Chapter 10 Property, Plant and Equipment

Introduction
Property, Plant and Equipment are:
a. tangible assets;
b. held for use in the production or supply of goods, services or program outputs,
for rental to others, or for administrative purposes, and not intended for resale in
the ordinary course of operations; and
c. expected to be used for more than one reporting period 

Recognition
An item of PPE is recognized if it meets the definition of a PPE and the recognition
criteria for assets, as well as the capitalization threshold of P15,000. 

The 15,000 capitalization threshold is the minimum cost an item should have
before it is capitalized as PPE. This threshold is applied on a per item basis, except as
follows:
a. Individual items with values below the threshold but work together as a group
of assets are recognized as PPE if the total cost of the assets as a group is P15,000 or
more (e.g., the costs of web servers, routers, modems, and other hardware comprising
a communications network are capitalized as PPE under the communications network'
account).
b. Bulk acquisitions of small items of PPE like library bool computer peripherals,
and small items of equipment recognized as PPE if their aggregate cost is P15,000 or
more 
Items below the capitalization threshold are recognized as inventories (i.e., Semi-
Expendable Property). 

Initial Measurement
PPE are initially measured at cost. The initial cost comprises the following:
a. Purchase price, including import duties and non-refundable 
purchase taxes, after deducting trade discounts and rebates;
b. Direct costs of bringing the asset to the location and condition necessary for it to be
capable of operating in the manner | intended by management; and
c. Present value of Decommissioning and Restoration costs - Decommissioning
costs refer to the costs of dismantling or uninstalling a PPE at the end of its useful life.
Restoration costs refer to the cost of restoring the site where the PPE is previously
installed. The present value of these estimated costs are capitalized as cost of the PPE,
with a corresponding credit to a liability account (i.e., 'Other Provisions'). 

Examples of directly attributable costs:

a. Costs of employee benefits arising directly from the construction or acquisition of
PPE; b. Costs of site preparation;
C. Initial delivery and handling costs (e.g., freight costs);
d. Installation and assembly costs;
e. Testing costs, net of disposal proceeds of samples generated during testing; and f.
Professional fees. 
Examples of costs that are expensed outright:
a Costs of opening a new facility.
b. Costs of introducing a new product or service (including costs of advertising and
promotional activities).
c. Costs of conducting business in a new location or with a new class of customers
(including costs of staff training).
d. Administration and other general overhead costs. 

Modes of Acquisition a. Acquisition by Purchase – acquisitions of PPE through

purchase 
are classified as Capital Outlays (CO) in the budget registries. 
Cash discounts, whether taken or not, are excluded from the initial measurement of an
item of PPE. A cash discount not taken is recognized as "Other Losses." A PPE
purchased under installment basis is initially measured at the cash price equivalent. The
difference between the cash_price and the installment price is amortized as interest
expense over the credit term. Promotional items acquired in conjunction with the
purchase of PPE are accounted for as follows: a. If the promotional item is the same as
those 
purchased, the total acquisition cost is allocated to all the items acquired including the
promotional item. 
b. If the promotional item is different from the other 
items acquired, the initial cost of the promotional ten is its fair value. The purchase
price, net of the fair value of the promotional item, is allocated to the other assets
acquired. 
• The individual costs of items of PPE acquired at a "lump 
sum price" are determined by allocating the "lump sum price" based on the relative fair
values of the items acquired. 
• 
If the individual costs of items of PPE acquired at a "luma sum price” are indicated in the
invoice, the items shall be recognized at their individual costs as indicated in the
invoice. 
Example: Entity A acquires a laptop computer and a printer for $100,000. The invoice
indicates the following individual costs: P70,000 for the laptop and P30,000 for the
printer. In this case, the laptop and the printer are initially recognized at their individual
costs of 270,000 and $30,000, respectively. 
2) b. Acquisition by Construction - acquisitions of PPE through 
construction are also classified as Capital Outlays (CO) in the budget registries. 
Construction costs incurred are initially recorded in the "Construction in Progress"
account pending the completion of the asset. Upon completion, the construction costs
are reclassified to the appropriate PPE account. 
a. Acquisition through Construction Contracts awarded to 
contractors – the cost of PPE acquired through a construction contract is the contract
price. 
b. Construction by Administration (Self-construction) – the 
cost of a self-constructed PPE includes the costs of direct materials, labor and other
construction overheads. The cost of wasted materials, labor or other resources incurred
in constructing the property are recognized as expense. 
Acquisition through Exchange – the measurement of the asset acquired depends on
whether the exchange transaction has commercial substance or not. 
i. With Commercial Substance - an exchange has a 
commercial substance if the subsequent cash flows of the entity change as a result of
the exchange. The asset received is measured using the following order of priority: (3)
1. Fair value of asset Given, up (plus any cash paid or 
minus any cash received); 2. Fair value of asset Received; or 3. Carrying amount of
asset Given up (plus any cash 
paid or minus any cash received) 
Lacks Commercial Substance - The asset received is measured at the: ( 1. Carrying
amount of asset Given up (plus any cash 
paid or minus any cash received) 
No gain or loss shall arise if the asset received 15 measured at the carrying amount of
the asset given up (plus any cash paid or minus any cash received). 
ni Acquisition through Non-Exchange Transaction - The asset 
acquired in a non-exchange transaction (e.g., donation, grant) is initially measured at its
fair value at the acquisition date. 
Those received without condition are recognized immediately as income (i.e., 'Income
from Grants and Donations in Kind'). 
Those with condition are initially recognized as liability (i.e., 'Other Deferred Credits')
and subsequently recognized as income when the condition is met. 
gle. Acquisition through Intra-agency or Inter-agency Transfers – The 
asset acquired from either intra or inter-agency transfer is measured at the carrying
amount of the asset received. 
Intra-agency transfers are transfers within the same agency (e.g., from Central Office to
a Regional Office or Operating Unit, and vice versa. 
Inter-agency transfers are transfers between different agencies (e.g., from BIR to
DPWH). 
* If the transfer is made in the year the equipment is purchased, the "Subsidu from
Central Office" and "Subsidy to Regional Offices" accounts are used in lieu of the
“Accumulated Surplus (Deficit)" account 
Similar entries are made for inter-agency transfers. 
6)f. Acquisition through Finance Lease - we will discuss this later in 
Chapter 13. 
Subsequent Expenditures on recognized PPE Capitalization of costs ceases when the
PPE is in the location and condition necessary for it to be capable of operating in the
manner intended by management. Therefore, costs incurred in using or redeploying a
PPE are not capitalized. 
The following subsequent expenditures on PPE are recognized as expenses: a. Costs
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. b. Initial operating losses, such as those
incurred while demand 
for the item's output builds up. C. Costs of relocating or reorganizing part or all of the
entity's 
operations. 
As a general rule, subsequent expenditures on recognized PPE are expensed.
Subsequent expenditures are capitalized only when it is clear that they meet the
recognition criteria for PPE, including the P15,000 capitalization threshold. 
The GAM for NGAs provides the following guidelines when accounting for subsequent
expenditures on recognized PPE: 
Repairs and Maintenance – these are classified into:(2) 
1. Minor repairs – costs of day-to-day servicing of an item of 
PPE, necessary to maintain its operating capability. These 
are charged as expenses. 2. Major repairs are considered 'betterments' and are 
capitalized. See discussion in 'd' below. 
If it is not clear that a cost is a major repair, it shall be treated as expense. 
b. Replacement costs – the cost of replacing a part of an item of 
PPE is capitalized. The carrying amount of the replaced part is derecognized and
recognized as loss on derecognition. 
If the carrying amount of the replaced part cannot be determined, the cost of the
replacement part is used as an indication of what the cost of the replaced part was at
the time it was acquired or constructed. 
c. Spare parts and servicing equipment - Minor spare parts are 
recognized as inventory and charged as expense when consumed. 
Major spare parts and stand-by equipment are recognized as PPE when they meet the
recognition criteria, e.g., they are expected to be used over more than one period. 
Spare parts and servicing equipment that can only be used in conjunction with an item
of PPE are accounted for as PPE. 
Betterments - are enhancements to the future economic benefits or service potential of
a PPE, such as: a. an increase in the previously assessed physical output or 
service capacity; b. a reduction in associated operating costs; C. an extension of the
estimated useful life; or d. an improvement in the quality of output. 
ntly depreciated 
Costs of betterments are capitalized (if they meet recognition criteria for PPE) and are
subsequently depre as follows: 
Over the remaining useful life, if the betterment incres the service potential of the asset
without extendine useful life; or Over the extended useful life, if the betterment extends
the useful life of the asset. The extended period shall no exceed the original estimate of
useful life of the asset. 
If the betterment involves the replacement of an asset the replacement is accounted for
under 'b' above. 
If it is not clear that a cost is a betterment, it shall be treated as expense. 
e: Additions and Rearrangements 
Additions are modifications which increase the physical size or function of the PPE. An
addition can be: 
i. a new unit that is physically distinct from the old unit (e.g., 
a wing of a building); or ii. an expansion, extension or enlargement of the old unit (e.g.,
a 
new floor to a building). 
The cost of an addition that is a new unit is depreciated over its own useful life while an
expansion cost is depreciated over the shorter of its useful life and the remaining life of
the PPE of which it is part. 
Rearrangement is the relocation or reinstallation of an asset which proves to be less
efficient in its original location. Rearrangement costs are capitalized and depreciated
over remaining life of the related asset. The carrying amount of original installation cost
is derecognized and charged as ! (GAM for NGAs, Chapter 10, Sec. 26) 
An entity should be very careful when assessing, rearrangement costs qualify for
capitalization as GAM NGAs, Chapter 10, Sec. 9 states the following: "Recognition 
Ognition of 
costs in the carrying amount of an item of PPE ceases which the item is in the location
and condition necessary for it to be capable of operating in the manner intended by
management. Therefore, costs incurred in using or redeploying an item are not included
in the carrying amount of that item. 
Subsequent Measurement PPE are subsequently measured using the cost model.
Under this model, an item of PPE is measured at its cost less any accumulated
depreciation and any accumulated impairment losses. 
• Depreciation - is the systematic allocation of the depreciable 
amount of an asset over its useful life. 
• Depreciable Amount - is the cost of an asset, or other amount 
substituted for cost, less its residual value. Residual Value - is the amount the 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 
Depreciation is recognized as expense unless it forms part of the carrying amount of
another asset (e.g., depreciation of a factory equipment is included in the carrying
amount of inventory). 
Guidelines in depreciating items of PPE:(10) a. The three factors considered when
determining depreciation 
are: initial cost, useful life, and residual value. b. All items of PPE shall be depreciated,
except land and heritage 
assets. C. Depreciation begins when the asset is available for its 
intended use. For simplicity, if a PPE becomes available for its intended use: i On or
before the 15th of the month – depreciation is computed 
at the beginning of that month. 
ii. After the 15th of the month – depreciation is computed at 
beginning of the following month. 
on the asset 
d. Depreciation ceases when the asset is derecognized or for 
depreciated. Depreciation does not cease when the becomes idle or retired from active
use and held for disposa 
e. The straight line method of depreciation shall be used unless 
another method is more appropriate. 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 or service potential. 
f. 
The estimation of the useful life of an asset is a matter of judgment, based on the
entity's experience with similar assets. As a guideline, PPE shall be depreciated over
the following life spans: 
0 Property, Plant and Equipment Estimated Useful Life 
| Infrastructure Assets 
> 20 to 50 years 2 Buildings and Other Structures > 30 to 50 years Machinery and
Equipment | > 5 to 15 years 4Transportation Equipment: 
a Motor Vehicles 
> 5 to 15 years bMilitary Vehicles 
► 3 to 20 years cTrains 
> 10 to 20 years dAircrafts and Ground Equipt. ► 10 to 20 years | Watercrafts 
>> 10 to 25 years k Furniture, Fixtures and Books 2 to 15 years 
Leased assets, excluding land > Shorter of the asset's useful life 
and lease term, including extension period if renewal 15 
expected. h Leased Assets Improvements → Shorter of the asset's useful lite 
and lease term, including extension period if renewal 15 expected. 
Spected. 
Service Concession Assets 
4 Land Improvements 
> Shorter of the asset's useful life 
and term of service concession arrangement, including extension period if renewal is
expected Over the useful life of the asset to which the improvement was made or the
useful life of the improvement if significantly 
shorter 
► 2 to 15 years 
Y Others 
(GAM for NGAs, Chapter 10, Sec. 27.f) 
g. Residual value shall be at least 5% of cost, unless an entity 
determines a more appropriate estimate, subject to the approval of COA. 
h. The residual value and the useful life of an asset shall be 
reviewed at least at each annual reporting date and, if expectations differ from previous
estimates, the change(s) shall be accounted for as a change in an accounting estimate 
i. Depreciation shall be recognized on a monthly basis. 
j. 
Each part of an item of PPE with a cost that is significant in relation to the total cost of
the item shall be recorded and depreciated separately. 
For example, each part of an aircraft (i.e., its engines, passenger seats, and other parts)
shall be depreciated separately. Each part shall also be assigned a 5% residual value
based on the cost of each part. 
Impairment A PPE is impaired if its carrying amount exceeds its recoverable service
amount or recoverable amount. 
Recoverable service amount – is the higher of a non cash generating asset's fair value
less costs to sell and its value in use. 
At each reporting date, an entity shall assess whether there is an indication that an
asset may be impaired. If such indication exists, the entity shall estimate the
recoverable amount of the asset. An entity shall consider the following indications of
impairment: 
1. External sources of information: 
a. Cessation, or near cessation, of the demand for services 
provided by the asset. 
b. Significant long-term changes with an adverse effect on the 
entity have taken place during the period, or will take place in the near future, in the
technological, legal, or government policy environment in which the entity operates. 
2 Internal sources of information: 
a. Physical damage of an asset. b. Significant changes in the expected use of an asset
that 
adversely affect its recoverable amount (e.g., the asset becomes idle, plan to
discontinue or restructure the operation to which an asset belongs, plan to dispose of
the asset earlier than expected, and reassessment of an asset's 
useful life from indefinite to finite). c. Cessation of the construction of an asset before it
is 
completed. d. Indications that the service performance of an asset is, or 
will be, significantly worse than expected. 
Computation of Value in Use 
• Value in use of a cash generating asset – the present value of the 
estimated future cash flows expected to be derived from the continuing use of an asset
and from its disposal at the end of its useful life. Value in use of a non-cash generating
asset – the present value of the asset's remaining service potential. 
Value in use can be computed using one of the following methods: 
a. Depreciated Replacement Cost Approach 
Under this approach, value in use is equal to the asset's replacement cost adjusted for
depreciation to reflect the asset's used condition. 
Replacement cost is the cost of replacing or reproducing the asset, whichever is lower. 
When determining the replacement cost of an asset, a overdesign or overcapacity of
that asset is ignored * Overdesign refers to features that are unnecessary for the 
goods or services the asset provides. 1Overcapacity refers to excess capacity over
what is needed to meet the demand for the goods or services the asset provides. 
b. Restoration Cost Approach 
Under this approach, value in use is equal to the asset's depreciated replacement cost
or depreciated reproduction cost (whichever is lower) minus estimated restoration cost. 
Restoration cost is the cost of restoring the service potential of an asset to its pre-
impaired level. 
C. Service Units Approach 
Under this approach, value in use is equal to the asset's depreciated replacement cost
or depreciated reproduction cost (whichever is lower) minus a proportionate reduction to
reflect the reduced number of service units expected from the asset in its impaired
state. 
The choice of the most appropriate approach to measuring value in use depends on the
availability of data and the nature of the impairment: 
Method Depreciated replacement cost approach or Service units approach, whichever
is more appropriate. 
Indication of impairment a. Significant long-term 
changes in the technological, legal, or government policy 
environment b. Significant long-term 
change in the extent or manner of use, including cessation or near cessation of
demand 
Depreciated replacement cost approach or Service units approach, whichever is more
appropriate 
Physical damage 
Restoration cost approach or Depreciated replacement cost approach, whichever is
more appropriate 
Reversal of Impairment The principles used in recognizing reversals of impairment loss
on items of PPE are the same as those used for investment property. See discussions
in Chapter 9. 
Heritage Assets Heritage assets are those which have historical, cultural and
environmental significance, and are intended to be preserved for future generations. 
Examples include: historical buildings and monuments, statues, museum and gallery
collections, archeological sites, national archives, ruins, conservation areas, nature
reserves, and works of art. 
The characteristics of heritage assets are: (4) a. Their value in cultural, environmental,
educational, and 
historical terms is unlikely to be fully reflected in a financial 
value based purely on market price; b. The law may impose restrictions on their
disposal by sale; 
They are often irreplaceable and their value may increase over 
time, even if their physical condition deteriorates; and d. It may be difficult to estimate
their useful lives, which in some 
cases could be several hundred years. (GAM for NGAs, Chapter 10, Sec. 30) 
Heritage assets are measured at cost. If acquired through non-exchange transaction,
the cost is the fair value at the acquisition date. 
Heritage assets are not depreciated, but subject to impairment. If determinable, a
heritage asset's fair value is disclosed. 
However, heritage assets that have future economic benefits or service potential other
than their heritage value are depreciated similar to the other items of PPE, e.g., a
historic building being used as office. 
Heritage assets not recognized in the books of accounts are recorded in the Registry of
Heritage Assets. 
Infrastructure Assets Infrastructure assets include road networks (including facilities,
such as traffic lights and road signage), flood control, sewer, water and power supply
systems, communications networks, railways, seaports, airports, and the like. 
Infrastructure assets have the following additional characteristics: a. Part of a system or
network; b. Specialized in nature and do not have alternative uses; C. Immovable; and
4. May be subject to constraints on disposal. 
Measurement! 
Infrastructure assets are accounted for similar to the other items of PPE, i.e., they are
initially measured at_ cost and subsequently depreciated. 
ave no residual 
However, generally, infrastructure assets have no re value. In cases where a part of an
infrastructure asset ha residual value, it shall be at least 5% of the cost of that part. 
sset has a 
Reforestation Projects Reforestation refers to the renewal of a forest cover by plantino
seeds or young trees. 
Reforestation projects are recorded as land improvement in the books of accounts of
the Department of Environment and Natural Resources (DENR) or other entity
concerned. 
The initial costs of reforestation projects include the following: a. Survey, mapping and
planning b. Nursery operation and seedling production or procurement C. Plantation
establishment (site preparation, hauling of 
seedlings and planting) 
Initial costs are recorded in the “Construction in Progress Land Improvements" account
pending the completion of the project, which normally takes 3 years. Upon completion
and turn over of the project, the costs are reclassified to the "Land Improvements,
Reforestation Projects" account. 
Subsequent costs on reforestation projects are accounted for as follows: a.
Maintenance and protection costs incurred within the 
duration of the project, such as construction of fire lines, strip brushing, replanting, pest
control, and patrolling, are 
capitalized. b. Maintenance and protection costs incurred after the turn-over 
of the project are charged as repairs and maintenance expense. c. The cost of replacing
trees are expensed where small numbers 
of trees are being replaced in any one particular area. 
Reforestation projects are not depreciated but subject to impairment. Impairment loss is
recognized when a reforestation project is destroyed by a force majeure or fortuitous
event beyond 
Derecognition The carrying amount of a PPE is derecognized when it is disposed of
when no future economic benefits or service potential 15 expected from the asset. 
On derecognition, the difference between the carrying amount of the derecognized PPE
and the net disposal proceeds, if any, is recognized as gain or loss in surplus or deficit. 
Disposals of PPE shall be in accordance with the Supply and Property Management
Manual and Sec. 79 of P.D. No. 1445. 
lv taken out of 
Idle, Fully Depreciated, Unserviceable and Lost PPE 
• Idle PPE refers to assets that are temporarily taken o 
active use or temporarily abandoned. Idle PPE ar derecognized but continued to be
depreciated because fut benefits are consumed not only through usage but al through
obsolescence and wear and tear. 
A PPE is fully depreciated when its carrying amount is equal to zero or its residual
value. Fully depreciated PPE are not derecognized, meaning the historical cost and
accumulated depreciation are not removed from the books of accounts. 
Unserviceable property are those which do not have future economic benefits or service
potential. Unserviceable property is derecognized. The carrying amount is recognized
as impairment loss. Unserviceable properties are reported in the Inventory and
Inspection Report of Unserviceable Property. 
• 
When a PPE is lost, either through theft, fire or other force majeure, the officer having
custody of the PPE shall immediately notify the COA within 30 days and shall submit an
application for relief, together with supporting evidence. If warranted by the evidence, a
credit for loss shall be allowed. Failure to do the requirements will not relieve the officer
of liability. (P.D. No. 1445, Sec. 73) 
The carrying amount of the lost PPE is derecognized and charged as loss, upon receipt
of the Report of Lost, Stolen, Damaged, or Destroyed Property together with the Notice
of Loss by the Accountable Officer. 
Pending the result of the investigation, the accountability of the officer shall be
established, equal to the depreciated replacement cost of the lost PPE. If a credit for
loss 15 subsequently allowed to the officer, the entry to establish the accountability is
simply reversed. If not, the officer shall pay cash to settle his accountability.