PROPERTY, PLANT & EQUIPMENT

Property, plant & These are tangible assets which are held by entity for use in production
equipment or supply of goods and services, for rental to others, or for
administrative purposes, and are expected to be used during more
than one period.

Tangible Items
Major Used in Business
Characteristics Expected to be used over a period of more than 1 year

Cost
Cost comprises:

1. Purchase price , including import duties & nonrefundable purchase

taxes, after deducting trade discounts & rebates

2. Cost directly attributable to bringing the asset to the location &

condition necessary for it to be capable of operating in the manner
intended by management
✓ Cost of employee benefits
✓ Cost of site preparation
✓ Initial delivery & handling cost
✓ Installation & assembly cost
Initial Measurement ✓ Professional fees
✓ Cost of testing whether the asset is functioning properly

EXPENSED OUTRIGHT
X Cost of opening a new facility
X Cost of introducing a new product or service, including
cost of advertising & promotion
X Cost of conducting business in a new location or with a
new class of customer, including cost of staff training
X Administration & other general overhead cost
X Cost 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
X Initial operating loss
X Cost of relocating or reorganizing part or all of an entity’s
operations

3. Initial estimate of dismantling & removing the item & restoring the
site on which it is located, the obligation for which an entity
incurs.

Cost Model Revaluation Model

Cost Fair value at date of revaluation
Subsequent Less: Accum. Depreciation Less: Subseq. Accum. Depreciation
Measurement Accum. Impairment Loss Subseq. Accum. Impairment Loss
Carrying Amount Revalued Amount

1. Frequency of revaluation depends upon

the changes in the fair value of PPE
being revalued. When the fair value of
a revalued asset differs materially from

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 the carrying amount, a further
revaluation is necessary.

2. When PPE are revalued, the entire

class of PPE should be revalued.

3. The revalued amount of PPE is based

on the following:
a. Fair Value
b. Depreciated Replacement Cost

DEFINITION OF TERMS:

Revalued Amount It is the fair value or depreciated replacement cost of the item of PPE.
It is the price that would be received to sell an asset or paid to transfer a
Fair Value liability in an orderly transaction between market participants at the
measurement date.
Depreciated It is the replacement cost of the PPE minus the corresponding accumulated
Replacement Cost depreciation
Replacement Cost It is the current purchase price of the PPE
Carrying Amount It is equal to historical cost minus the corresponding accumulated
depreciation
Revaluation Surplus It is equal to the fair value or depreciated replacement cost minus the
carrying amount of the PPE
Appreciation or It is the excess of the revalued amount over the historical cost
Revaluation Increase
Appreciation minus the corresponding accumulated depreciation
Revaluation Surplus
ACCOUNTING TREATMENT:
1. RS is a component of OCI
2. RS may be transferred to RE when surplus is realized
3. Whole RS may be realized on the retirement or disposal of the
asset

When an asset’s carrying amount is decreased as a result of

Reversal of Revaluation revaluation, the decrease shall be recognized as an expense.
Increase However, a revaluation decrease shall be charged directly against
any revaluation surplus to the extent that the decrease is a reversal
of a previous revaluation and the balance is charged to expense.
When an asset’s carrying amount is increased as a result of
Reversal of Revaluation revaluation, the increase shall be credited to revaluation surplus.
Decrease However, a revaluation increase shall be recognized as income to
the extent that it reverses a revaluation decrease of the same asset
previously recognized as an expense.

Determining COST of PPE

Mode of Acquisition Cost
Cash Basis ( Single Item) Cash Price Equivalent at recognition date
Cash Basis ( Several Items at Basket Price) Cash Price Equivalent at recognition date.
Allocate the cash price equivalent to the assets
relative to their fair values
On Account Invoice Price minus cash discount whether taken
or not

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 Installment Basis Cash Price. If not available, present value of all
payments using an implied interest rate
Issuance of Share Capital 1. Fair value of property received
2. Fair value of share capital
3. Par Value/stated value of share capital
Issuance of Bonds Payable 1. Fair value of bonds payable
2. Fair value of asset received
3. Face value of bonds payable
Exchange – with commercial substance (no 1. Fair value of property given
cash involved) 2. Fair value of property received
3. Carrying amount of property given
Exchange- with commercial substance (cash Fair value of asset given + cash payment
involved)
Exchange – without commercial substance Carrying amount of asset given
Exchange – without commercial substance Carrying amount of asset given + cash payment
Fair value of asset received with credit going to
donated capital. Expenses incurred in relation
Donation ( from shareholders) with donation shall be charged to donated capital
account.
Construction DM , DL, OH
Government Grant separate topic

Depreciation Method How to compute depreciation?

Straight Line Depreciation (Cost – Residual Value)/ Useful Life in Years
Composite Method Cost x Composite Rate
Group Method Cost x Group Rate
Working Hours Method Depreciable Amount / Estimated Useful Life in Service Hours
Output or Production Method Depreciable Amount / Estimated Useful Life in Units of Output
Sum of Years’ Digits Depreciable Amount x Series of Fractions
150% Declining Balance ( 1÷ Useful Life) x 1.5 x Carrying Amount
Double Declining Balance ( 1÷ Useful Life) x 2 x Carrying Amount

BORROWING COST: They are interest and other costs that an entity incurs in connection with
borrowing of funds. They include the following:
a. Interest expense calculated using the effective interest
b. Finance charge with respect to a finance lease
c. Exchange difference arising from foreign currency borrowing to the extent that is
regarded as an adjustment to interest cost.

QUALIFYING ASSET: It is an asset that necessarily takes a substantial period of time to get ready for the
intended use or sale.

BORROWING COSTS RELATED TO ASSETS BELOW ARE:

Capitalized Expensed
Manufacturing Plant Assets measured at Fair Value
Power Generation Facility Inventories that are manufactured or
produced on a repetitive basis
Intangible Asset
Investment Property Assets that are ready for their intended
Other Qualifying Assets use or sale when acquired

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ACCOUNTING OR BORROWING COST

1. If borrowing cost is directly attributable to the acquisition, construction, or production of

a qualifying asset, the borrowing cost is required to be capitalized.

2. If the borrowing cost is not directly attributable to a qualifying asset, the borrowing cost
is expended immediately.

CAPITALIZATION
Upon meeting the following conditions:
a. When the entity incurs expenditures for the asset
Commencement b. When the entity incurs borrowing costs
c. When the entity undertakes activities that are necessary to
prepare the asset for the intended use or sale
Suspension During extended periods in which active development is interrupted
Cessation When substantially all the activities necessary to prepare the qualifying
asset for the intended use or sale are complete.

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 Land Land Improvements Building – Purchased Building – Constructed Building Improvements
➢ Purchase Price ➢ Cost of permanent ➢ Purchase Price ➢ DM, DL, OH ➢ Ventilating system,
➢ Cost to establish clean title fences ➢ Legal fees & other ➢ Building Permit/License Lighting System, &
➢ Broker/agent commission ➢ Cost of sidewalks, expenses ➢ Cost of sidewalks, Elevator during
➢ Escrow fees pavements, parking ➢ Lighting Installations, pavements, parking lot, after construction
➢ Registration fees & fees for lot, driveways -if not Partitions, and other driveways -if part of
transfer of title to land part of blueprint renovating /remodeling blueprint
➢ Cost of costs ➢ Superintendent Fee
relocation/reconstruction of ➢ Payments to tenants to ➢ Architect Fee
property of others to acquire induce them to vacate ➢ Excavation cost
possession building ➢ Temporary buildings &
➢ Payments of tenants to vacate ➢ Mortgages/encumbranc temporary safety fences
land for purposes of preparing es/interest assumed by ➢ Capitalizable Borrowing
the land for intended use and buyer costs
not for building construction ➢ Unpaid taxes up to date ➢ Cost of insurance taken
➢ Mortgages/encumbrances/inte of acquisition during construction
rest assumed by buyer ➢ Permanent fixtures-if
➢ Unpaid taxes up to date of permanent
acquisition assumed by buyer ➢ Safety inspection fee
➢ Cost of survey ➢ Ventilating system, Lighting
➢ Cost of System, & Elevator during
clearing/grading/leveling/landfi building construction
ll minus sold scrap
➢ Cost of option if only acquired
➢ Special assessments (taxes by
owner of land)

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GOVERNMENT GRANT

It is an assistance by government in the form of transfer of resources to an

Government Grant entity in return for part or future compliance with certain conditions
relating to the operating activities of the entity.

Government grant shall be recognized when there is reasonable assurance that:

a. The entity will comply with the conditions attaching to the grant
b. The grant will be received

Grant in recognition of specific expenses Shall be recognized as income over the period of the
related expense
Grant related to depreciable asset Shall be recognized as income over the periods and in
proportion to the depreciation of the related asset
Grant related to nondepreciable asset Shall be recognized as income over the periods which
requiring fulfillment of certain conditions bear the cost of meeting the conditions
Grant that becomes receivable as
compensation for expenses or losses Shall be recognized as income of the period in which
already incurred or for the purpose of it becomes receivable
giving immediate financial support to the
entity with no further related costs

PRESENTATION OF GOVERNMENT GRANT

Government Grant Related to Asset Government Grant Related to Income

Presented in the income statement either
Setting the grant as deferred income separately or under the general heading “other
income”
Deducting the grant in arriving at the carrying Deducted from the related expense
amount of the asset

REPAYMENT OF GOVERNMENT GRANT

1. A grant, that becomes repayable because of noncompliance with condition, shall be
accounted for as a change in accounting estimate.
2. Repayment of grant related to income shall be applied first against any unamortized
deferred income and any excess shall be recognized immediately as an expense
3. Repayment of a grant related to an asset shall be recorded by increasing the carrying
amount of the asset
4. The cumulative additional depreciation that would have been recognized to date in the
absence of the grant shall be recognized immediately as an expense.

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MACHINERY
Cost of Purchased Machinery includes:

Purchase Price
Freight , handling, storage & other cost related to the acquisition
Insurance while in transit
Installation cost, including site preparation and assembling
Cost of testing and trial run, & other cost necessary in preparing the machinery for
its intended use
Initial estimate of dismantling & removing the machinery and restoring the site on
which it is located , and for which the entity has a present obligation
Fees paid to consultants for advice on the acquisition of the machinery
Cost of safety rail & platform surrounding machine
Cost of water device to keep machine cool

SUBSEQUENT COST

Additions are modifications or alterations which increase the physical size or

capacity of the asset
Improvements are modifications or alterations which increase the service life or the
capacity of the asset
Replacements are substitution but new asset is not better than the old asset when
acquired
Repairs are those expenditures used to restore assets to good operating
condition upon their breakdown or replacement of broken parts
Rearrangement Cost Relocation or redeployment of an existing PPE

WASTING ASSET
Wasting asset: material objects of economic value and utility to man produced by nature

The COST of wasting asset is comprised as follows:

• Acquisition Cost
• Exploration Cost
o Successful effort method
o Full cost method
• Development Cost
o Tangible items
▪ depreciated using either straight line method or output method
▪ use straight line method to depreciate:
• if useful life of PPE is shorter than that of wasting asset
• during the event of shutdown
▪ use output method to depreciate if useful life of wasting asset is shorter
than that of output method
o Intangible items
• Estimated Restoration Cost

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 o capitalize only when entity incurs the obligation when the asset is acquired

Depletion Rate = Cost of Wasting Asset – Residual Value

Estimated Units to be Extracted

Revision of Depletion Rate = Remaining Depletable Amount

Revised Estimate of Units to be Extracted

RELEVANT FORMULAE:

➢ Cost of Wasting Asset

Acquisition Cost
Exploration Cost
Development Cost
Estimated Restoration Cost
Total Wasting Asset

➢ Depletable Amount
Remaining Cost of Wasting Asset
Less: Residual Value
Depletable Amount

➢ Depletion
Depletion Rate
Multiplied by: Actual Units Extracted
Depletion

➢ Depreciation

Output Method Straight Line Method

Remaining Depreciable Amount Remaining Depreciable Amount
Divided by: Total Units of Extraction Divided by: Useful Life
Depreciation Rate Depreciation
Multiplied by: Actual Units Extracted
Depreciation

➢ Cost per Unit Extracted

Depletion (Materials Used in Production)
Direct Labor
Production Overhead
Inventoriable Depreciation Expense
Total Production Cost
Divided by: Actual Units Extracted
Cost per Unit

➢ Inventory & Cost of Sales

Cost per Unit x Unsold Extracted Units = Inventory
Cost per Unit x Sold Extracted Units = Cost of Sales

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INVESTMENT PROPERTY
Investment property:
• applies only to land and building
• held by an owner or by lessee (under finance lease) to earn rentals or for capital
appreciation

Initial measurement: Cost

Subsequent measurement: Either fair value model or cost model

Cost Model Fair Value Model

Cost
Less: Accumulated depreciation Fair value
Accumulated Impairment loss Add(Less): Change in fair value
Carrying Amount Fair value

Investment in Property Owner-Occupied Property

for capital appreciation for use in production or supply of goods/services;
for administrative purposes
for undetermined use for future use as owner-occupied property
for rental under operating lease for rental under finance lease
being constructed or developed for future for sale in the ordinary course of business; others
use as investment property

Compilation by:

Jay Lourd De Veyra, CPA

Arleen Rocabo, CPA

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