognized
on disposal or when no future economic benefits
are expected from its use or disposal.

The gain / loss from the derecognition = net

disposal proceeds minus carrying amount of the
PPE
 Fully Depreciated PPE
This means that the Carrying Amount is equal to zero or the
residual value.

However, it is not uncommon for an entity to continue to use an

asset after it has been fully depreciated.

In this case, the cost of fully depreciated PPE remaining in service

and the related Accumulated Depreciation ordinarily shall not be
removed from the accounts.

Entities are encouraged but not required to disclose fully

depreciated PPE.
 Property Classified as held for sale
PFRS 5, paragraph 7, provides that an item of PPE is classified as
“held for sale” if the asset is available for immediate sale in the
present condition within one year from the date of classification as
held for sale. This will be presented separately as a “current
asset”.

PFRS 5, paragraph 15, further provides that an entity shall

measure a non-current asset classified as held for sale at the
lower of carrying amount or fair value less cost to sell.

Fair value less cost to sell < carrying amount = IMPAIRMENT

LOSS
 Property Classified as held for sale

Is the asset
available for
immediate sale Current Excluded form PPE
and presented
in present YES Asset Held separately as current
for Sale asset
condition within
one (1) year Noncurrent
Measured @the lower of
carrying amount or fair value
from the date NO Asset Held
less cost to sell.

of classification for Sale These item shall not be

depreciated
as held for
sale?
 Idle or Abandoned Property
PFRS5, paragraph 13, provides that an entity shall not
classify as held for sale a noncurrent asset that is to be
abandoned. This is because the carrying amount would be
recovered principally through continuing use.

Temporary idle activity or abandonment does not prelude

depreciating the asset as future benefits are consumed not
only through usage but also through wear and tear and
obsolescence.
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