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FINANCE

MANUAL
STANDARD A-137

Accounting for Property, Plant and Equipment

Issued:

January 1, 2014

Next review:

January 1, 2016

Maintained by:

PMI Finance Controlling

1.

Purpose
This standard provides direction for Finance personnel in relation to the accounting for Property,
Plant & Equipment. This standard applies to all PMI consolidated affiliates.

2.

Definition of Property, Plant and Equipment


Property, Plant & Equipment (PP&E) has the following characteristics:

Are long-lived assets;

Are acquired for use in operations, not for resale;

Do not become part of a product for sale;

Have physical presence (i.e. excludes intangible assets);

Are subject to depreciation (except land).

This standard covers all assets, with the above characteristics, where the legal and economic
ownership is held by a PMI affiliate, i.e. the title and risk of loss has been transferred to a PMI
affiliate.

3. Requirements
3.1. Expenditures to be capitalized for property, plant and equipment
Purchased Asset

Constructed Asset

Other Assets

Purchase price (minus


discounts)

Direct construction costs

Leased Assets

Note: If a purchased asset


includes an equipment trade in
with the supplier, the trade in
value should not be deducted
from the capitalized amount of
the new equipment.

Surveying
Building
Legal fees
Architectural and
engineering fees
Excavating
Demolition costs, only if part
of acquisition of real estate
Insurance premiums on
uncompleted structures
Out-of-fence costs based on
a contractual right to use or
share the out-of fence asset
with a third party

If the lease qualifies as a


"Capital Lease" (see Finance
Standard A-102 Leasing),

Other Costs

Cost of resources

Rebuild and Overhaul Costs

Packaging
Transportation/Freight
Import duties
Materials, tool shop and
labor
Insurance
Non-recoverable VAT and
sales taxes
Software packages that form
an integral part of the
operation of manufacturing
equipment
Trial run costs incurred to
qualify a newly developed
asset against a set of predetermined standards of
acceptance

Both internal and/or third


party resources assigned as
a project team member (only
applies to large construction
projects over USD 20 million)

Including major replacement


parts, provided the assets
useful life is significantly
prolonged, and/or new
functionalities are added
(e.g. upgrade kits)

Transaction related costs

Interest Costs

Application Development Costs

Commissions
Legal fees
Title investigation
Title insurance

Capitalization of interest
costs of qualifying assets
(see Finance Standard A109 Interest Capitalization)

See Finance Standard A-126


Accounting for Computer
Software Costs

3.2. Applying the capitalization threshold


The capitalization threshold is USD 2,500 and should be applied to the cost of a complete and
usable asset rather than to the cost of separately purchased components. For example, personal
computers (desktop and laptop computers) and each item of peripheral equipment (monitors,
printers, etc.) are all considered to be complete and separate usable assets.
In certain cases, it may be appropriate to capitalize assets which fall below the capitalization
threshold. For example, if a PMI affiliate purchases a large quantity of an individual asset and the
overall cost is material to the affiliate, capitalization may be appropriate (e.g. purchasing a large
number of computers for the office, furniture acquired for a new office building, bins acquired for
a new cut-filler storage system, etc.) Note: This does not apply to devices such as smartphones.
If the statutory threshold for capitalization is below USD 2,500, individual affiliates may elect to
use the lower limit also for their U.S. GAAP financial statements.
3.3. Expenditures to be expensed
Costs that should be expensed include:

All expenditures that do not add to the utility or functionality of the asset;

Demolition costs should be expensed as incurred, except when (a) contemplated as part of
the acquisition of real estate and (b) occurs within a reasonable period of time;

Transportation, installation, and import duties of second hand equipment transferred between
PMI affiliates;

Start-up (break-in) costs incurred to train employees on new assets;

Scheduled factory overhaul projects designed for regular maintenance of an asset;

Temporary and permanent point of sale materials (TPOSM / PPOSM) and marketing display
fixtures (see Finance Standard A-114 Accounting for Sales Allowances and Expenses);

Devices which due to the rapid technology changes have a short economic useful life and
are exposed to various risks such as wear and tear, theft (e.g. smartphones).

3.4. Depreciation
3.4.1. General guidelines
For U.S. GAAP purposes, the depreciation method should be straight-line over the economic
useful life of the asset, regardless of tax or statutory methods:
Land Improvement
Building
Building Equipment
Machinery & Equipment new
Machinery & Equipment new (innovative formats)
Machinery & Equipment second hand (3rd party)
Machinery & Equipment
Upgrades/overhauls/ rebuilds
Q.A. Equipment
Furniture and Fixtures Furniture
Furniture and Fixtures Office Equipment
(copiers, fax machines, shredders, etc.)
Furniture and Fixtures Audio Visual Equipment
Information Technology (servers, etc.)
Office Technology (workstations, laptops, tablets, etc.)
SOP 98 Software Dev. Major projects
SOP 98 Software Dev. - Others
Transportation Equipment Benefit Cars
Transportation Equipment Sales & Distribution
Transportation Equipment Vans, Trucks, Fork lifts
Transportation Equipment Airplanes
Leasehold Improvements

30 years
40 years
15 years
15 years
5 years
3-8 years
Remaining useful life of base
machine (3-8 years)
5-8 years
5-10 years
5 years
3-5 years
5 years
3 years
5 years
3 years
4-5 years
3-5 years
4-8 years
15 years
Lower of lease term or useful life
of the improvements

The full cost should be depreciated with no residual value.


Land and construction in progress should not be depreciated.
In a very rare case where an assets economic useful life does not match with the life shown in
the above chart, determine the appropriate useful life and document your rationale.
Once a useful life is established, it should only be adapted if there is a significant change in
underlying assumptions.
Accelerated depreciation of an asset should be applied when it becomes evident that the actual
remaining useful life of an asset is shorter than expected. Any significant change requires
consultation with PMI Consolidations & Accounting.
Depreciation of the asset should start in the first month following capitalization to the appropriate
account. When disposing of an asset not fully depreciated, depreciation should cease at the end
of the month prior to the disposal. Fully depreciated assets that are still being used should be
carried on the books until they are sold, transferred or abandoned (scrapped). Depreciation
should not be reduced or discontinued during periods where an asset is temporarily idled.
3.4.2. Classification of Fixed Asset Depreciation
Normal and accelerated depreciation for machinery and equipment should be charged to FME as
the equipment is being used for production. For administrative buildings, furniture & fixtures,
cars, IT equipment, etc. the appropriate P&L line item should be used to record depreciation
expense (i.e. G&A, Distribution, etc.).

3.5. Valuation and accounting treatment for intercompany transfers, disposals,


impairment and asset held for sale
3.5.1. Inter-company Transfers:
For U.S. GAAP purposes, assets transferred between PMI consolidated entities should not
generate any gain or loss at the PMI Consolidation level and should be transferred at U.S. GAAP
net book value (NBV). If an inter-company transfer involves an unconsolidated affiliate please
consult with PMI Consolidation and Accounting to discuss any profit elimination.
For statutory purposes, legal entities may be required to transfer a fixed asset at its fair market
value (FMV), irrespective of its U.S. GAAP net book value. In such a case, the transfer price
should be reviewed and agreed between the two parties. PMI Affiliates can consider the
following guidelines to determine the transfer price:
-

If the fixed asset has been fully depreciated, the commercial transfer price could be 5% of its
original cost;

If the fixed asset has been subject to accelerated depreciation and its NBV is zero, the
commercial transfer price could be the NBV prior to accelerating depreciation or

the fair market value; and

If a mark-up is required for statutory purposes, 5% of the above values could be used.

The transaction value (transfer price) is the basis for the customs valuation and is generally
accepted by the customs authorities of the country of import. If not accepted, a customs value
should be determined in cooperation with the importer and PMI Indirect Taxation.
Depreciation during the transfer period of PP&E between two consolidated legal entities: As a
practical expedient, to align the timing of the recognition in the fixed asset register for the
statutory and U.S. GAAP accounting, depreciation for transferred assets can be put on hold for
the period during which the asset is in transit. The selling affiliate removes the asset from its
balance sheet and stops depreciation upon sale (or upon transfer of title and risk of loss) and the
receiving affiliate records asset as construction-in-progress until the equipment is placed in
service. The receiving affiliate records the asset in the appropriate asset category and resumes
depreciation once the asset is placed in service and is ready for its intended use. The
depreciation period is the assets remaining useful life at the time of sale.
3.5.2. Disposals
Disposals incorporate the following:
-

Sale to a third party, or a PMI unconsolidated affiliate

Loss, including those situations where the value should be written off because
destroyed, or because it cannot be located following a physical inventory

Abandonment or donation which usually occurs when there is no further use for a capital
asset and when there is no market for its sale.

it was

Fixed asset write downs associated with sale, loss, or abandonment are accounted for either
through charging account 8095-Fixed Asset Write Downs or through recording accelerated
depreciation in account 8090/8093 depreciation. In both cases, the cost should be reported
under the same P&L line item used in the regular depreciation of the asset.
3.5.3. Impairment
Impairment is a condition that exists when the carrying amount of a long-lived asset (asset
group) is not recoverable and exceeds its fair value.

A long-lived asset or asset group, if applicable, shall be tested for impairment whenever events
or changes in circumstances indicate that its carrying amount may not be recoverable (i.e.
triggering event). Examples of such events include (list is not all inclusive):
-

A significant decrease in the market value of an asset (asset group);

A significant change in the extent or manner in which an asset (asset group) is used or a
physical deterioration ;

Adverse changes in the legal or business environment that affect the value of an asset (asset
group);

A business forecast indicates that there will be continuing losses or negative cash flows
associated with the asset (asset group).

Asset impairment associated with a restructuring which qualifies as an exit activity (i.e. per
Finance Standard A-133) should be recorded in 6493 - Asset impairment. Consult with PMI
Consolidations and Accounting as prior approval is needed before using this account.
For assessing potential impairment of fixed assets outside of a restructuring, see the Q&A For
Property, Plant, And Equipment (UPDATED).
3.5.4. Assets Held for Sale
When PMI management plans to sell a piece of land, a building, or both, the asset(s) should be
transferred to 1678 - Asset held for sale. Before an asset can be transferred to this account all of
the following criteria should be met:
-

Management with the authority to do so commits to a plan to sell the asset;

Asset is available for immediate sale in its present condition;

Entity initiates a program to locate a buyer and other actions to complete plan to sell;

Entity believes that the completed sale of the asset is probable within one year;

Entity is marketing the asset for sale at a reasonable price relative to its current fair value;

Actions required to complete the plan indicate that significant changes are unlikely or the
plan will be withdrawn.

The asset (or disposal group) is measured at lower of current carrying value or fair value less
cost to sell.
The fair value is determined by:
-

Amount at which assets could be bought or sold using quoted market price in active markets,
if available, otherwise

Discounted cash flow methodology

Consult with PMI Consolidations and Accounting for accounting for assets held for sale as prior
approval is needed before using this account.
3.6. Accounting for government grants
PMI Affiliates may receive government grants for the construction or acquisition of a particular
asset in return for compliance with certain conditions. Government grants that relate to an asset
should be recognized initially as deferred income when there is reasonable assurance that the
entity will comply with the relevant conditions and the grant will be received (Receipt of the cash

itself does not provide conclusive evidence that the conditions of the grant have been or will be
met). The grant (i.e. deferred income) should be amortized over the period necessary to match it
with the related costs, for which it is intended to compensate.
For example, if the grant is based on capital expenditure, the grant would be amortized over the
useful life of the related assets (e.g. machinery and building) or over a required holding period of
the asset. However, if a grant is given for a capital project based on the company creating 100
new jobs over three years, the grant would be amortized over a three year period to match the
related additional labor costs. If a grant is based on capital expenditure and job creation, it may
be appropriate to amortize part of the grant based on the useful life of the related assets and
another part based on the period of the related additional labor costs.

4. Cash Flow Treatment


PMI uses the indirect method to prepare its statement of cash flows. The classification of the
various elements relative to Property, Plant and Equipment are as follows:

Depreciation and amortization Operating Activities (adjustment to reconcile to net earnings)

Gains/Losses on sale of fixed assets Operating Activities (Other)

Write-downs Operating Activities (Other)

Capex Investing Activities (Capital Expenditures)

Cash receipts on sale of fixed assets Investing Activities (Other)

Capital Lease Payments Financing Activities (Other)

5. Authorization and Documentation


In accordance with PMI P&P 38 all purchases, leases, development, sales, transfers, or disposal
of Capital Assets should be properly authorized and documented. This includes investments of
PMI in PP&E that is located at the supplier.

6. Frequently Asked Questions


Q&A For Property Plant And Equipment (UPDATED)
PMIS Investments in PP&E Located at 3rd Parties

7. Contact
If you have any questions regarding Standard A-137, Property, Plant & Equipment, contact the
Manager Consolidations and Accounting or the Manager Accounting Research PMI.