PAS 16

Property, Plant and

Equipment
Introduction

PAS 16 prescribes the accounting

treatment for property, plant and
equipment (PPE). It addresses the
principal issues of recognition of
depreciation charges.
PAS 16 applies to all items of PPE except to the following for which
other standards apply:

a. Assets classified as held for sale (PFRS 5 Non-current Assets

Held for Sale and Discontinued Operations)
b. Biological assets other than bearer plants (PAS 41 Agriculture).
PAS 16 applies to bearer plants but it does not apply to the
produce on bearer plants
c. The recognition and measurement of exploration and evaluation
assets (PFRS 6 Exploration for and Evaluation of Mineral
Resources)
d. Mineral rights and mineral reserves such as oil, natural gas and
similar non-regenerative resources

However, PAS 16 applies to PPE used to develop or maintain the

assets described in (b)-(d). (PAS 16.3)
Property, Plant and Equipment (PPE)

PPE are:

a. Tangible assets (have physical substance);

b. Used in business (used in the production or supply
of goods or services, for rental, or for administrative
purposes); and
c. Long-term in nature (expected to be used for more
than one period).
Examples 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
The following are not PPE:

a. Land held for speculation

b. Land held for an undetermined future use
c. Land and/or building classified as investment property
under PAS 40 Investment Property
d. Property held for sale in the ordinary course of business
e. Assets classified as held for sale under PFRS 5
f. Biological assets related to agricultural activity, other
than bearer plants
g. Intangible assets
h. Minor spare parts and short-lived stand-by equipment
Recognition

An item of PPE is recognized 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.
(PAS 16.7)
Spare parts, stand-by equipment and servicing equipment
are recognized as PPE if they meet the definition of PPE
(i.e., they are expected to be used for more than one
period); otherwise, they are classified as inventory. (PAS
16.8)

Safety and environmental equipment are usually recognized

as PPE because, although they do not directly increase the
future economic benefits of other existing assets, they are
necessary in obtaining future economic benefits from other
assets. For example, a factory may be required to install
safety and environmental equipment by the government;
non-compliance may result to the factory being shut down.
Initial Measurement

An item of PPE is initially measured at cost. Cost

comprises the following:
a. Purchase price, including import duties, nonrefundable
purchase taxes, less trade discounts and rebates.
b. Direct costs of bringing the asset to the location and
condition necessary for it to be used in the manner
intended by management.
c. Initial estimate of dismantlement, removal and site
restoration costs for which the entity incurs an
obligation by acquiring or using the asset other than to
produce inventories.
Examples of directly attributable costs:

a. Cost of employee benefits arising directly form the

construction or acquisition of PPE;
b. Costs of site preparation;
c. Initial delivery and handling costs (e.g., freight
costs);
d. Installation and assembly costs;
e. Testing costs, net of disposal proceeds of samples
generated during testing; and
f. Professional fees. (PAS 16.17)
Examples of costs that are expensed outright:

a. Costs of opening a new facility.

b. Costs of introducing a new product or service
(including costs of advertising and promotional
activities).
c. Costs of conducting business in a new location or
with a new class of customers (including costs of
staff training).
d. Administration and other general overhead costs.
Illustration:
Entity A acquires equipment on January 1, 20x1. information on costs is as follows:

Purchase price, gross of trade discount 1,000,000

Trade discount available 10,000
Freight costs 20,000
Testing costs 30,000
Net disposal proceeds of samples generated
during testing 5,000
Present value of estimated costs of dismantling the
equipment at the end of its useful life 6,209

 The initial cost of the equipment is computed as follows:

Purchase price, net of trade discount (1M-10K) 990,000

Freight costs 20,000
Testing costs 30,000
Net disposal proceeds of samples generated (5,000)
Present value of dismantlement costs 6,209
Initial measurement 1,041,209
Incidental operations

Incidental operations before or during the construction of

a PPE are not necessary in bringing the PPE to the
location and condition necessary for it to be capable of
operating in the manner intended by management.
Accordingly, income and related expenses of incidental
operations are recognized in profit or loss, and hence do
not affect the measurement of cost of a PPE.

For example, a vacant lot may be temporarily used as

parking space before or during the construction of a
building. The income and the related expenses from the
parking space are recognized in profit or loss.
Self-constructed assets

“The cost of a self-constructed asset is determined using

the same principles as for an acquired asset”. (PAS
16.22)

Accordingly, the cost of a self-constructed asset

excludes internal profits (e.g., savings on self-
construction) and the cost of abnormal amounts of
wasted material, labor, or other resources incurred in
self-constructing the asset.
Bearer plants

A bearer plant is a living plant that:

a. Is used in the production or supply of agricultural produce;

b. Is expected to bear produce for more than one period; and
c. Has a remote likelihood of being sold as agricultural
produce, except for incidental scrap sales. (PAS 16.6)

Bearer plants are accounted for similar to self-constructed

assets. PAS 16 uses the term ‘construction’ to include
activities that are necessary to cultivate the bearer plants
before they are in the location and condition necessary to be
capable of operating in the manner intended by management.
Measurement of cost

Cost is measured at the cash price equivalent at the acquisition 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 credit period.

The cost of a PPE acquired through an exchange of non-monetary

assets is measured using the following order of priority:
1. Fair value of the asset given up
2. Fair value of the asset received
3. Carrying amount of the asset given up

If the exchange lacks commercial substance, the PPE acquired is

measured at the carrying amount of the asset given up.
Subsequent expenditures on recognized PPE

Capitalization of costs ceases when the PPE is in the location and condition
necessary for it to be capable of operating in the manner intended by
management. Therefore, costs incurred in using or redeploying a PPE are
not capitalized.

The following subsequent expenditures on PPE are recognized as expenses:

a. Costs of day-to-day servicing of a PPE (i.e., repairs and maintenance
expenses).
b. 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. (PAS 16.20)
c. Initial operating losses.
d. Costs of relocating or reorganizing part or all of the entity’s operations.
(PAS 16.20)
An entity uses the recognition criteria when determining whether subsequent
expenditures can be capitalized. PAS 16 specifically addresses the
capitalization of the following subsequent expenditures:

a. Replacement costs – some PPE have parts that need to be replaced, e.g., the
seats in an aircraft. The cost of replacing a part of an item of PPE is
capitalized if the recognition criteria are met. The carrying amount of the
replaced part (old part) is derecognized and charged as loss, regardless of
whether it had been depreciated separately or not. If the carrying amount of
the replaced part cannot be determined, the cost of the replacement part
(new part is used as an indication of what the cost of the replaced part was
at the time it was acquired or constructed.

b. Major inspections – some PPE require regular major inspections as

condition for their continued operation. For example, a cruise ship may not
be permitted to continue sailing without the inspection. Major inspections
are accounted for similar to replacement cost, i.e., the cost of a major
inspection is capitalized while the carrying amount of the previous
inspection is derecognized.
Subsequent Measurement

After initial recognition, an entity chooses

either the cost model or the revaluation
model as its accounting policy and
applies that policy to an entire class of
PPE.
Cost model

Under the cost model, a PPE is carried at its cost less

any accumulated depreciation and any accumulated
impairment losses.

 Cost is “the amount of cash or cash equivalents paid

or the fair value of the other consideration given to
acquire an asset at the time of its acquisition or
construction or, where applicable, the amount
attributed to that asset when initially recognized in
accordance with the specific requirements of other
PFRSs”. (PAS 16.6)
Depreciation

 Depreciation is “the systematic allocation of the depreciable

amount of an asset over its useful life”. (PAS 16.6)
 Depreciable amount “the cost of an asset, or other amount
substituted for cost, less its residual value”. (PAS 16.6)
 Residual value is “the estimated amount that an entity would
currently obtain from disposal of the asset, after deducting
the estimated costs of disposal, if the asset were already of
the age and in the condition expected at the end of its useful
life”. (PAS 16.6)
 Useful life is: “(a) the period over which an asset is expected
to be available for use by an entity; or (b) the number of
production or similar units expected to be obtained from the
asset by an entity”. (PAS 16.6)
Each significant part of an item of PPE is depreciated
separately. For example, the engines and airframe of an
aircraft are depreciated separately. (PAS 16.44)

Depreciation is recognized as expense (in profit or loss)

unless it is included in the cost of producing another
asset. For example, the depreciation of a factory
building is included in the cost of inventories.
Depreciation starts when the asset is available for use,
in the manner intended by management.

Depreciation stops when the asset is:

a. Derecognized (i.e., sold or disposed of);
b. Classified as held for sale under PFRS 5; or
c. Fully depreciated. An asset is fully depreciated when
its carrying amount is zero or equal to its residual
value. However, if the residual value decreases
below the carrying amount, the decrease is
recognized as an additional depreciation.
 Carrying amount is “the amount at which an asset is
recognized after deducting any accumulated
depreciation and accumulated impairment losses”.
(PAS 16.6)

Depreciation does not cease when the asset becomes idle

or is retired from active service.

Land and buildings are accounted for separately even

when they are acquired together. Land is not depreciated
because it has an unlimited useful life (with certain
exceptions, such as quarries and landfill sites). Buildings
are depreciated because they have limited useful life.
Depreciation Method

There are a variety of depreciation methods. PAS 16 mentions

three examples, namely; straight-line method, diminishing
balance method and units of production method. However,
PAS 16 does not prescribe any specific method. The choice of
depreciation method depends on management’s judgment.

When making judgment, PAS 16 requires management to

choose the method that best reflects the expected pattern of
consumption of the future economic benefits embodied in the
asset and to apply that method consistently from period to
period unless there is a change in the expected pattern of
consumption of those future economic benefits.
PAS 16, however, prohibits the use of a depreciation method
that is based on revenue. Revenue generally reflects factors
other than the consumption of the economic benefits of the
asset. For example, revenue is affected by selling activities,
changes in sales volume and prices, inflation, and other inputs
and processes. All of which have no bearing on the way the
future economic benefits of an asset are consumed.

PAS 16 requires an annual review of the depreciation method

and the estimates of useful life an residual value at each year-
end. Any change is accounted for as a change in accounting
estimate.

The most commonly used depreciation method is the straight-

line method.
Illustration: Straight-line method of depreciation

On January 1, 20x1, Entity A acquires equipment for a total cost of

P1,000,000. The equipment is estimated to have a useful life of 5
years and a residual value of P50,000.

 The annual depreciation is computed as follows:

Cost 1,000,000
Less: Residual value (50,000)
Depreciable amount 950,000
Divide by: Useful life 5
Annual depreciation 190,000
 The carrying amount of the equipment at the end of 20x1 is
computed as follows:

Cost 1,000,000
Accumulated depreciation (190,000 x 1yr) 190,000
Carrying amount – 12/31/20x1 810,000

Entity A recognizes depreciation of P190,000 per year during the 5-

year life of the equipment. The carrying amount of the asset at
December 31, 20x5, when the asset is fully depreciated, would be
P50,000, equal to the residual value or [1M cost – (190K x 5 yrs)].
Revaluation model

Under the revaluation model, a PPE is carried at its fair value at

the date of the revaluation less any subsequent accumulated
depreciation and subsequent accumulated impairment losses.

 Fair value is “the price that would be received to sell an

asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date”.

The frequency of revaluation depends on the significance of

changes in fair values. Assets whose fair values fluctuate
significantly may need to be revalued annually. Assets whose
fair values do not fluctuate significantly may be revalued every
three or five years.
Revaluations are applied to an entire class of PPE. A class of PPE is a grouping
of assets with similar nature. The following are examples of separate classes:
a. Land;
b. Land and buildings;
c. Machinery;
d. Ships;
e. Aircraft;
f. Motor vehicles;
g. Furniture and fixtures;
h. Office equipment; and
i. Bearer plants. (PAS 16.37)

For example, if an entity revalues a bearer plant, it must revalue all of its
bearer plants. Moreover, all the bearer plants are revalued simultaneously to
avoid selective revaluation. If simultaneous is not possible, the revaluation may
be carried out on a rolling basis (i.e., one asset after another) provided the
revaluation of all the assets within the class is completed within a short period.
Accounting for Revaluations

An increase or decrease in the carrying amount of a

PPE resulting from revaluation is recognized in other
comprehensive income and accumulated in equity
under the “Revaluation surplus” account, except for the
following:
a. An increase that represents a reversal of a previous
impairment loss is recognized in profit or loss as
impairment gain.
b. The decrease in excess of the credit balance in the
“Revaluation surplus” of the asset is recognized in
profit or loss as impairment loss.
The revaluation increase or decrease is computed using
the following formula:

Fair value* xx
Less: Carrying amount (xx)
Revaluation surplus xx

*The fair value is determined using an appropriate

valuation technique is accordance with PFRS 13 Fair
Value Measurement
Illustration:

On December 31, 20x1, Entity A determines that its building with

historical cost of P20,000,000 and accumulated depreciation of
P5,000,000 has a fair value of P17,000,000.

 The revaluation surplus is computed as follows:

Fair value 17,000,000

Less: Carrying amount (20M-5M) (15,000,000)
Revaluation surplus 2,000,000

After revaluation, a revalued asset is depreciated based on its fair

value
Illustration:

Continuing the illustration, assume that the building has a remaining

useful life of 10 years with no residual value. The annual depreciation
in subsequent periods using the straight-line method is computed as
follows:

Fair value 17,000,000

Divide by: Remaining useful life 10
Annual depreciation 1,700,000
Subsequent accounting for revaluation surplus

Revaluation surplus is subsequently accounted for as follows:

a. If the revalued asset is non-depreciable, e.g., land, the whole
of the revaluation surplus is transferred directly to retained
earnings when the asset is derecognized.
b. If the revalued asset is depreciable, a portion of the
revaluation surplus may be transferred directly to retained
earnings as the asset is used. The portion transferred each
year is equal to the difference between the depreciation based
on the revalued carrying amount and the depreciation based
on the original cost.

Transfers from revaluation surplus to retained earnings are not

made through profit or loss.
Illustration:

Continuing again the illustration, the amount of revaluation surplus to be transferred

directly to retained earnings each year as the asset is used is computed as follows:

Depreciation based on revalued

carrying amount (17M / 10) 1,700,000
Depreciation based on original
cost (15M / 10) (1,500,000)
Amount of revaluation surplus
transferred to retained
earnings each year 200,000

Alternative solution:
(2,000,000 revaluation surplus / 10 years) = 200,000

 As mentioned earlier, revaluation increases and decreases are recognized in other

comprehensive income and accumulated in equity unless they represent
impairment gain or impairment loss.
Illustration:

On December 31, 20x1, Entity A acquires a piece of land for P1,000,000.

Entity A revalues the land to fair value on the following dates:
12/31/x2 12/31/x3 12/31/x4
Fair value 800,000 1,300,000 900,000

 The revaluation decrease on December 31, 20x2 represents impairment

loss because the carrying amount of the asset is decreased below its
original cost.

Fair value – 12/31/20x2 800,000

Less: Carrying amount (original cost) (1,000,000)
Impairment loss (200,000)

The impairment loss is recognized in profit or loss rather than in other

comprehensive income.
 The revaluation increase on December 31, 20x3 is partly
impairment gain and partly revaluation surplus.

Fair value – 12/31/20x3 1,300,000

Less: Carrying amount (FV on 12/31/20x2) (800,000)
Total increase 500,000
Impairment gain (reversal of the 20x2 impairment loss) (200,000)
Revaluation surplus 300,000

The impairment gain of P200,000 is recognized in profit or loss while

the P300,000 revaluation surplus is recognized in other
comprehensive income and accumulated in equity.
 The revaluation decrease on December 31, 20x4 is partly a
decrease in revaluation surplus and an impairment loss. The
decrease in revaluation surplus is recognized in other
comprehensive income while the impairment loss is recognized in
profit or loss.

Fair value – 12/31/20x4 900,000

Less: Carrying amount (FV on 12/31/20X4) (1,300,000)
Total decrease (400,000)
Decrease in revaluation surplus __300,000
Impairment loss (100,000)
Derecognition

Derecognition is the opposite of recognition.

Derecognition refers to the removal of a previously
recognized asset or liability from the entity’s statement
of financial position.

The carrying amount of a PPE is derecognized when:

a. It is disposed (e.g., sold); or
b. No future economic benefits are expected from the
asset’s use or disposal.
On derecognition, the difference between the carrying amount of
the derecognized PPE and the net disposal proceeds, if any, is
recognized as gain or loss in profit or loss.

If the asset derecognized is revalued, any balance in the related

revaluation surplus is transferred directly to retained earnings and
will not affect the amount of gain or loss recognized in profit or
loss

Special case:
Some entities, in the ordinary course of their activities, routinely
manufacture or acquire items of PPE to be held for rental to others
and subsequently transfer these assets to inventories when they
cease to be rented and become held for sale. For these entities, the
proceeds from the sale of such assets are recognized as revenue.
Illustration:

Entity A sells a machine with carrying amount of P860,000 for

P1,000,000. Entity A paid broker’s commission of P100,000.

 The gain (loss) on the sale is computed as follows:

Net disposal proceeds (1M-100K broker’s commission) 900,000

Carrying amount (860,000)
Gain on sale 40,000

There is gain because the net selling price exceeds the carrying
amount.
Disclosure

General disclosure for each class of PPE:

a. The measurement bases used
b. The depreciation method used
c. The useful lives or depreciation rates used
d. The gross carrying amount and the accumulated depreciation (aggregated with
accumulated impairment losses) at the beginning and end of the period
e. A reconciliation of the carrying amount at the beginning and end of the period
showing: additions, disposals, and other changes.

Additional disclosures:
f. Restrictions on title and PPE pledged as security for liabilities
g. Expenditures to construct PPE during the period
h. Contractual commitments for the acquisition of PPE
i. Compensation for impairment losses
j. Changes in estimates relating to PPE
Disclosures for revalued PPE:
a. Date of the revaluation
b. Whether an independent valuer was involved
c. The carrying amount of each revalued class of PPE if they had been
measured under the cost model
d. Revaluation surplus, including changes during the period and any
restrictions on its distribution to shareholders.

Encouraged disclosures:
e. Carrying amount of temporarily idle PPE
f. Gross carrying amount of any fully depreciated PPE that is still in
use
g. Carrying amount of PPE retired from active use and not classified as
held for sale in accordance with PFRS 5
h. When the cost model is used, the fair value of PPE when this is
materially different from the carrying amount