PAS 16

Property, Plant and

Equipment

CHAPTER 7
PPE are tangible assets that:

• Held for use in the production or supply of

goods or services
• For rentals to others
• For administrative purpose
That are expected to be used during more tan
one period
 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 from more than a year
 Examples of items of PPE
a. Land used in business
b. Land held for future plant site
c. Building used in business
d. Equipment used in the production of goods
e. Equipment held for environmental and safety
reasons
f. Equipment held for rentals
g. Major spare parts and long-lived stand-by
equipment
h. Furniture and fixture
i. Bearer plants
 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
Examples of directly attributable costs
• Costs of employee benefits arising directly
from the construction or acquisition of PPE;
• Costs of site preparation;
• Initial delivery and handling costs (e.g., freight
costs);
• Installation and assembly costs;
• Testing costs, GROSS* of disposal proceeds of
samples generated during testing; and
• Professional fees.
* (the proceeds, and the cost of the samples are recognized in
profit or loss)
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.
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
b. Fair value of asset Received
c. Carrying amount of asset Given up

• If the exchange lacks commercial substance, the

asset received from the exchange is measured at (c)
above.
 Subsequent measurement

• Subsequent to initial recognition, an entity

shall choose either:
(a) the cost model or
(b) the revaluation model
as its accounting policy and shall apply that
policy to an entire class of PPE
Cost Model

• After recognition, an item of PPE is

measured at its cost less any
accumulated depreciation and any
accumulated impairment losses.
Depreciation
• Depreciation is the systematic allocation of the
depreciable amount of an asset over its estimated useful life.
• When computing for depreciation, each part of an item of
PPE with a cost that is significant in relation to the total cost
of the item shall be depreciated separately.
• Depreciation begins when the asset is available for use,
i.e., when it is in the location and condition necessary for it to
be capable of operating in the manner intended by
management.
• Depreciation ceases when the asset is derecognized or
when it is classified as “held for sale” under PFRS 5,
whichever comes earlier.
 Selection of depreciation
method
• There are various methods of depreciation.
The entity shall select the method that most
closely reflects the expected pattern of
consumption of the future economic
benefits embodied in the asset.
• However, a depreciation method that is
based on revenue that is generated by an
activity that includes the use of an asset is
not appropriate.
 The Straight-line method of
Depreciation
Straight line method – depreciation is recognized
evenly over the life of the asset by dividing the
depreciable amount by the estimated useful life.

Depreciation = (Historical cost – Residual

value) ÷
Estimated
useful life
 Changes in depreciation method, useful life, and residual
value

• A change in depreciation method, useful life, or

residual value is a change in accounting
estimate accounted for prospectively.

• Prospective accounting means the change

affects only the current period and/or future
periods. The change does not affect past
periods.
 Revaluation Model

• After recognition as an asset, an item of

PPE whose fair value can be measured
reliably shall be carried at a revalued
amount, being its fair value at the date
of the revaluation less any subsequent
accumulated depreciation and subsequent
accumulated impairment losses.
 Revaluation surplus
Fair value*
xx
Less: Carrying amount
(xx)
Revaluation surplus – gross of tax
xx

*The fair value is determined using an appropriate

valuation technique, taking into account the
principles set forth under PFRS 13.
Frequency of revaluation

• For items with significant and volatile

changes in fair value, annual
revaluation is necessary. For items with
insignificant changes in fair value,
revaluation may be made every 3 or 5
years.
Revaluation applied to all assets in a
class
• If an item of PPE is revalued, the entire class of PPE
to which that asset belongs shall be revalued.
• The items within a class of PPE are revalued
simultaneously to avoid selective revaluation of
assets and the reporting of amounts in the financial
statements that are a mixture of costs and values as
at different dates.
 Subsequent accounting for revaluation surplus

• Revaluation is initially recognized in other comprehensive income unless

the revaluation represents impairment loss or reversal of impairment loss, in
which case it is recognized in profit or loss.

• Subsequently, the revaluation surplus is accounted for

as follows:
1. If the revalued asset is non-depreciable, the revaluation
surplus accumulated in equity is transferred directly to
retained earnings when the asset is derecognized.
2. If the revalued asset is depreciable, a portion of the
revaluation surplus may be transferred periodically to retained
earnings as the asset is being used.
Derecognition
• The carrying amount of an item or PPE
shall be derecognized:
a. on disposal; or
b. when no future economic benefits are
expected from its use or disposal
END