ESTRADA, EURICH G.

COA 1J

SUMMARY OF CHAPTER 9

PROPERTY, PLANT and EQUIPMENT

According to PAS 16/ IAS 16, the definition of “Property, Plant and Equipment” are “ tangible assets that are held for use in
production of supply of goods or services, for rental to others, or for administrative purposes, and are expected to be used during
more than one period”.

THE CHARACTERISTICS OF PROPERTY, PLANT AND EQUIPMENT BASED FROM ITS DEFINITION:

 The Property, plant and equipment are “tangible assets”, meaning with physical substance.
 The Property, plant and equipment are expected to be used over a period of “more than one year”.
 Accordingly, PPE’s are classified as NON-CURRENT ASSETS
 The PPE s are “Used in Business”, meaning used in production or supply of goods or services, for rental purposes and for
administrative purposes.
 However, Asset that are held for sale, including Land, or held for investment are not included in property, plant
and equipment.

EXAMPLES OF PROPERTY, PLANT AND EQUIPMENT

1. LAND
2. LAND IMPROVEMENTS
3. BUILDING
4. EQUIPMENT
5. NATURAL RESOURCES
6. BEARER PLANTS

DEFINED TERMS

A Bearer plant is a living plant:

a) Is used in the production or supply of agriculture produce;

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

The carrying amount of an asset is the amount at which an asset is recognized after deducting any accumulated depreciation and
accumulated impairment losses.

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

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

The Entity – specific value is the present value of the cash flows an entity expects to arise from the continuing use of asset and from
its disposal at the end of its useful life or expects to incur when settling a liability.

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.

An Impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.

The Recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use.

The Residual value of an asset 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.

Useful life is defined as:

a) It is 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.

RECOGNITION OF PPE

 It is probable that future economic benefits associated with the asset will flow to the entity.
 The cost of the asset can be measured reliably.

INITIAL RECOGNITION OF INDIRECT COSTS

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 - Items of property, plant and equipment may be acquired for safety or environmental reasons. The acquisition of such
property, plant and equipment, although not directly increasing the future economic benefits of any existing item of
property, plant and equipment, may be necessary for an entity to obtain the future economic benefits from its other assets.

Such items of property, plant and equipment qualify for recognition as assets because they enable and entity to derive
future economic benefits from relayed assets in excess of what could be derived had those items not been acquired.

SUBSEQUENT RECOGNITION IF INDIRECT COSTS

DAY TO DAY SERVICING:

 An entity does not recognize in the carrying amount of an item of property, plant and equipment the costs of the
day- to – day servicing of the item. The purpose of these expenditures is often described as for the “ repairs and
maintenance” are primarily the costs of labor and consumables and may include the costs of small parts.
These Costs are expensed through profit or loss.

REPLACEMENT PARTS:

 Parts of some items of property, plant and equipment may require replacement at regular intervals or acquired to
make a less frequently recurring replacement, an entity recognizes in the carrying amount of an item of property,
plant and equipment the cost of replacing part of such an item when that cost is incurred provided that the
recognition criteria are met.

MAJOR INSPECTIONS:

 Costs incurred for major inspections for faults regardless of whether parts of the item are replaced are recognized
to the carrying amount of the item property, plant and equipment.
 Any remaining carrying amount of the cost of the previous inspection (as distinct from physical parts) is
derecognized. This occurs regardless of whether the cost of the previous inspection was identified int the
transaction in which the item was acquired or constructed.

MEASUREMENT AT RECOGNITION

- An item of Property, plant and equipment that qualifies for recognition as an asset shall be measured at COST.

“Cost is the amount of cash or cash equivalent paid and the fair value of the other consideration given to acquire an asset at the
time of acquisition or construction. Or where applicable, the amount attributed to that asset when initially recognized in
accordance with the specific requirements of their IFRSs.”

ELEMENTS OF COST

a) Purchase price, including import duties and nonrefundable purchase taxes, after deducting trade discounts and rebates.
b) Cost directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in
the manner intended by management.
c) Initial estimate of the cost of dismantling and removing the item and restoring the site on which it is located, the obligation
for which an entity incurs.

DIRECTLY ATTRIBUTABLE COST

a) Cost of employee benefits arising directly from the construction or acquisition of the item of property, plant and
equipment.
b) Cost of site preparation.
c) Initial Delivery and Handling cost
d) Installation and assembly cost
e) Professional fees
f) Cost of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced
while bringing the asset to the location and condition, such as samples produced when testing equipment.

COST NOT QUALIFYING FOR RECOGNITION

a) Cost of opening a new facility

b) Cost of introducing a new product or service, including cost of advertising and promotion.
c) Cost of conducting business in a new location or with a new class of customer, including cost of staff training.
d) Administration and other general overhead costs
e) Cost incurred while an item capable of operating in the manner intended by management has yet to brought into use or is
operated at less than full capacity.
f) Initial operating losses
g) Cost of relocating or reorganizing part or all of entity’s operations.

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CASH PRICE EQUIVALENT

The Cost of an item of Property, plant and equipment is the cash price equivalent at the recognition 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 period of credit unless such interest is capitalized in accordance with IAS 23 BORROWING COSTS.

ASSET EXCHANGE

One or more items of property, plant and equipment may be acquired in exchange for a non-monetary asset or assets, or a
combination of monetary and non-monetary assets. The following discussion refers simply to an exchange of one non-monetary
asset for another, but it also applies to all exchanges described in the preceding sentence.

The cost of such an item of property, plant and equipment is measured at fair value unless:

(a) the exchange transaction lacks commercial substance or

(b) the fair value of neither the asset received, nor the asset given up is reliably measurable.

The acquired item is measured in this way even if an entity cannot immediately derecognize the asset given up. If the acquired item
is not measured at fair value, its cost is measured at the carrying amount of the asset given up.

An entity determines whether an exchange transaction has commercial substance by considering the extent to which its future cash
flows are expected to change as a result of the transaction. An exchange transaction has commercial substance if:

(a) the configuration (risk, timing and amount) of the cash flows of the asset received differs from the configuration of the cash flows
of the asset transferred; or

(b) the entity-specific value of the portion of the entity’s operations affected by the transaction changes as a result of the exchange;
and

(c) the difference in (a) or (b) is significant relative to the fair value of the assets exchanged.

For the purpose of determining whether an exchange transaction has commercial substance, the entity-specific value of the portion
of the entity’s operations affected by the transaction shall reflect post-tax cash flows. The result of these analyses may be clear
without an entity having to perform detailed calculations.

The fair value of an asset is reliably measurable if:

(a) the variability in the range of reasonable fair value measurements is not significant for that asset; or

(b) the probabilities of the various estimates within the range can be reasonably assessed and used when measuring fair value.

If an entity is able to measure reliably the fair value of either the asset received or the asset given up, then the fair value of the asset
given up is used to measure the cost of the asset received unless the fair value of the asset received

GOVERNMENT ASSISTANCE

The carrying amount of an item of property, plant and equipment may be reduced by government grants in accordance with IAS 20
Accounting for Government Grants and Disclosure of Government Assistance.

MEASUREMENT AFTER RECOGNITION

An entity shall choose either the cost model or the revaluation model as its accounting policy and shall apply that policy to an entire
class of property, plant and equipment.

COST MODEL

After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation
and any accumulated impairment losses.

REVALUATION MODEL

After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at
a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent
accumulated impairment losses.

Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which
would be determined using fair value at the end of the reporting period

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When an item of property, plant and equipment is revalued, the carrying amount of that asset is adjusted to the revalued amount.
At the date of the revaluation, the asset is treated in one of the following ways:

(a) the gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the
asset. The gross carrying amount may be restated by reference to observable market data or it may be restated
proportionately to the change in the carrying amount. The accumulated depreciation at the date of the revaluation is
adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking into
account accumulated impairment losses; or
(b) the accumulated depreciation is eliminated against the gross carrying amount of the asset.

Revaluation changes shall be accounted for as follows:

If an asset’s carrying amount is increased as a result of a revaluation:

 the increase shall be recognized in other comprehensive income and accumulated in equity under the heading of
revaluation surplus; or
 the increase shall be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset
previously recognized in profit or loss

If an asset’s carrying amount is decreased as a result of a revaluation:

 the decrease shall be recognized in profit or loss; or

 the decrease shall be recognized in other comprehensive income to the extent of any credit balance existing in the
revaluation surplus in respect of that asset. The decrease recognized in other comprehensive income reduces the amount
accumulated in equity under the heading of revaluation surplus.

The effects of taxes on income, if any, resulting from the revaluation of property, plant and equipment are recognized and disclosed
in accordance with IAS 12 Income Taxes.

The revaluation surplus included in equity in respect of an item of property, plant and equipment may be transferred directly to
retained earnings when the asset is derecognized. This may involve transferring the whole of the surplus when the asset is retired or
disposed of. However, some of the surplus may be transferred as the asset is used by an entity. In such a case, the amount of the
surplus transferred would be the difference between depreciation based on the revalued carrying amount of the asset and
depreciation based on the asset’s original cost. Transfers from revaluation surplus to retained earnings are not made through profit
or loss.

DEPRECIATION

Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be
depreciated separately.

The depreciation charge for each period shall be recognized in profit or loss unless it is included in the carrying amount of another
asset. The depreciable amount of an asset shall be allocated on a systematic basis over its useful life and shall reflect the pattern in
which the asset’s future economic benefits are expected to be consumed by the entity.

A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful
life. These methods include:

 straight-line method, the diminishing balance method and the units of production method. Straight-line depreciation
results in a constant charge over the useful life if the asset’s residual value does not change.
 diminishing balance method results in a decreasing charge over the useful life.
 units of production method result in a charge based on the expected use or output.

The entity selects the method that most closely reflects the expected pattern of consumption of the future economic benefits
embodied in the asset. That method is applied consistently from period to period unless there is a change in the expected pattern of
consumption of those future economic benefits.

The depreciable amount of an asset is determined after deducting its residual value. In practice, the residual value of an asset is
often insignificant and therefore immaterial in the calculation of the depreciable amount.

The residual value of an asset may increase to an amount
equal to or greater than the asset’s carrying amount. If it
does, the asset’s depreciation charge is zero unless and until
its residual value subsequently decreases to an amount below
the asset’s carrying amount. Depreciation is recognized even
if the fair value of the asset exceeds its carrying amount, as
long as the asset’s residual value does not exceed its carrying
amount. Repair and maintenance of an asset do not negate
the need to depreciate it.
The useful life of an asset is defined in terms of the asset’s
expected utility to the entity. The asset management policy of
the entity may involve the disposal of assets after a specified
time or after consumption of a specified proportion of the
future economic benefits embodied in the asset. Therefore,
the useful life of an asset may be shorter than its economic
life. The estimation of the useful life of the asset is a matter of
judgement based on the experience of the entity with similar
assets.

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Depreciation of an asset begins when it is available for use, i.e. when it is in the location and condition necessary for it to be capable
of operating in the manner intended by management.

Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale (or included in a disposal group
that is classified as held for sale) and the date that the asset is derecognized.

Therefore, depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully
depreciated. However, under usage methods of depreciation the depreciation charge can be zero while there is no production.

The residual value and the useful life and depreciation method of an asset shall be reviewed at least at each financial year-end and,
if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate in
accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

A depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate.
The revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the
economic benefits of the asset. For example, revenue is affected by other inputs and processes, selling activities and changes in sales
volumes and prices. The price component of revenue may be affected by inflation, which has no bearing upon the way in which an
asset is consumed.

IMPAIREMENT

To determine whether an item of property, plant and equipment is impaired, an entity applies IAS 36 Impairment of Assets. That
Standard explains how an entity reviews the carrying amount of its assets, how it determines the recoverable amount of an asset,
and when it recognizes, or reverses the recognition of, an impairment loss.

COMPENSATION FOR IMPAIRMENT

Compensation from third parties for items of property, plant and equipment that were impaired, lost or given up shall be included in
profit or loss when the compensation becomes receivable.

DERECOGNITION

The carrying amount of an item of property, plant and equipment shall be derecognized:

(a) on disposal; or
(b) when no future economic benefits are expected from its use or disposal.

The gain or loss arising from the derecognition of an item of property, plant and equipment shall be determined as the difference
between the net disposal proceeds, if any, and the carrying amount of the item.

The gain or loss shall be included in profit or loss when the item is derecognized (unless IFRS 16 Leases requires otherwise on a sale
and leaseback). Gains shall not be classified as revenue.

However, an entity that, in the course of its ordinary activities, routinely sells items of property, plant and equipment that it has held
for rental to others shall transfer such assets to inventories at their carrying amount when they cease to be rented and become held
for sale. The proceeds from the sale of such assets shall be recognized as revenue in accordance with IFRS 15 Revenue from
Contracts with Customers. IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred
to inventories.

PRESENTATION AND DISCLOSURES

An entity shall present and disclose information that enables users of the financial statements about the entity’s investment in its
property, plant and equipment and the changes in such investment.

(a) In the Notes to the financial statement:

(a) The financial statements shall disclose, for each class of property, plant and equipment:
(i) the measurement bases used for determining the gross carrying amount;
(ii) the depreciation methods used;
(iii) the useful lives or the depreciation rates used;
(iv) the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment
losses) at the beginning and end of the period; and (v) a reconciliation of the carrying amount at the beginning
and end of the period showing:
 additions;
 assets classified as held for sale or included in a disposal group classified as held for sale and other
disposals;
 acquisitions through business combinations;
 increases or decreases resulting from revaluations and from impairment losses recognized or reversed in
other comprehensive income;
 impairment losses recognized in profit or loss;

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  impairment losses reversed in profit or loss;
 depreciation;
 the net exchange differences arising on the translation of the financial statements from the functional
currency into a different presentation currency, including the translation of a foreign operation into the
presentation currency of the reporting entity; and

(b) The financial statements shall also disclose:

i. the existence and amounts of restrictions on title, and property, plant and equipment pledged as security for liabilities;
ii. (ii) the amount of expenditures recognized in the carrying amount of an item of property, plant and equipment in the
course of its construction;
iii. the amount of contractual commitments for the acquisition of property, plant and equipment; and

(iv) if it is not disclosed separately in the statement of comprehensive income, the amount of compensation from third parties for
items of property, plant and equipment that were impaired, lost or given up that is included in profit or loss.

(c) If items of property, plant and equipment are stated at revalued amounts, the following shall be disclosed in addition to the
disclosures required by IFRS 13 Fair Value Measurement:

(i) the effective date of the revaluation;

(ii) whether an independent valuer was involved;
(iii) for each revalued class of property, plant and equipment, the carrying amount that would have been recognized had the
assets been carried under the cost model; and
(iv) the revaluation surplus, indicating the change for the period and any restrictions on the distribution of the balance to
shareholders.

Users of financial statements may also find the following information relevant to their needs:

a) the carrying amount of temporarily idle property, plant and equipment;

b) the gross carrying amount of any fully depreciated property, plant and equipment that is still in use;
c) the carrying amount of property, plant and equipment retired from active use and not classified as held for sale; and
d) when the cost model is used, the fair value of property, plant and equipment when this is materially different from the
carrying amount.

SUMMARY OF CHAPTER 10

INVESTMENT PROPERTY

According to PAS 40/IAS 40, the definition of Investment property is “as property (land or building or part of a building or both)

Held by an owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both.”

Otherwise speaking, only land and building can qualify as investment property.

An equipment or any movable property cannot qualify as investment property.

An Investment property is not held:

a) For use in the production or supply of goods or services or for administrative purposes.
b) For sale in the ordinary course of business.

The property held by an owner or by the lessee under a finance lease for use in the production or supply of goods or services, or for
administrative purposes is known as owner – occupied property.

DEFINED TERMS

PROPERTY HELD UNDER OPERATING LEASE

A property interest that is held by a lessee under an operating lease may be classified and accounted for as investment property if,
and only if, the property would otherwise meet the definition of an investment property and the lessee uses the fair value model for
the asset recognized.

This classification alternative is available on a property-by-property basis. However, once this classification alternative is selected for
one such property interest held under an operating lease, all property classified as investment property shall be accounted for using
the fair value model. When this classification alternative is selected, any interest so classified is included in the disclosures.

PARTIAL OWN USE

Investment property is held to earn rentals or for capital appreciation or both. Therefore, an investment property generates cash
flows largely independently of the other assets held by an entity. This distinguishes investment property from owner-occupied

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property. The production or supply of goods or services (or the use of property for administrative purposes) generates cash flows
that are attributable not only to property, but also to other assets used in the production or supply process. IAS 16 Property, plant
and equipment applies to owner-occupied property.

Some properties comprise a portion that is held to earn rentals or for capital appreciation and another portion that is held for use in
the production or supply of goods or services or for administrative purposes. If these portions could be sold separately (or leased out
separately under a finance lease), an entity accounts for the portions separately.

If the portions could not be sold separately, the property is investment property only if an insignificant portion is held for use in the
production or supply of goods or services or for administrative purposes.

PROVISION OF ANCILLARY SERVICES TO OCCUPANTS

In some cases, an entity provides ancillary services to the occupants of a property it holds. An entity treats such a property as
investment property if the services are insignificant to the arrangement as a whole. An example is when the owner of an office
building provides security and maintenance services to the lessees who occupy the building. In other cases, the services provided are
significant.

INTER – COMPANY RENTALS

Property leased to, and occupied by, its parent or subsidiary does not qualify as investment property in consolidated financial
statements because the property is owner-occupied from the perspective of the group. Such property will be investment property in
the separate financial statements of the lessor.

MEASUREMENT AT INITIAL RECOGNITION

An investment property shall be measured initially at its cost. Transaction costs shall be included in the initial measurement. The cost
of a purchased investment property comprises its purchase price and any directly attributable expenditure.

Directly attributable expenditure includes, for example, professional fees for legal services, property transfer taxes and other
transaction costs.

The initial cost of a property interest held under a lease and classified as an investment property shall be as prescribed for a finance
lease, i.e. the asset shall be recognized at the lower of the fair value of the property and the present value of the minimum lease
payments. An equivalent amount shall be recognized as a liability.

MEASUREMENT AFTER RECOGNITION

An entity may:

a) choose either the fair value model or the cost model for all investment property backing liabilities that pay a return linked
directly to the fair value of, or returns from, specified assets including that investment property; and
b) choose either the fair value model or the cost model for all other investment property, regardless of the choice made in (a).

Cost model  When a property interest held by a lessee under an

operating lease is classified as an investment
 After initial recognition, an entity that chooses the
property is not elective; the fair value model shall be
cost model shall measure all of its investment
applied.
properties in accordance with IAS 16’s requirements
 A gain or loss arising from a change in the fair value
for that model, other than those that meet the
of investment property shall be recognized in profit
criteria to be classified as held for sale (or are
or loss for the period in which it arises.
included in a disposal group that is classified as held
 Requirements relating to the inability to measure fair
for sale) in accordance with IFRS 5. Investment
value reliably.
properties that meet the criteria to be classified as
held for sale (or are included in a disposal group that
is classified as held for sale) shall be measured in
accordance with IFRS 5.

Fair value model

 After initial recognition, an entity that chooses the

fair value model shall measure all of its investment
property at fair value,

TRANSFERS

Transfers to, or from, investment property shall be made when, and only when, there is a change in use, evidenced by:

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 a) commencement of owner-occupation, for a transfer from investment property to owner-occupied property;
b) commencement of development with a view to sale, for a transfer from investment property to inventories;
c) end of owner-occupation, for a transfer from owner-occupied property to investment property; or
d) commencement of an operating lease to another party, for a transfer from inventories to investment property.

For a transfer from investment property carried at fair value to owner-occupied property or inventories:

 the property’s deemed cost for subsequent accounting in accordance with IAS 16 Property, plant and equipment or IAS 2
Inventories shall be its fair value at the date of change in use. If an owner-occupied property becomes an investment
property that will be carried at fair value, an entity shall apply IAS 16 Property, plant and equipment up to the date of
change in use.
 the entity shall treat any difference at that date between the carrying amount of the property in accordance with IAS 16
Property, plant and equipment and its fair value in the same way as a revaluation in accordance with IAS 16 Property, plant
and equipment.

For a transfer from inventories to investment property:

 that will be carried at fair value, any difference between the fair value of the property at that date and its previous carrying
amount shall be recognized in profit or loss.

DISPOSALS

An investment property shall be de-recognized (eliminated from the statement of financial position) on disposal or when the
investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal.

Gains or losses arising from the retirement or disposal of investment property shall be determined as the difference between the net
disposal proceeds and the carrying amount of the asset and shall be recognized in profit or loss.

Compensation from third parties for investment property that was impaired, lost or given up shall be recognized in profit or loss
when the compensation becomes receivable.

PRESENTATION AND DISCLOSURE

An entity shall present and disclose information that enables users of the financial statements to evaluate the financial effects of
investment property held in accordance with either the cost model or the fair value model.

COST MODEL AND FAIR VALUE MODEL

In the Notes to the financial statement: An entity that applies either the cost model or the fair value model shall disclose:) whether it
applies the fair value model or the cost model;

a) when classification is difficult, the criteria it uses to distinguish investment property from owner-occupied property and
from property held for sale in the ordinary course of business;
b) the existence and amounts of restrictions on the realizability of investment property or the remittance of income and
proceeds of disposal; and
c) contractual obligations to purchase, construct or develop investment property or for repairs, maintenance or
enhancements.

In the Statement of Comprehensive Income:

a) the amounts recognized in profit or loss for:

(i) rental income from investment property;
(ii) direct operating expenses (including repairs and maintenance) arising from investment property that generated rental
income during the period;
(iii) direct operating expenses (including repairs and maintenance) arising from investment property that did not generate
rental income during the period; and
(iv) the cumulative change in fair value recognized in profit or loss on a sale of investment property from a pool of assets in
which the cost model is used into a pool in which the fair value model is used.

COST MODEL
The following are disclosure requirements for investment property held in accordance with the cost model:

In the Notes to the financial statement:

An entity that applies the cost model shall disclose:

a) the depreciation methods used;

b) the useful lives or the depreciation rates used;
c) )the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the
beginning and end of the period
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 d) ; a reconciliation of the carrying amount of investment property at the beginning and end of the period, showing the
following:
i. additions, disclosing separately those additions resulting from acquisitions and those resulting from subsequent
expenditure recognized as an asset;
ii. additions resulting from acquisitions through business combinations;
iii. assets classified as held for sale or included in a disposal group classified as held for sale and other disposals;
iv. depreciation;
v. the amount of impairment losses recognized, and the amount of impairment losses reversed, during the period;
vi. the net exchange differences arising on the translation of the financial statements into a different presentation
currency, and on translation of a foreign operation into the presentation currency of the reporting entity;
vii. transfers to and from inventories and owner-occupied property; and
viii. other changes.

(e) the fair value of investment property. In the exceptional cases, when an entity cannot measure the fair value of the
investment property reliably, it shall disclose:

(i) a description of the investment property;

(ii) an explanation of why fair value cannot be measured reliably; and (iii) If possible, the range of estimates within which fair
value is highly likely to lie.

FAIR VALUE MODEL

The following are disclosure requirements for investment property held in accordance with the fair value model:

In the Notes to the financial statement:

An entity that applies the fair value model shall disclose:

(a) a reconciliation between the carrying amounts of investment property at the beginning and end of the period, showing the
following:
i. additions, disclosing separately those additions resulting from acquisitions and those resulting from subsequent
expenditure recognized in the carrying amount of an asset;
ii. additions resulting from acquisitions through business combinations;
iii. assets classified as held for sale or included in a disposal group classified as held for sale and other disposals;
iv. (net gains or losses from fair value adjustments;
v. the net exchange differences arising on the translation of the financial statements into a different presentation
currency, and on translation of a foreign operation into the presentation currency of the reporting entity;
vi. transfers to and from inventories and owner-occupied property; and (vii) other changes.
(b) when a valuation obtained for investment property is adjusted significantly for the purpose of the financial statements, for
example to avoid double-counting of assets or liabilities that are recognized as separate assets and liabilities, the entity shall
disclose a reconciliation between the valuation obtained and the adjusted valuation included in the financial statements,
showing separately the aggregate amount of any recognized lease liabilities that have been added back, and any other
significant adjustments.
(c) the extent to which the fair value of investment property (as measured or disclosed in the financial statements) is based on
a valuation by an independent valuer who holds a recognized and relevant professional qualification and has recent
experience in the location and category of the investment property being valued. If there has been no such valuation, that
fact shall be disclosed.

SUMMARY OF CHAPTER 11
LIABILITIES

According to PAS 37/IAS 37, the definition of Liability is “a present obligation of the entity arising from past events which is expected
to be settled by the outflow of economic benefits.”

The Essential Characteristics of a Liability are:

a) The liability is the present obligation of a particular entity

b) The liability arises from Past transaction or event.
c) The settlement of the liability requires an outflow of resources embodying economic benefits.

According to PAS 1, paragraph 69, provides that an entity shall classify a liability as current when:

a) The entity expects to settle the liability within the entity’s normal operating cycle.
b) The entity holds the liability primarily for the purpose of trading.
c) The liability is due to be settled within twelve months After reporting period.

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 d) The entity does not have an unconditional right right to defer settlement of the liability for at least twelve months after the
reporting period.

The term “Noncurrent Liabilities “is also a residual definition from PAS 1, paragraph 69, provides that all liabilities not classified as
current are classified as noncurrent.

RECOGNITION OF LIABILTY

An entity must recognize a provision if, and only if: [IAS 37.14]

 a present obligation (legal or constructive) has arisen as a result of a past event (the obligating event),

 payment is probable ('more likely than not'), and

 the amount can be estimated reliably.

An obligating event is an event that creates a legal or constructive obligation and, therefore, results in an entity having no realistic
alternative but to settle the obligation. [IAS 37.10]

A constructive obligation arises if past practice creates a valid expectation on the part of a third party, for example, a retail store that
has a long-standing policy of allowing customers to return merchandise within, say, a 30-day period. [IAS 37.10]

A possible obligation (a contingent liability) is disclosed but not accrued. However, disclosure is not required if payment is remote.
[IAS 37.86]

In rare cases, for example in a lawsuit, it may not be clear whether an entity has a present obligation. In those cases, a past event is
deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present
obligation exists at the balance sheet date. A provision should be recognized for that present obligation if the other recognition
criteria described above are met. If it is more likely than not that no present obligation exists, the entity should disclose a contingent
liability, unless the possibility of an outflow of resources is remote. [IAS 37.15]

Measurement of provisions

The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the
balance sheet date, that is, the amount that an entity would rationally pay to settle the obligation at the balance sheet date or to
transfer it to a third party. [IAS 37.36] This means:

 Provisions for one-off events (restructuring, environmental clean-up, settlement of a lawsuit) are measured at the most
likely amount. [IAS 37.40]

 Provisions for large populations of events (warranties, customer refunds) are measured at a probability-weighted expected
value. [IAS 37.39]

 Both measurements are at discounted present value using a pre-tax discount rate that reflects the current market
assessments of the time value of money and the risks specific to the liability. [IAS 37.45 and 37.47]

In reaching its best estimate, the entity should take into account the risks and uncertainties that surround the underlying events.
[IAS 37.42]

If some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement
should be recognized as a separate asset, and not as a reduction of the required provision, when, and only when, it is virtually
certain that reimbursement will be received if the entity settles the obligation. The amount recognized should not exceed the
amount of the provision. [IAS 37.53]

In measuring a provision consider future events as follows:

 forecast reasonable changes in applying existing technology [IAS 37.49]
 
 ignore possible gains on sale of assets [IAS 37.51]
 
 consider changes in legislation only if virtually certain to be enacted [IAS 37.50]

Remeasurement of provisions [IAS 37.59]

 Review and adjust provisions at each balance sheet date
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 If an outflow no longer probable, provision is reversed.
Some examples of provisions
Circumstance Recognise a provision?

Restructuring by sale of Only when the entity is committed to a sale, i.e. there is a binding sale agreement [IAS 37.78]
an operation

Restructuring by closure Only when a detailed form plan is in place and the entity has started to implement the plan, or
or reorganisation announced its main features to those affected. A Board decision is insufficient [IAS 37.72,
Appendix C, Examples 5A & 5B]

Warranty When an obligating event occurs (sale of product with a warranty and probable warranty
claims will be made) [Appendix C, Example 1]

Land contamination A provision is recognised as contamination occurs for any legal obligations of clean up, or for
constructive obligations if the company's published policy is to clean up even if there is no
legal requirement to do so (past event is the contamination and public expectation created by
the company's policy) [Appendix C, Examples 2B]

Customer refunds Recognise a provision if the entity's established policy is to give refunds (past event is the sale
of the product together with the customer's expectation, at time of purchase, that a refund
would be available) [Appendix C, Example 4]

Offshore oil rig must be Recognise a provision for removal costs arising from the construction of the the oil rig as it is
removed and sea bed constructed, and add to the cost of the asset.  Obligations arising from the production of oil
restored are recognised as the production occurs [Appendix C, Example 3]

Abandoned leasehold, A provision is recognised for the unavoidable lease payments [Appendix C, Example 8]
four years to run, no re-
letting possible

CPA firm must staff No provision is recognised (there is no obligation to provide the training, recognise a liability if
training for recent and when the retraining occurs) [Appendix C, Example 7]
changes in tax law

Major overhaul or repairs No provision is recognised (no obligation) [Appendix C, Example 11]

Onerous (loss-making) Recognise a provision [IAS 37.66]

contract

Future operating losses No provision is recognised (no liability) [IAS 37.63]

Restructurings
A restructuring is: [IAS 37.70]
 sale or termination of a line of business
 
 closure of business locations
 
 changes in management structure
 
 fundamental reorganizations.
Restructuring provisions should be recognized as follows: [IAS 37.72]
 Sale of operation: recognize a provision only after a binding sale agreement [IAS 37.78]
 
 Closure or reorganization: recognize a provision only after a detailed formal plan is adopted and has started being
implemented, or announced to those affected. A board decision of itself is insufficient.
 
 Future operating losses: provisions are not recognized for future operating losses, even in a restructuring
 
 Restructuring provision on acquisition: recognize a provision only if there is an obligation at acquisition date [IFRS 3.11]
Restructuring provisions should include only direct expenditures necessarily entailed by the restructuring, not costs that associated
with the ongoing activities of the entity. [IAS 37.80]
What is the debit entry?

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When a provision (liability) is recognized, the debit entry for a provision is not always an expense. Sometimes the provision may
form part of the cost of the asset. Examples: included in the cost of inventories, or an obligation for environmental cleanup when a
new mine is opened or an offshore oil rig is installed. [IAS 37.8]
Use of provisions
Provisions should only be used for the purpose for which they were originally recognised. They should be reviewed at each balance
sheet date and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources will be required
to settle the obligation, the provision should be reversed. [IAS 37.61]
Contingent liabilities
Since there is common ground as regards liabilities that are uncertain, IAS 37 also deals with contingencies. It requires that entities
should not recognise contingent liabilities – but should disclose them, unless the possibility of an outflow of economic resources is
remote. [IAS 37.86]
Contingent assets
Contingent assets should not be recognised – but should be disclosed where an inflow of economic benefits is probable. When the
realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate. [IAS
37.31-35]
Disclosures
Reconciliation for each class of provision: [IAS 37.84]
 opening balance
 
 additions
 
 used (amounts charged against the provision)
 
 unused amounts reversed
 
 unwinding of the discount, or changes in discount rate
 
 closing balance
A prior year reconciliation is not required. [IAS 37.84]
For each class of provision, a brief description of: [IAS 37.85]
 nature
 
 timing
 
 uncertainties
 
 assumptions
 
 reimbursement, if any.

RESOURCES:

FINANCIAL ACCOUNTING VOL. 1(C.T. VALIX, J.F. PERALTA, C.A.M, VALIX) 2017 EDITION

CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS (PFRSs AND PASs - BASED) – (CABRERA, OCAMPO, CABRERA) 2018 –
2019 EDITION.

INTERNATIONAL ACCOUNTING STANDARDS / PHILIPPINE ACCOUNTING STANDARDS – 16 (PROPERTY, PLANT AND EQUIPMENT)

INTERNATIONAL ACCOUNTING STANDARDS / PHILIPPINE ACCOUNTING STANDARDS – 40 (INVESTMENT PROPERTY)

INTERNATIONAL ACCOUNTING STANDARDS / PHILIPPINE ACCOUNTING STANDARDS - 37 (LIABILITIES, CONTIGENT LIABILITES AND
CONTINGENT ASSETS)

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