Characteristics of PPE

 Tangible assets – items of PPE have physical substance

 Used in normal operations – items of PPE are used in the production or supply of goods or services, for rental,
or for administrative purposes.
 Long-term in nature – items of PPE are expected to be used for more than a year.

Recognition

 The cost of an item of property, plant and equipment shall be recognized as an asset only if:
 It is probable that future economic benefits associated with the item will flow to the entity; and
 The cost of the item can be measured reliably.

Initial measurement

 An item of PPE is initially measured at its cost.

Elements of Cost

 Purchase price, including non-refundable purchase taxes, after deducting trade discounts and rebates.
 Costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of
operating in the manner intended by the management.
 Present value of decommissioning and restoration costs to the extent that they are recognized as obligation.

Cessation of capitalizing costs to PPE

 Recognition of costs in the carrying amount of an item of PPE ceases when the item is in the location and
condition necessary for it to be capable of operating in the manner intended by management.

Measurement of Cost

 The cost of an item of PPE 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 PAS 23 Borrowing Cost.

Cost of Land (Property)

1. Purchase price including other necessary costs such as broker’s commissions.

2. Closing costs, such as titling costs, attorney’s fees, and recording fees.
3. Costs incurred in getting the land in the condition for its intended use, such as surveying, grading, filling, draining,
and clearing.
4. Unpaid taxes prior to date of acquisition assumed by the buyer.
5. Assumption of any liens, mortgages, or encumbrances on the property
6. Special assessments for local government-maintained improvements, such as pavements, street lights, sewers,
and drainage systems.
7. Option paid to acquire the land.
8. Costs incurred to induce tenants to vacate premises and costs of relocating and reconstructing property belonging
to others.
9. Initial estimate of restoration costs for which the entity has a present obligation
Any additional land improvements that have indefinite useful life such as costs of draining, clearing, grading, leveling
and filling, surveying, subdividing, and other permanent improvements.

Land improvement

 Land improvements are enhancements to the land which have definite useful life, such as private driveways,
walks, fences, parking lots, drainages and water systems, and cost of trees, shrubs, plants and other landscaping.

Cost of purchased Building (Plant)

 Purchase price including other necessary costs such as broker’s commissions and legal fees.
 Assumption of any liens, mortgages, or encumbrances on the property.
 Option paid to acquire the building.
 Unpaid taxes prior to date of acquisition assumed by the buyer.
 Costs incurred to induce tenants to vacate premises.
 Costs of getting the building in the condition for its intended use, such as remodeling, renovation, and other
repairs prior to occupancy.

Cost of self-constructed Building (Plant)

 Materials, labor, and overhead costs incurred during construction.

 Architectural costs, supervision costs, and costs of building permit
 Excavation costs
 Insurance costs and safety inspection fees
 Costs of temporary structures built during construction
 Interest on borrowings made to finance construction (Borrowing costs are discussed in Chapter 18)
The following costs are not included in the cost of a self-constructed building:

 Internal profits or savings on self-construction

 Cost of abnormal amounts of wasted material, labor, or other resources due to inefficiencies
 Costs of uninsured hazards or claims for uninsured accidents

 Costs of private driveways, walks, permanent fences, parking lots, and drainages and water systems that are not
included in the building’s blueprint.

Building improvement

 Building improvements refer to costs incurred subsequent to occupancy of a purchased building or subsequent to
completion of a self-constructed building that either increase the useful life of the building or improve its current
state.

Cost of equipment

 Purchase price including other necessary costs such as broker’s commissions and non-refundable purchase
taxes.
 Freight, handling charges, and insurance on the equipment while in transit
 Cost of necessary special foundations or platform,
 Assembling and installation costs
 Costs of testing and conducting trial runs
 The initial estimate of decommissioning and restoration costs for which the entity has a present obligation

The following costs are not included in the cost of an equipment:

 Cost of relocating the equipment after it has been put to the location and condition originally intended by
management.
 Cost of training personnel who will be responsible in operating the equipment.
 Cost of dismantling and removing an old equipment belonging to the entity prior to the installation of a new
equipment.

Lump-sum purchase

 The acquisition cost of a group of items of PPE acquired on a lump-sum price (basket price) is allocated to the
individual assets based on their relative fair values at the date of purchase.

Demolition costs

 The accounting treatment for demolition costs depends on the reason for the demolition.

 Example:

 Case: An old structure is demolished to make way for the construction of a new building.

 Accounting: The demolition costs are considered as costs of site preparation under PAS 16.; and therefore,
capitalized as cost of the new building.

 Any proceeds from sale of salvaged materials from the demolition are deducted from the demolition cost that is
capitalized to the new building.

Acquisition through exchange

If the exchange has commercial substance, the asset received from the exchange is measured using the following order
of priority:

 Fair value of asset Given up Plus cash Paid/ minus cash received
 Fair value of asset Received
 Carrying amount of asset Given up Plus cash Paid/ minus cash received
 If the exchange lacks commercial substance, the asset received from the exchange is measured at (c) above.

Acquisition through issuance of own equity instrument or debt instrument

 The assets acquired is measured using the following order of priority:

 Fair value of asset Received
 Fair value of instrument Issued

Acquisition by donation

Items of PPE received as donation are measured at fair value and accounted for as:

 Income – if the donor is an unrelated party.

 Donated capital – if the donor is an owner (shareholder).
 Government grant, in accordance with PAS 20 Accounting for Government Grants and Disclosure of Government
Assistance. Accounting (see Chapter 17) – if the donor is the government.

PART 2

Subsequent measurement

Subsequent to initial recognition, an entity shall choose either:

(a) the cost model or

 (b) the revaluation model

As its accounting policy and shall apply that policy to an entire class of PPE.

Cost Model

After recognition, an item of PPE is measured at its cost less any accumulated depreciation and any accumulated
impairment losses.

Depreciation

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

When computing for depreciation, 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.

Depreciation begins when the asset 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 ceases when the asset is derecognized or when it is classified as “held for sale” under PFRS 5, whichever
comes earlier.

Selection of depreciation method

There are various methods of depreciation. The entity shall select the method that most closely reflects the expected
pattern of consumption of the future economic benefits embodied in the asset.

However, a depreciation method that is based on revenue that is generated by an activity that includes the use of an asset
is not appropriate.

Common types of depreciation methods

 Straight line method – depreciation is recognized evenly over the life of the asset by dividing the depreciable
amount by the estimated useful life.

Depreciation = (Historical cost – Residual value) ÷

Estimated useful life

 Sum-of-the-years’ digits (SYD) depreciation – depreciation is computed by applying a series of fractions to the
depreciable amount of the asset.

Depreciation = (Historical cost – Residual value) x

Fraction

SYD Life + 1
= Life x
denominator 2

 Double declining balance method – depreciation is computed by applying a fixed rate on the carrying amount of
the asset at the end of each period. Unlike for other depreciation methods, the residual value is initially ignored
when computing depreciation under the double declining method.

Depreciation = Carrying amount x Rate

2
Double declining rate =
Life

 Units of production method (Activity method or Variable-charge method)

The units-of-production method relates depreciation to the estimated production capability of an asset and is expressed in
a rate per unit of output or per hour of input.

Depreciation = (Historical cost – Residual value) x

Rate

Leasehold improvements

 Leasehold improvements are depreciated over the useful life of the improvements or the remaining lease term,
whichever is shorter.
  An option to renew the lease is considered when determining the shorter between the useful life and the
remaining lease term if it is probable that the renewal option will be exercised.

Changes in depreciation method, useful life, and residual value

 A change in depreciation method, useful life, or residual value is a change in accounting estimate accounted
for prospectively.
 P accounting means the change affects only the current period and/or future periods. The change does not
affect past periods.

Accounting for replacements of major parts

The cost of the replacement part is recognized while the carrying amount of the replaced part is derecognized. If the
carrying amount of the replaced part is indeterminable, the entity may use the cost of the replacement as an indication of
what the cost of the replaced part was at the time it was acquired or constructed.

Revaluation Model
After recognition as an asset, an item of PPE 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.

Revaluation surplus

Fair value* xx

Less: Carrying amount (xx)

Revaluation surplus – gross of tax xx

*The fair value is determined using an appropriate valuation technique, taking into account the principles set forth under
PFRS 13.

The Cost Approach of fair value measurement

Total economic life = Effective life + Remaining eco. Life

Percentage depreciation = Effective life ÷ Total eco. Life

Depreciation = Percentage dep’n. x Replacement cost

Fair value = Replacement cost – Depreciation

Methods of recording revaluation

Proportional method – The gross carrying amount is adjusted proportionately to the change in the carrying amount.

Elimination method – The accumulated depreciation is eliminated against the gross carrying amount of the asset.

Frequency of revaluation

For items with significant and volatile changes in fair value, annual revaluation is necessary. For items with insignificant
changes in fair value, revaluation may be made every 3 or 5 years.

Revaluation applied to all assets in a class

If an item of PPE is revalued, the entire class of PPE to which that asset belongs shall be revalued.

The items within a class of PPE are revalued simultaneously to avoid selective revaluation of assets and the reporting of
amounts in the financial statements that are a mixture of costs and values as at different dates.

Subsequent accounting for revaluation surplus

Revaluation is initially recognized in other comprehensive income unless the revaluation represents impairment loss or
reversal of impairment loss, in which case it is recognized in profit or loss. Subsequently, the revaluation surplus is
accounted for as follows: If the revalued asset is non-depreciable, the revaluation surplus accumulated in equity is
transferred directly to retained earnings when the asset is derecognized. If the revalued asset is depreciable, a portion of
the revaluation surplus may be transferred periodically to retained earnings as the asset is being used.

Derecognition

The carrying amount of an item or PPE shall be derecognized:

a. On disposal; or
b. When no future economic benefits are expected from its use or disposal