PROPERTY, PLANT AND EQUIPMENT Important note:

SUB-TOPIC 1: RECOGNITION (1) Exchange is a kind of disposal and acquisition transaction,

(a) Cost upon disposition of the PPE, the company should recognize
(b) + Directly attributable cost, to bring the asset into operating condition the gain or loss on disposal.
(c) + Estimated dismantling cost Fair value of the PPE given up xx
What is the amount of cost necessary to determine the initial measurement? Carrying amount of the PPE given up (xx)
Gain or (loss) on exchange transaction xx
1. Cash Simply the amount of cash paid
2. On account 1. Invoice price minus discount (taken or not) (2) No gain or loss is recognize if the exchange lacks
or commercial substance.
2. Cash price (3) If the problem is silent, the transaction is assumed to have a
3. Issuance of 1. Cash price commercial substance.
note or
2. Fair value of the note plus down payment 7. Trade-in Apply the rule in exchange transaction
4. Issuance of 1. Fair value of the PPE (first priority) Important note:
shares or (1) The usual problem in trade-in transaction is that, the fair
2. Fair value of shares (second priority) value of the PPE given up is not available. If it is the case,
+ any other consideration we can not directly compute the gain or loss on exchange
or or trade in transaction.
3. Par value of the shares (third priority)
(2) To compute the gain or loss, we must compute first the
+ any other consideration
“assumed fair value of asset given up”
5. Issuance of 1. Fair value of the PPE (first priority)
bonds or Cash price or Fair value of asset received xx
2. Fair value of the bonds (second priority) Minus cash paid (xx)
+ any other consideration or Plus cash received xx
6. Exchange 1. Fair value of asset given Assume fair value of asset given up xx
Less: cash received 8. Donation Fair value of asset received
Plus: cash paid (first priority)
Important note:
or
2. Fair value of asset received (second priority) (1) The corresponding credit, is to: share premium – donated
or capital (if coming from a shareholder) or other income (if
3. Carrying amount of asset given coming from a non-shareholder)
Less: cash received (2) Direct attributable cost is not capitalized or added to your
Plus: cash paid (third priority or without commercial cost, instead it will be a deduction to the corresponding
substance transaction) credit regardless whether coming from a shareholder or not.
 9. Basket price Fair value of the specific PPE SUB-TOPIC 2: CONSTRUCTION OF BUILDING, ALLOCATION OF COST TO LAND,
Cash paid x
Total fair value of all the PPE acquired BUILDING AND LAND IMPROVEMENT
Important note: • Of course before you can rise a building, you should purchase first a land . The
(1) Direct attributable cost should also be prorated problem now is when you purchased a land with an old building in it.

10. Construction see SUB-TOPIC 2: CONSTRUCTION How much is the cost allocated to the land how much to the ‘OLD building’?
11. Government see SUB-TOPIC 4: GOVERNMENT GRANT Land OLD building
grants Purchase price pro-rate Include Include
Options acquired pro-rate Include Include
What are the common types of direct attributable cost that is added to the ‘cost’?
Unpaid mortgage pro-rate Include Include
(a) Freight, delivery, handling, transportation, includes insurance during the delivery.
(b) Installation cost Unpaid real property taxes pro-rate Include Include
(c) Testing cost, net of proceeds from sale of the produced product during test Professional fees pro-rate Include Include
(d) Repair or reconditioning cost before usage. Payment in vacating the premise pro-rate Include Include
(e) Registration cost Title search and legal fees Include Exclude
(f) Site preparation City assessments Include Exclude
(g) Payment to the consultant or adviser in acquiring the PPE (professional fees) Cost of grading, leveling, etc. Include Exclude
(h) Cost of safety platforms, water devices and cost of adjustments necessary before Repair and reconditioning before use Exclude Include
using the PPE. Important note:
What are the common types of ‘distractions’ in the problem that is not included in (a) Pro-rate using the relative fair value method allocation.
determining the initial measurement of PPE? (b) Pro-rate only if the old building is usable, otherwise, all will be allocated to land.
(a) Pre-operating losses. (c) If demolished, cost allocated to the ‘OLD building’ will be recognized as loss and will
(b) Loss on early (pre-mature) disposal of the old PPE not form part of the capitalized amount of ‘NEW building’.
(c) Dismantling cost of the old PPE What are the cost that should be capitalized as ‘NEW building’?
(d) Repair cost as a result of negligence (a) Demolition cost of the old building, net of proceeds from sale of scrap
(e) Repair cost after usage (b) Cost of materials used, net of discount taken or not, includes normal amount of waste
(f) Training cost of the personnel that will use the PPE (c) Cost of labor incurred
(g) Insurance cost after delivery (d) Cost of overhead incurred
(h) Value added tax (VAT) or recoverable taxes (e) Excavation cost
(i) Discount taken or not (f) Architecture cost
(j) Advertisement cost (g) Cost of temporary fences and removal cost
What is the amount of dismantling cost to be capitalized? (h) Cost of temporary shelters of construction equipment & crew plus the cost of removal
(a) The dismantling cost is capitalized if required by the contract, if the problem is silent, it (i) Insurance during construction
is assumed to be required by the contract. (j) Cost of building permit
(b) The amount of dismantling cost to be added in the cost should be its present value. (k) Supervision and inspection
(l) Interest cost on specific or construction loan (borrowing cost) see SUB-TOPIC 3

What are the cost that should be capitalized as ‘Land improvement? How much is the borrowing cost to be capitalized if the construction of a
(a) Landscaping qualifying asset is financed only by SPECIFIC & GENERAL borrowing?
(b) Permanent fences Principal amount of specific borrowing xx
(c) External driveways, parking lots and safety lighting Interest rate x%
(d) Side walks and pavements Gross interest incurred xx
Interest income on temporary investment of principal (xx)
What are the cost that are considered as ‘distractions’ or not capitalizable?
Capitalizable borrowing cost from specific borrowing xx
(a) Insurance after the construction
(b) Taxes subsequent to the acquisition Weighted average accumulated expenditure xx
(c) Interest from borrowing after construction Principal amount of the specific borrowing (xx)
(d) Damages of accident during construction Expenditure financed by general borrowings xx
(e) Options not acquired Average interest rate x%
(f) Advertisement and open-house parties Capitalizable borrowing cost from general borrowing xx
(g) Abnormal amount of wasted materials, labor and overhead Capitalizable borrowing cost from specific borrowing xx
Total borrowing cost xx

SUB-TOPIC 3: BORROWING COST

How much is the borrowing cost to be capitalized if the construction of a What is the amount to be recognize as interest expense or the non capitalizable?
Annual interest incurred of all general borrowings xx
qualifying asset is financed only by SPECIFIC borrowing?
Principal amount of specific borrowing xx Capitalizable borrowing cost from general borrowing (xx)
Interest rate x% Interest expense reported in profit or loss xx
Gross interest incurred xx
Interest income on temporary investment of principal (xx)
Capitalizable borrowing cost xx Important notes:
(a) In computing the weighted average expenditure, and the construction is more than
one year. The cumulative construction cost plus the capitalized borrowing cost of the
How much is the borrowing cost to be capitalized if the construction of a previous year will be included wholly (12/12).
qualifying asset is financed only by GENERAL borrowing?
Annual interest incurred of all general borrowings (b) The capitalizable borrowing cost from general borrowing should not exceed the
= Average interest rate annual interest incurred of all general borrowing, if it is the case, the annual interest
Total amount of principal of all general borrowings
incurred it the capitalizable borrowing cost.
Weighted average accumulated expenditure xx
Average interest rate x%
Capitalizable borrowing cost xx

SUB-TOPIC 4: DEPRECIATION (e) Composite method
Annual depreciation expense of all PPE in the group
= Composite rate
What is the amount of depreciation expense? Cost

Cost – residual value

(a) Straight line method = Composite life
Annual depreciation expense of all PPE in the group
Cost – Residual value
= Depreciation expense
Useful life Cost xx
Composite rate x%
(b) Double-declining-method Depreciation expense xx
Cost xx Cost – residual value xx
Accumulated depreciation (xx) Composite life ÷ x
Carrying amount xx Depreciation expense xx
Depreciation rate (2 ÷ useful life) x%
Depreciation expense xx
QUICKNOTES 5 ‒ PROPERTY, PLANT AND EQUIPMENT
Residual value is being ignored in using this method.

(c) Sum-of-years digit (SYD)

BY: JSC
Cost xx
Residual value (xx)
Depreciable amount xx
Fraction of depreciation x/x
Depreciation expense xx

Useful life – number of times depreciated

= Fraction of depreciation
Summation of 1 up to useful life*

Short-cut*
Life + 1
x life
2

(d) Output method

Cost – residual value
x actual output during the year
Number of total output