PAS 16

PROPERTY, PLANT AND
EQUIPMENT
 PROPERTY, PLANT AND EQUIPMENT
• Tangible
• Held for use in production or supply of goods and
services
• For rental to others
• For administrative purposes
• Expected to be used during more than one period
 RECOGNITION OF PPE
• When it is probable that future economci benefits
associated with the asset will flow to the entity
• The cost of the asset can be measured reliably
 MEASUREMENT AT RECOGNITION
• At COST
• Cost ­ 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
 ELEMENTS OF COST
• Purchase price, including import duties and
nonrefundable purchase taxes, after deducting trade
discounts and rebates
• 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
• Initial estimate of the cost of dismantling and removing
the item and restoring the site on which it is located for
which an entity has a present obligation
 DIRECTLY ATTRIBUTABLE COSTS
• Cost of employee benefit arising directly from the
cnstruction or acquisition of the item of PPE
• Cost of site preparation
• Initial delivery and handling cost
• Installation and assembly cost
• Professional fee
• Costs of testing whether the asset is functioning
properly
 COSTS NOT QUALIFYING FOR
RECOGNITION
• Cost of opening a new facility
• Cost of introducing a new product or service
• Cost of conducting business in a new location or with a
new class of customer
• Administration and other general overhead cost
• Cost 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
• Initial operating loss
• Cost of relocating or reorganizing part or all of an entity
operations
 MEASUREMENT AFTER RECOGNITION
• After initial recognition, an entity shall choose either the
cost model or the revaluation model as the accounting
policy
• It shall be applied to an entire class
• Cost model = Cost less any accumulated depreciation
and accumulated impairment loss
• Revaluation model = FV at the date of revaluation less
any subsequent accumulated depreciation and
subsequent accumulated impairment loss
 ACQUISITION ON A CASH BASIS
• Cash price equivalent at the recognition date
• Cash paid plus directly attributable costs and
other necessary cost in bringing the asset in
the location and condition for the intended use
 ACQUISITION ON ACCOUNT
• With discount ­ the cost of the asset is equal to the
invoice price minus the discount, regardless
whether the discount is taken or not
• Cash discounts are generally considered as
reduction of cost and not as income
 ACQUISITION ON INSTALLMENT BASIS
• Deferred beyond normal credit terms ­ cost is
the cash price equivalent
• The excess of the installment price over the
cash price is treated as an interest to be
amortized over the credit period
 ISSUANCE OF SHARE CAPITAL
• Fair valur of the consideration received
• In priority:
– FV of the property received
– FV of the share capital
– Par value or stated value of the share capital
 ISSUANCE OF BONDS PAYABLE

• In priority
– FV of bonds payable
– FV of assets received
– Face amount of bonds payable
 EXCHANGE
Cost of PPE acquired in exchange for a
nonmonetary asset or a combination of
monetary and nonmonetary asset is measured
at FV plus any cash payment

Exchange is recognized at carrying amount if

the exchange transaction lacks commercial
substance
 DEFINITION OF COMMERCIAL
SUBSTANCE
• New notion and is defined as the event or
transaction causing the cash flows of the
entity to change significantly by reason of the
exchange
• An exchange has commercial substance
when the cash flows of the asset received
differ significantly from the cash flows of the
asset transferred
 CONSTRUCTION
• Direct cost of materials
• Direct cost of labor
• Indirect cost and incremental overhead
specifically identifiable or traceable to the
construction
 DERECOGNITION
• means that the cost of the PPE together with the related
accumulated depreciation shall be removed from the
statement of financial position
• the carrying amount of an item of PPE shall be
derecognized on disposal or when no future economic
benefits are expected from the use or disposal
• Gain/Loss shall be included in P/L
• Gains ­ Other income
• G/L = Net disposal proceeds and the carrying amount of
item
 FULLY DEPRECIATED PROPERTY
• When the carrying amount is equal to zero or the
carrying amount is equal to the residual value
• The asset account and the related accumulated
depreciation account are closed, the residual value is set
up in a separate account
• Entity's are ENCOURAGED to disclose fully depreciated
property
 CONCEPT OF DEPRECIATION
• Defined as the systematic allocation of the depreciable
amount of an asset over the useful life
• A matter of cost allocation in recognition of the
exhaustion of the useful life of an item of PPE
• Objective is to have each period benefiting from the use
of the asset
• An expense, may be part of cost of goods manufactured
or an operating expense
 DEPRECIATION PERIOD
• Allocated on a systematic basis over the useful life
• Begins when it is available for use
• Ceases when the asset is derecognized
• Temporary idle activity does not preclude depreciating
the asset as future economic benefits are consumed not
only through usage but also through wear and tear and
obsolescence
 DEPRECIABLE AMOUNT
• Cost of an asset or other amount substituted for cost,
less the residual value
• Each part of an item of PPE with a cost that is significant
in relation to the total cost of the item shall be
depreciated separately.
 RESIDUAL VALUE
• The estimated net amount currently obtainable if the
asset is at the end of the useful life
• It shall be reviewed at least at each financial year­end
and if expectation differs from previous estimate, the
change shall be accounted for as a change in accounting
estimate
• May increase to an amount equal to or greater than the
carrying amount ­­ the depreciation charge is zero until
the RV subsequently decreases to an amount below the
CA
• Even if the FV > CA, depreciation is recognized
 USEFUL LIFE

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
• Expected usage of the asset ­ assessed by
reference to the asset's expected capacity or
physical output.
• Expected physical wear and tear ­ depends on the
operational factors such as the number of shifts
the asset is used, the repair and maintenance
• Technical or commercial obsolescense
• Legal limits
 Depreciation method
• Reflects the pattern in which the future economic
benefits from the asset are expected to be
consumed by the entity
• Shall be reviewed every year­end
• Change in pattern is a change in accounting
estimate
• Straight line, production method and diminishing
balance method
 STRAIGHT LINE METHOD

• Annual depreciation charge is calculated by
allocating the depreciable amount equally over
the number of years of useful life.
• Constant charge over the UL
• Adopted when the principal cause is passage of
time
• Considers depreciation as a function of time rather
than as a function of usage
 PRODUCTION METHOD

• Output method
• Assumes that depreciation is more of a function of use
rather than passage of time
• Useful life ­ output it produces or the number of hours it
works
• Depreciation is based on the estimated production
capability of the asset and is express in a rate per unit of
output or per hour of use
• Adopted if principal cause is usage
 DIMINISHING BALANCE OR ACCELERATED METHODS

• Provide higher depreciation in the earlier years and lower

in the later years of the UL of the asset
• On the philosophy that new assets are generally capable
of producing more revenue in the earlier years than in the
later years
• Sum of years' digits method and double declining
balance method
 Problem 14­1

   Appraised value
* Land 2,000,000 X  5,400,000  = 2,160,000
   Building 3,000,000   = 3,240,000
                        5,000,000
*Building 9,600,000 X .60 = 5,760,000
 Land 9,600,000 x. 40 = 3,840,000
*25,000 shares x P120(Market price) = 3,000,000
Answer: C 9,000,000; C 9,000,000
Note: Don't forget the order when acquiring assets.
 Problem 14­2

Installment basis/Deferred ­ we use the cash price, the
excess is an interest to be amortized

Cash equivalent price P950,000
Installation cost     30,000
Cost of machine P980,000

Answer: B
 Problem 14­3

• Same as last problem

Cash price P2,000,000
Installation cost 50,000
Cost of the machine P2,050,000

Residual value is not capitalizable
Answer: C
 Problem 14­4
• FV of the asset given + Cash payment
1. FV of the machine P700,000
    Cash payment   160,000
    Cost of machine P860,000
2.  Carrying amount Fair value
Mach (1,200,000 x .50)
     =P600,000 P700,000
Cash          160,000  160,000       Gain
760,000 ­ 860,000 =   P 100,000
Answer: A 860,000; B 100,000
 Problem 14­5

• “configuration of cash flows from land acquired is

expected to be significantly different” means there is a
commercial substance, just like the problem earlier

Eagle
Land P2,800,000
Cash   1,000,000
Cost P3,800,000

Answer: D
 Problem 14­6

• When an exchange lacks commercial substance, use the
carrying amount of the asset given + cash payment

Yola Company
CA of oil inventory 1,000,000
Cash payment    300,000
Cost of oil inventory P1,300,000

Answer: B
 Problem 14­7

Bronze
FV of the truck P500,000
Cash payment   600,000
Cost of the land P1,100,000

Answer: A
 Problem 14­8

• Whether discounts were taken or not, it should be

deducted

* Purchase price P3,000,000
  Less: Discounts (3,000,000x.5%) (     150,000)
  Cost of freight and insurance         50,000
  Installation cost        200,000
  Cost of equipment P3,100,000
 Problem 14­8

*Purchase price P2,000,000
 Less: Discount (2,000,000x.10) (    200,000)
 Cost of welding machine P1,800,000

Answer: P3,100,000 + P1,800,000
A P4,900,000
 Problem 14­9

Construction of office equipment

Materials P600,000
Direct labor   500,000
Overhead (P1,200,000 x 15,000 units
50,000 units)   360,000
Cost of office equipment P1,460,000

Answer: C
 Problem 14­10

1. D
2. C
3. D
4. D
5. D
 Problem 14­11

1. B
2. A
3. A
4. C
5. C
 Problem 14­12

1. D
2. C
3. D
4. B
 Problem 14­13

1. A
2. C
3. D
4. D
5. D
 Problem 14­14

1. C
2. D
3. D
4. D
5. D
 Problem 14­15

1. D
2. D
3. D
4. A
5. D
6. A
7. B
8. B
9. C
10. D