CHAPTER 14 – PAS 16

Property, Plant and Equipment

Measurement after recognition

The cost model mean that property, plant and equipment are carried at cost less any accumulated
depreciation and any accumulated impairment loss.

The revaluation model means that property, plant and equipment are carried at revalued carrying
amount.

The revalued carrying amount is the fair value at the date of revaluation less any subsequent
accumulated depreciation and subsequent accumulated impairment loss.

Acquisition on a 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

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.
Cash discounts are generally considered as reduction of cost

Acquisition on installment basis

When payment for item of property, plant and equipment is deferred beyond normal credit terms,
the cost is the cash price equivalent.

Issuance of share capital

Accordingly, 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

Issuance of bonds payable

PFRS 9, paragraph 5.1.1, provides 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 amount 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 plus any cash payment.

Commercial substance is a new notion and is defined as the event or transaction causing the cash flows
of the entity of change significantly by reason of the exchange.

Construction
The cost of self-constructed property, plant and equipment includes:
1. Direct cost of materials
2. Direct cost of labor
3. Indirect cost and incremental overhead specifically identifiable or traceable to the 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.

Derecognition means that the cost of the property, plant and equipment together with the related
accumulated depreciation shall be removed from the statement of financial position.

PAS 16, paragraph 67, provides that the carrying amount of an item of property, plant and equipment
shall be derecognized on disposal or when to future economic benefits are expected from the use or
disposal

Concept of depreciation

Depreciation is defined as the systematic allocation of the depreciable amount of an asset over the
useful life.

The objective of depreciation is to have each period benefit from the use of the asset bear an equitable
share of the asset cost.

Factors of depreciation
In order to properly compute the amount of depreciation, three factors are necessary, namely
depreciable amount, residual value and useful life.

Depreciable amount is the cost of an asset or other amount substituted for cost, less the residual value.

Residual value is the estimated net amount currently obtainable if the asset is at the end of the useful
life

Useful life in either the period over which an asset is expected to be available for use by the entity, or
the number of production or similar units expected to be obtained from the asset by the entity.

Factors in determining useful life

a. Expected stage of the asset — usage is assessed by reference to the asset's expected capacity or
physical output.
b. Expected physical wear and tear
 c. Technical or commercial obsolescence
d. Legal limits for the use of the asset, such as the expiry date of the related lease.

Depreciation method

Depreciation methods include straight line, production method and diminishing balance method.

Straight line method

Under the straight line method, the annual depreciation charge is calculated by allocating the
depreciable amount equally over the number of years of useful life.

Production method
The production or output method assumes that depreciation is more a function of it’s rather than
passage of time. The useful life of the asset is considered in terms of the output it produces or the
number of hours it works.

Diminishing balance or accelerated methods

The diminishing balance or accelerated methods provide higher depreciation in the earlier years and
lower depreciation in the later years of the useful life.

The accelerated depreciation is on the philosophy that new assets are generally capable of producing
more revenue in the earlier years than the later years.

CHAPTER 15 – PAS 20

Government Grant
GOVERNMENT GRANT
PAS 20, paragraph 3 defines government grant as assistance by government in the form of transfer of
resources of an entity in turn for part or future compliance with certain conditions relating to the
operating activities of the entity.

Recognition and measurement

Government grant shall be recognized when there is reasonable insurance that:
a. The entity will comply with the conditions attaching to the grant.
b. The grant will be received

Government grant shall not be recognized on a cash basis as this is not consistent with generally
accepted accounting practice.

Classifications of government grant

a. Grant related to asset
This is government grant whose primary condition is that an entity qualifying for the grant shall
purchase, construct or otherwise acquire long-term asset.
b. Grant related to income
By residual definition, this is government grant other than grant related to asset.

Accounting for government grant

Government grant shall be recognized as income on systematic basis over the periods in which an entity
recognizes as expenses the related costs for which the grant is intended to compensate.

In other words, the grant is taken to income over one or more periods in which the related cost is
incurred.

Government assistance is action by government designed to provide an economic benefit specific to an

entity or range of entities qualifying under certain criteria.

The essence of government agency is that no value can reasonably be placed upon it. Examples of
government assistance are:

a. Free technical or marketing advice

b. Provision of guarantee
c. Government procurement policy that is responsible for a portion of the entity's sales.

Government assistance does not include the following indirect benefits or benefits not specific to an
entity:

a. Infrastructure in development areas such as improvement to the general transport and

communication network
b. Imposition of trading constraints on competitors
c. Improved facilities such as irrigation for the benefit of an entire local community

Disclosures about government grant

a. The accounting policy adopted for government grant including the method of presentation adopted
in the financial statements.

b. The nature and extent of government grant recognized in the financial statements and an indication
of other forms of government assistance from which the entity has directly benefited

c. Unfulfilled conditions and other contingencies attaching to government assistance that has been
recognized.

It is not required to lose the name of the government agency that gave the grant along with the date of
sanction of the grant by such government agency and the date when cash was received in case of
monetary grant.
SOURCE/S:

CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 2019 EDITION (VALIX)

-Vince Pereda