Determining whether an item may qualify as PPE using the asset recognition

criteria and the PPE definition criteria

PPE Criteria:
Asset Recognition Criteria: To qualify as asset:
It is probable that future economic benefits associated with the asset will flow
to the entity; and
The cost of the asset to can be measured reliably
PPE Definition Criteria*: To qualify as a PPE item, the asset must be:
The asset is tangible (with physical substance)
The asset is held for use in the ordinary conduct of the business**, that is,
held for use in the production or supply of goods or services, for rental to
others***, or for administrative purposes
The asset is expected to be used during more than one year/period

Note:
*Property, Plant and Equipment tangible assets that are held by an enterprise
for use in the production or supply of goods or services, for rental to others, or
for administrative purposes and are expected to be used during more than
one period
**Even if not directly held for use in the production or supply of goods or
service. Note that PPE for administrative purposes are still PPE. Also, some
PPE items acquired for safety or environmental reasons, although they do not
directly increase the future economic benefits of any particular existing PPE
item, they are PPE items because they are necessary for an entity to obtain
the future economic benefits from its other assets.
***The entity should be engaged in leasing or rental business, otherwise, the
property is an investment property.
Determining the cost (measurement at initial recognition) of a PPE item, in
general

Measurement of PPE at initial recognition:

A PPE item that qualifies for recognition as an asset shall be measured at its
cost.
Cost means the amount of cash or cash equivalents paid or fair value of the
other consideration given to acquire an asset at the time of its acquisition or
construction or where applicable, the amount attributed to that asset when
initially recognized
Simply stated, cost means the amount of cash or cash equivalents paid or
cash price equivalent.

Elements of cost of a PPE item:

Purchase price (including import duties and non-refundable purchase taxes,
after deducting trade discount and rebates) at the date of recognition
Additional costs (if any/applicable):
Costs directly attributable to bringing the asset to the location and condition
necessary for its intended use
Examples of directly attributable costs:
Costs of employee benefits arising directly from the construction or acquisition
of the PPE item
Costs of site preparation
Initial delivery and handling costs
Installation and assembly costs
Professional fees
Costs of testing whether the asset is functioning properly, after deducting the
net proceeds from selling any items produced while bringing the asset to that
location and condition (such as samples produced when testing equipment)
Other costs that are necessary in bringing the PPE item to the location and
condition for its intended use
Initial estimate of decommissioning costs measured at present value

Note:
Decommissioning costs costs of dismantling and removing the item and
restoring the site on which it is located that are expected to be incurred at the
end of the assets useful life
Decommissioning costs and the related liability should be recognized and
measured at present value at the date of acquisition of the asset. At the end
of each reporting period, such liability is adjusted to its amortized cost, using
an appropriate discount rate under the effective interest method.

Examples of exclusions from the costs or carrying amount of PPE items:

Costs of opening a new facility;
Costs of introducing a new product or service (including costs of advertising
and promotional activities);
Costs of conducting business in a new location or with a new class of
customer (including costs of staff training);
Administration and other general overhead costs
Costs incurred in using or redeploying an item such as:
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
Initial operating losses, such as those incurred while demand for the items
output builds up, and
Costs of relocating or reorganising part or all of an entitys operations
Other costs which are not necessary in bringing the PPE item to the location
and condition for its intended use
Determining the purchase price of a PPE item

Mode/manner of acquisition/payment
Purchase price or cash price equivalent
(in the order of priority)
Cash basis
Cash paid
Normal credit terms (on account)
Net cash paid (net of rebate or cash discount, whether taken or not)
Deferred payment basis
The difference between the cash price equivalent and the total payments
(instalment price) is recognised as interest over the period of credit unless
such interest is capitalised.
Issuance of a short-term note

Fair value of asset received

In its absence, Face value of short-term note

Issuance of a long-term note

Fair value of asset received

In its absence:
Face value of note if note is interest-bearing; or
Present value or discounted value of the note if the note is
non-interest-bearing
Finance lease (capital lease) lessees books
Fair value of asset leased received or Present value of minimum lease
payments, whichever is lower

Note:
Finance leases are in effect purchases of property on a deferred payment
basis.
Issuance of bonds
Fair value of bonds payable plus transaction costs (PAS 39.43)
In its absence:
FV of assets received
Face value of bonds payable

Issuance of shares
Fair value of asset received
In its absence:
Fair value of shares issued
Par value / stated value of shares issued

Exchange for a non-monetary asset (or a combination of monetary and

non-monetary assets) exchange with commercial substance

At fair value by reference to the following:

Fair value of asset given/surrendered
In its absence, fair value of asset received
If both fair values are not reliably measurable, carrying amount (or book value)
of the asset given/surrendered
Note:
Commercial substance ability to significantly affect expected cash flows
For item a, if cash is involved, plus cash payment if payor, or less cash
received if recipient.
Exchange under item a or b would result to gain or loss on the exchange that
is fully recognized in profit or loss.
Exchange for a non-monetary asset or a combination of monetary and
non-monetary assets (no commercial substance)

Carrying amount* (or book value) of the asset given/surrendered

Note:
*Carrying amount, if cash in involved, plus cash payment if payor, or less cash
received if recipient.
No gain or loss is recognized when the exchange lacks commercial
substance.
Exchange for a similar or dissimilar asset

Measurement should be based on whether the exchange has commercial

substance and not whether assets exchanged are similar or dissimilar

Trade in

Fair value of asset given/surrendered plus cash payment

In its absence, trade in value of asset given/surrendered
fair value of asset received
Note:
Trade in usually involves a significant amount of cash, and thus, it is treated
similar to exchange with commercial substance.
Trade in value plus cash payment is equal to fair value of asset received.

Donation
From shareholders

Fair value of the asset received at date of donation

Note:
Should be credited directly to donated capital account.
Expenses incurred in connection with the donation, like payment for
registration fees and legal fees shall be charged to the donated capital
account.
Directly attributable costs incurred necessary to bring the donated asset for its
intended use shall be capitalized.
From a non-governmental unit other than a shareholders

Fair value of the asset received when they are received or receivable

Note:
Credit to income unless subject restrictions or conditions
Liability is transferred to income when the initial restrictions are met.
Government grant
Fair value of the asset received at date of grant

Note:
Initially credited to an unearned income account and then recognized as
income over the periods on a systematic basis
Construction
Cost of a self-constructed asset is determined using the same principles as for
an acquired asset.
Includes costs incurred during construction (including capitalizable borrowing
costs)
Property dividends
Fair Value of the asset received
Purchased of PPE items at lump-sum/ single/ basket price
Purchase price or cash price equivalent should be allocated based on relative
fair values

Determining the cost of specific PPE item

Basic guide: All costs that are necessary in bringing the PPE item in its
location and condition for its intended use are part of the cost of the PPE item.

Land

Land
Purchase price
Brokers or realtors commission
Fees for registration and transfer of title
Cost of closing and obtaining title
Title insurance
Escrow fees
Fee for title search
Legal fees and other expenses for establishing clean title (such as
documentation expenses and examination of title)
Special assessments by local governments (such as taxes, drainage project)
even if subsequent to date of acquisition because they increase the value of
the land
Liens, mortgages, or encumbrances on the property as of date of purchase (if
assumed by the buyer)
Accrued interest payable up to date of purchase (if assumed by the buyer)
Delinquent property/realty taxes up to date of purchase (if assumed by the
buyer)
Cost of survey (thus, surveying costs before construction of new building are
part of the cost of the land and not of the building)
Land improvements of permanent in nature such as costs of clearing, grading,
subdividing, or filing, leveling or landfill
Payments to tenants to induce them to vacate the structure/building to be
demolished
Payments to occupants to induce them to vacate the land
Cost of relocation of and reconstruction of property belonging to others in
order to acquire possession
Costs of clearing, demolishing, tearing down, razing or removing unwanted
structure/building (net of proceeds from scrap material or salvage)
Cost of option to buy the land (cost of option is expensed outright is the land is
not acquired)
All other costs related to the acquisition of the land that permanently improve
the land or prepare it for its intended use