Land, Building, and Machinery

IA 1 | J. Tamayao
 COST OF LAND {BID STOP M CLER}
q Broker’s Commission or Fees q Clearing cost of unwanted old
q Improvements of permanent structures, less proceeds from
character (Grading Levelling) salvage.
q Draining cost and filling the land. q Legal Fees and other expenditures
q Survey Cost for establishing clean title.
q Taxes unpaid up to the date of q Escrow fees on the land
acquisition assumed by the buyer. q Relocation or Reconstruction cost of
q Option Cost to buy the acquired property belonging to others in order
land. to acquire possession. Including
q Purchase Cost Payments to tenants to induce them
q Mortgages, encumbrances and to vacate the premises.
interest on such mortgages q Registration fees and transfer of
assumed by buyer. title.
IA 1 | J. Tamayao
 IMPROVEMENTS

Permanent Other
Improvement Improvements

Cost of: surveying, clearing

Fences, water systems,
grading and leveling,
drainage systems, sidewalks
subdividing.
and pavements, landscaping.
PART OF LAND

Part of the blueprint of the Not part of the blueprint of the

Building Building
BUILDING LAND IMPROVEMENT
IA 1 | J. Tamayao
 OTHER TREATMENT ON LAND ACCOUNT
qLand acquired and held for speculation is classified as an
investment.

qLand held by a real estate concern for resale should be

classified as inventory.

qLand held for sale is classified as Non-Current Asset held

for sale.
IA 1 | J. Tamayao
 SPECIAL ASSESSMENT ON LAND ACCOUNT

qSpecial Assessment on land account is to be capitalized

as part of the land.

IA 1 | J. Tamayao
 COST OF PURCHASED BUILDING {TIP LRT}
qTaxes unpaid up to the date of acquisition assumed by the buyer.
qInterest, Liens and other encumbrances on the building assumed
by the buyer.
qPurchase Price
qLegal Fees and other expenses incurred in connection with the
purchase.
qRenovating or Remodeling costs incurred to put a building
purchased in a condition suitable for its intended use such as
lighting installations, partitions and repairs.
qTenants paid to induce them to vacate the premises.
IA 1 | J. Tamayao
 COST OF CONSTRUCTED BLDG {SPACED SIT}
qSuperintendent fee
qPermits and licenses on building construction
qArchitect Fee
qConstruction Costs (Materials, labor employed and overhead incurred
during the construction
qExcavation Cost
qDemolition Cost of old building and old structures, less proceeds from
salvage
qService equipment and fixtures made permanent part of the structure
qInterest on construction loans and insurance
qTemporary Buildings used as construction office and/or tools or materials
shed IA 1 | J. Tamayao
 LAND AND BUILDING ACQUIRED
qAny purchase cost and directly attributable cost:

Has Fair Values Building has

minimal value

Do not allocate a cost to the

Allocate using relative fair
building. The cost is only
values
attributable to the Land.

IA 1 | J. Tamayao
 EXAMPLE: LAND AND BUILDING ACQUIRED
CDH purchased a land and building at a total cost of Php
10,000,000 .

What is the amount allocated to the Land and Building:

q Assuming the Land has a Fair Value of 13M and the
Building has a Fair Value of 7m.
q Assuming the building has a minimal value.

IA 1 | J. Tamayao
 EXAMPLE: LAND AND BUILDING ACQUIRED
CDH purchased a land and building at a total cost of Php
10,000,000. Broker’s fee of 50,000 was also incurred.

What is the amount allocated to the Land and Building:

q Assuming the Land has a Fair Value of 13M and the
Building has a Fair Value of 7m.
q Assuming the building has a minimal value.

IA 1 | J. Tamayao
 OLD BUILDING ACQUIRED TO BE DEMOLISHED
q In accordance with PIC Q&A No. 2012-02
q ISSUE: When an entity which owns a property (consisting of land and an old building)
constructs a new building on the site of the old building, how shall the entity account for
the carrying value of the old building under the following scenarios?

Entity acquired the bldg in the current Entity acquired the bldg in the
period previous period

The allocated cost of the old
building shall not form part of
the cost of the new building.
Treated as loss.
IA 1 | J. Tamayao
The amount shall not be capitalized as
part of the cost of the new building;
instead, such amount shall be charged
to profit or loss
 TREATMENT OF INSURANCE

Insurance is for the Construction Insurance for other Purposes

Part as cost of the building Expense / Asset

Note: If during the construction there are claims for damages and there is no
insurance on construction, the claim is treated as an expense.
IA 1 | J. Tamayao
 EXAMPLE: COSTS OF LAND AND BUILDING
The expenditures and receipts below are related to land, land improvements,
and buildings acquired for use in a business enterprise. Determine how the
following should be classified:
q Money borrowed to pay building contractor (signed a note)

q Payment for construction from note proceeds

q Cost of land fill and clearing
q Delinquent real estate taxes on property assumed by purchaser
q Premium on 6-month insurance policy during construction
q Architect’s fee on building
q Cost of real estate purchased as a plant site
IA 1 | J. Tamayao
 EXAMPLE: COSTS OF LAND AND BUILDING
q Commission fee paid to real estate agency
q Cost of razing and removing building
q Installation of fences around property
q Proceeds from residual value of demolished building
q Interest paid during construction on money borrowed for construction
q Cost of parking lots and driveways
q Cost of trees and shrubbery planted (permanent in nature)
q Excavation costs for new building
IA 1 | J. Tamayao
 LAND AND BUILDING AS INVESTMENT
Investment Property (PAS 40)
Ø Land or a building or part of a building or both held by the
owner or by the lessee under a finance lease to earn rentals or
for capital appreciation or both.
Control? Type of Property Purpose
Land
Owner To Earn Rentals
Bldg / Part
Lessee in a
Finance Lease Land & Bldg For capital Appreciation
 EXAMPLES OF INVESTMENT PROPERTY

EXAMPLES:

ü Land held for long-term capital appreciation

ü Land held for undecided future use
ü Building leased out under an operating lease
ü Vacant building held to be leased out under an operating lease
ü Property under construction as investment property

IA 1 | J. Tamayao
 IP: PARTIAL OWN USE
If the owner uses part of the property for its own use, and part to
earn rentals or for capital appreciation

Portions can be Portions cannot

sold or leased out be sold or leased
separately out separately

Account Separately.
Own Use Significant = PPE
Own Use = PPE
Leased/ CA Significant =
Leased/CA = Investment
Investment Property
Property
IA 1 | J. Tamayao
 IP: ANCILLIARY SERVICES
If the enterprise provides ancillary services to the occupants of a
property held by the enterprise, the appropriateness of
classification as investment property is determined by the
significance of the services provided.

Insignificant Significant

Investment Property PPE

IA 1 | J. Tamayao
 MEASUREMENT OF INVESTMENT PROPERTY

INITIAL Cost + Transaction Cost

Cost Model
SUBSEQUENT
Fair Value Model
IA 1 | J. Tamayao
 TRANSFER TO OR FROM INVESTMENT PROPERTY
FROM TO
Investment property carried at Owner-occupied property or
fair value inventories
Investment property carried
Owner-occupied property
at fair value
Investment property at fair
Inventories
value
Completed investment
Investment property under
property that will be carried at
construction or development
fair value
Investment property under Owner-occupied property or
the cost model inventories
TREATMENT
Fair value at the change of use is the
'cost' of the property under its new
classification
Difference in carrying amount and fair
value as revaluation under PAS 16
Difference in carrying amount and fair
value is recognized in profit or loss.
Difference between the fair value at the
date of transfer and the previous
carrying amount should be recognized
in net profit or loss
No change the carrying amount of the
property transferred
 COST OF MACHINERY{IF PIT WAS FUND]
q Insurance while in transit. q Adjustment to machinery for
q Freight, handling, storage and operational efficiency and to
other cost related to the increase capacity.
acquisition. q Safety rail and platform
q Purchase Price surrounding machine
q Installation cost, including site q Fees paid to consultants for
preparation and assembling. advice on acquisition of the
q Cost of Testing and Trial run, and machinery
other cost necessary in preparing q Unloading charges
the machinery for use. q Nonrefundable sales tax
q Water device to keep machine q Dismantling and removing and
cool. restoring cost
IA 1 | J. Tamayao
 PPE COSTS SUBSEQUENT TO ACQUISITION
Recognize costs subsequent to acquisition as an asset when the
costs can be measured reliably and it is probable that the
company will obtain future economic benefits.

Evidence of future economic benefit would include increases in

ü useful life,
ü quantity of product produced, and
ü quality of product produced.

ADDITIONS REPAIRS REARRANGEMENT REPLACEMENT

IA 1 | J. Tamayao
 PPE COSTS SUBSEQUENT TO ACQUISITION

REVENUE EXPENDITURE CAPITAL EXPENDITURE

Expenditure that benefits Expenditure that benefits

only the current period. not only the current but
also the future periods
EXPENSED CAPITALIZED.
 ADDITIONS

Extensions, enlargements, or
Definition expansions made to an existing asset

Capitalized as part of the cost of the

Treatment asset

IA 1 | J. Tamayao
 REPAIRS
ORDINARY
Recurring, relatively small expenditures
• Maintain normal operating condition
• Do not add materially to use value
• Do not extend useful life
EXPENSED
Definition: Expenditures that
maintain assets in condition for
operation.
MAJOR
Not recurring, relatively large expend..
• Primarily increase the quality and/or
output of services
• Primarily extend the useful life

IA 1 | J. Tamayao CAPITALIZED
 REARRANGEMENT AND REINSTALLATIONS
Definition: Movement of assets from one location to
another.
Measurable
Benefit?
Yes. Provide greater efficiency in No. Benefit cannot be measured
production or reduce production reliably.
costs. Benefits extend into future EXPENSED
accounting periods.
CAPITALIZED IA 1 | J. Tamayao
 REPLACEMENT OR IMPROVEMENT
Major component of asset is removed and
replaced with the same type of component with
comparable performance capabilities
Definition (replacement) or a different type of component
having superior performance capabilities
(betterment)

Capitalized as part of the cost of the

Treatment asset

IA 1 | J. Tamayao
 EXAMPLE: SUBSEQUENT COSTS
For each of the following items, indicate whether the expenditure should be
capitalized (C) or expensed (E) in the period incurred.
1) Improvement.
2) Replacement of a minor broken part on a machine.
3) Expenditure that increases the useful life of an existing asset.
4) Expenditure that increases the efficiency and effectiveness of a productive asset
but does not increase its salvage value.
5) Expenditure that increases the efficiency and effectiveness of a productive asset
and increases the asset’s salvage value.
6) Expenditure that increases the quality of the output of the productive asset.
7) Improvement to a machine that increased its fair market value and its production
capacity by 30% without extending the machine’s useful life.
8) Ordinary repairs.
 PATTERNS AND DIES

For regular operations For special products

Treated as PPE Expensed.

Part of the cost of the product.
 CONTAINERS

RETURNABLE NOT RETURNABLE

PPE or NCA Expensed.

END