BALIUAG UNIVERSITY

College of Business Administration and Accountancy

APC 4: Auditing and Assurance Concepts and Application
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Module 1: Audit of PPE and Intangibles LVC

I. Property, Plant and Equipment (IAS 16)

 Definition
 Property, plant and equipment are tangible items that:
a. Are held for use in the production or supply of goods or services, for rental to others, or for administrative
purposes; and
b. Are expected to be used during more than one period.

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

 Measurement at recognition:
 An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its
cost.
 The cost of an item of property, plant and equipment 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 IAS 23.

 The cost of an item of property, plant and equipment comprises:

a. Its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts
and rebates.
b. Any 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 management.
c. The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is
located, the obligation for which an entity incurs either when the item is acquired or as a consequence of
having used the item during a particular period for purposes other than to produce inventories during that
period.

 Subsequent Measurement
 An entity shall apply the measurement model to an entire class of property, plant and equipment.
1. Cost model: Cost less any accumulated depreciation and any accumulated impairment losses.
2. Revaluation model: 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.

 Modes of acquisition of PPE:

Acquisition Mode Measurement
 Cash price equivalent
 Includes cash paid plus directly attributable costs (freight, installation cost, and
other costs necessary to bring the asset to the location and condition for its
Cash basis
intended use)
 For basket price or lump sum price acquisition, the single price is prorated based
on the relative fair value of the assets acquired.
On account with  Measurement is equal to the invoice price minus the cash discount.
cash discount  Discount is deducted whether taken or not.
 Cash price equivalent at recognition date.
 If cash price is not determinable, measurement shall be the present value of all
Installment basis
payments discounted using the implied interest rate.
 The excess is treated as interest amortized over the credit period.
 Order of priority:
Issuance of a. Fair value of PPE
equity securities b. Fair value of shares issued
c. Par or stated value of shares issued

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Module 1: Audit of PPE and Intangibles LVC
Acquisition Mode Measurement
 Order of priority:
Issuance of debt a. Fair value of issued debt security (i.e., bonds payable)
securities b. Fair value of PPE
c. Par or face value of issued debt security
 With commercial substance
o Order of priority
a. Fair value of PPE given
b. Fair value of PPE received
c. Carrying amount of PPE given
o Cash involved
a. Plus cash payment on part of payor
Exchange
b. Minus cash received on part of recipient
o Gain or loss on exchange is fully recognized
 Lacks commercial substance
o PPE acquired is measured at the carrying amount of the PPE given up.
o No gain or loss on exchange is recognized.
o Also cash involved is added on the part of payor and deducted on the part of
the recipient.
 Order of priority
Trade in a. Fair value of PPE given plus cash payment
b. Trade in value of PPE given plus cash payment (fair value of the PPE received)
 PPE received is measured at its fair value.
 Donated capital is credited if the donor is a shareholder.
Donation  When the donation is subsidy from non-shareholder, recognized as income
 When the donation is not a subsidy from non-shareholder, liability is recognized
then transferred to income when restrictions are met.
 Cost of self-constructed assets:
a. Direct materials
b. Direct labor
c. Indirect cost and incremental overhead specifically traceable to the
construction.
 Allocation of overhead may be done based on direct labor cost or direct labor
Construction
hours.
 Savings on construction is an internal profit but not recorded as income or gain.
 Loss on construction
a. Normal amount – Included in the cost of self-constructed PPE.
b. Abnormal amount – Excluded from the costs of self-constructed PPE. Treated
as loss.

 Cost of a new building constructed on the site of a previous building (PIC Q&A No. 2012-02)
 Accounting for the Allocated Cost or Carrying Value of the Old Building

Scenario 1: The entity intends to demolish the old building and will not use the old building prior to its
demolition.
A. New building will be used as an owner-occupied property
o The allocated cost of the old building shall not form part of the cost of the new building.
o The allocated cost of the old building should be de-recognized and the loss arising from derecognition
is included in profit or loss.
B. New building will be sold as an inventory
o Include any cost allocated to the old building as part of the cost of the new building or development
property that will be sold as an inventory.
C. New building will be held as an investment property
o Accounted same as owner-occupied property.

Scenario 2: The entity acquired the property in a prior reporting period and initially used the property as an
owner-occupied property. In the current reporting period, it decided to demolish the old building and replace it
with a new building.
o The entity, at the time it makes the decision to demolish the old building at a specific date in the future,
has to re-compute the related depreciation charges on the building to depreciate the remaining carrying
value of the building over the remainder of its life (or the remaining period before it is demolished).
o Accounted as changes in accounting estimate (IAS 18)
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o Hence, the old building will have a nil value at the date of the planned demolition.
o If for some reason there is a remaining carrying value of the old building at the time of demolition, such
amount shall not be capitalized as part of the cost of the new building; instead, such amount shall be
charged to profit or loss.
 Demolition costs of the old building to give way for the construction of the replacement building
o It is preferable to capitalize the demolition costs as part of the cost of the new building since the
demolition of the old building is a direct result of the decision to construct the new building.

 Illustration 1: Identify the cost to be included in Land, Building and Land Improvement accounts.
a. Architect fee and superintendent fee.
b. Construction cost of building.
c. Cost allocated to old building. The old building was not used and was subsequently demolished in order to
construct a new office building.
d. Cost of excavation done for construction of new building.
e. Cost of improvements made on the building such as replacing glass wall with shatter-proof glass.
f. Cost of landscaping, trees and shrubs.
g. Cost of option for alternative land not acquired.
h. Cost of option for land acquired.
i. Cost of permanent fence built around the perimeter of the land.
j. Cost of razing the old building to give way for construction of new building.
k. Cost of razing the old building no construction was planned.
l. Cost of regular repairs and replacements made on the building.
m. Cost of removal of safety fences used during construction.
n. Cost of surveying before construction.
o. Cost of temporary buildings used for construction purposes.
p. Cost of title to land.
q. Cost to construct sidewalks, pavements, driveways and parking lot that is part of the blueprint of the new
building constructed.
r. Cost to construct sidewalks, pavements, driveways and parking lot that are built subsequently years after the
construction of the building.
s. Demolition cost of old building acquired to give way to construction of new building.
t. Escrow fee for the land purchased.
u. Payment to tenants on the acquired land to vacate the premises.
v. Permanent improvements such as grading and levelling.
w. Premium on insurance during construction.
x. Premium paid on property insurance of the constructed building.
y. Purchase price allocated to land.
z. Safety inspection fee on construction.
aa. Sale of scrap from old building demolished.
bb. Special assessment charged by the local government to land owners as contribution to the cost of public
improvements.
cc. Subsequent real property tax on land following the acquisition.
dd. Temporary fence built for construction safety.
ee. Timber sold from trees felled during demolition of old building.
ff. Unpaid real property tax on land assumed by buyer.

 Illustration 2: Identify whether each item is included in, excluded or deducted from the cost of machinery.
a. Cash price of machinery.
b. Continuing and frequent repairs.
c. Cost of the dismantling and restoring the site as required by the contract.
d. Cost of training employees who will operate the machine.
e. Custom taxes for imported machines.
f. Freight paid on the new machinery.
g. Labor cost on installation of the new machine.
h. Overhaul costs that will increase productivity of the machine.
i. Property insurance on the new machinery.
j. Removal cost of the old machinery.
k. Replacement cost for broken gear on a machine as part of routine maintenance.
l. Safety device and parts added to the machine.
m. Term discount on purchased machinery. The discount was not taken.
n. Testing cost incurred.
o. Value added tax on purchase on machineries.

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 Depreciation methods
Method Formula Remarks
Straight line Depreciable amount = Cost – Salvage Value *Fixed depreciation per period.
Annual depreciation = Depreciable amount ÷ Useful life
Composite/ Composite life = Total depreciable amount ÷ Total annual *Discontinue depreciation when
Group method depreciation the carrying amount is already
Composite rate = Total annual depreciation ÷ Total costs equal to the salvage value.
*No gain or loss is recognized on
disposal or retirement of asset
Working hours Depreciation = Depreciable amount ÷ Estimated life in hours *Variable depreciation per hour
method of usage
Output/ Depreciation = Depreciable amount ÷ Estimated life in units *Variable depreciation per unit
Production of production
Method
Sum of years SYD = Life x [(Life + 1) ÷ 2] *nth starts with the last year of
digits Annual depreciation = (nth year ÷ SYD) x Depreciable amount useful life.
Double Depreciation rate = 200% x (1 ÷ Useful life) * Salvage value is not accounted
Declining Annual depreciation = Carrying amount x Depreciation rate in the annual depreciation.
150% Depreciation rate = 150% x (1 ÷ Useful life) *However, discontinue
Declining: Annual depreciation = Carrying amount x Depreciation rate depreciation when the carrying
amount is already equal to the
salvage value.

 Effect of change in estimate on depreciation

 Changes in useful life, salvage value and other estimates are accounted prospectively. Past depreciation is not
corrected.
 Revised depreciation is accounted only in the current and future period.
 The new depreciation to be computed shall be based on the carrying amount as of date of change in estimate.

 Measurement of PPE after recognition

1. Cost model = Cost – accumulated depreciation – accumulated impairment losses
2. Revaluation model = Revalued amount – subsequent accumulated depreciation – subsequent accumulated
impairment losses

 Revaluation
 Revaluation of all items in a class of PPE
 An entire class of PPE should be revalued to avoid selective revaluation.
 Examples of classes of PPE: land, buildings, machinery, furniture and fixtures, equipment, etc.
 Computation of revaluation surplus
 Revaluation surplus = Sound value – Carrying amount of asset
 Sound value = Replacement cost – Accumulated depreciation assigned to replacement cost
 Proportional approach:
Accumulated depreciation on replacement cost = Replacement cost x Rate of accumulated depreciation
Rate of accumulated depreciation = No. of years elapsed ÷ Useful life
Rate of accumulated depreciation = Recognized accum. Dep. ÷ Depreciable cost of asset (original amount)

 Proportional approach
Cost Replacement cost Appreciation
PPE XX XX XX
Less: Residual value (new estimate) XX XX XX
Depreciable amount XX XX XX
Less: Accumulated depreciation XX XX XX
Remaining depreciable amount XX XX XX
Carrying Amount Sound value Revaluation surplus

 Accounting considerations
 Revaluation increase and decrease
a. Revaluation increment (surplus) is classified as OCI.
b. Revaluation decrease is included in P/L.
 Realization of revaluation surplus

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 Realization of revaluation surplus is accounted by transferring the realized amount to retained earnings.
 Revaluation surplus is gradually realized as the asset is used (based on remaining life).
 The remaining amount is realized in full on the retirement or disposal of asset.
 Reversal of revaluation surplus
 Reversal of revaluation surplus is first charged to previously recognized revaluation surplus.
 The remaining balance is accounted as expense.
 Reversal of revaluation decrease
 Revaluation increase shall be recognized as income to the extent of the previous revaluation decrease.
 The remaining balance is accounted as revaluation surplus.

II. Intangible Assets (PAS 38)

 Specific intangible assets

Legal Life
Intangible Asset Definition
Amortization/Impairment
An exclusive right granted for a product, process or an 20 years
improvement of a product or process which is new, inventive and
Patent useful which gives the inventor the right to exclude others from
invention- ex. covid making, using, or selling the product during the life of the patent.
vaccine (Intellectual Property Office of the Philippines)
The legal protection extended to the owner of the rights in an Life of the author plus 50
Copyright original work (every production in the literary, scientific and artistic years after his death
artistic domain domain). (Intellectual Property Office of the Philippines)
A tool used that differentiates goods and services from each 10 years legal life but may
Trademark/
other. A trademark can be one word, a group of words, sign, be renewed. Normally not
Tradename/ Brand
symbol, logo, or a combination of any of these. (Intellectual amortized but subject for
name
Property Office of the Philippines) impairment.
An exclusive right granted by the franchisor (government or Amortize if with definite
private companies) to a franchisee to use the property or the period or tested for
Franchise
rights (trademark, patent and process of the franchisor) impairment if with
initial franchise fee whether definite or indefinite period, there is impairment indefinite period
An asset representing the future economic benefits arising from Not amortized but tested
Goodwill other assets acquired in a business combination that are not for impairment at least
individually identified and separately recognized. (IFRS 3) annually
The right acquired by the lessee by virtue of a contract of lease to Amortized over the
Leasehold right use the specific property owned by the lessor for a definite period life/term of the lease
leasehold improvement - PPE of time in consideration for a rent.
A permit from an authority to own or use something, do a If the term is renewable
Right or license particular thing, or carry on a trade. (i.e. broadcasting license, indefinitely, the license is
airline right) mining rights, fishing rights, public transfortation tested for impairment
Consists of information about customers such as their name and Tested for impairment
contact information. A customer list also may be in the form of a
Customer list
database that includes other information about the customers
not internally generated
such as their order history and demographic information.
An arrangement whereby a government or other public sector Amortized over definite
Service concession body contracts with a private operator to develop (or upgrade), period
- financial asset operate and maintain the grantor's infrastructure assets. if intangible asset
- intangible asset
 Acquisition of intangible assets (Rules same as PPE)
a. Separate acquisition
b. Part of a business combination
c. Government grant
d. Exchange of assets
e. Self-creation (internal generation)

 The cost of a separately acquired intangible asset comprises:

 Purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts
and rebates; and
 Any directly attributable cost of preparing the asset for its intended use such as:

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salaries capitalizable
a. Costs of employee benefits (IAS 19) arising directly from bringing the asset to its working condition;
b. Professional fees arising directly from bringing the asset to its working condition; and
c. Costs of testing whether the asset is functioning properly. if incidental in bring the asset to its present working
condition - expense
 Examples of expenditures that are not part of the cost of an intangible asset
 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); and
 Administration and other general overhead costs.
 Costs incurred while an asset capable of operating in the manner intended by management has yet to be
brought into use; and
 Initial operating losses, such as those incurred while demand for the asset’s output builds up.
net loss
 Subsequent measurement
a) Cost model = cost – accumulated depreciation – accumulated impairment losses
b) Revaluation model = revalued amount – subsequent accumulated depreciation – subsequent accumulated
impairment losses
definite life
Intangible assets with finite lives Intangible assets with indefinite useful lives
Amortization method: systematic basis over that life Amortization:
a. Reflect the pattern of benefits.  No amortization
b. Straight line method if the pattern cannot be deter-  Assessed for impairment per PAS 36
mined reliably. using useful life Useful life:
Amortization cost:  Reviewed each reporting period to support an indefi-
 Recognized in profit or loss unless another IFRS nite useful life assessment. if the indefinite life is still applicable
requires it be included in the cost of another asset. Change in the useful life assessment:
Amortization period:  Change from indefinite to finite life should be
 Should be reviewed at least annually. accounted for as a change in an accounting estimate
 Legal life or useful life whichever is shorter. carrying amount and useful life - basis
Residual value:
 Presumed to be zero unless prospective application, no retro active application
a) 3rd party is committed to buy by the end useful life
b) There is an active market

 Internally generated intangible assets

 To assess whether an internally generated intangible asset meets the criteria for recognition, an entity
classifies the generation of the asset into:
1. Research phase; and
2. Development phase.
 Internally generated goodwill shall not be recognized as an asset.
 Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance
shall not be recognized as intangible assets.

 Research and development costs

Research Phase automatic expense
- Outright expense
- Cannot distinguish research phase from develop-
ment phase, treat the expenditure as research
phase only.
- R&D costs without any explanation to the
contrary, expensed outright.
Examples of research activities:
a) Activities aimed at obtaining new knowledge.
b) Search for, evaluation and final selection of
applications of research findings or other
knowledge.
c) Search for alternatives for materials, devices,
products, processes, systems or services.
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Development Phase
- May be capitalized (all requisites are present):
1. Technical feasibility of completing the
intangible asset.
2. Intention to complete and use or sell it.
3. Ability to use or sell the intangible asset.
4. Probable future economic benefits.
5. Availability of resources (technical, financial,
etc.) to complete and use or sell
6. Measure reliably the expenditure attributable
to intangible asset during its development.
Example of development activities:
a) Design, construction and testing of
pre‑production or pre‑use prototypes and
models
b) Design of tools, jigs, moulds and dies involving
new technology
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d) Formulation, design, evaluation and final
selection of possible alternatives for new or
improved materials, devices, ….services.
LVC
c) Design, construction and operation of a pilot
plant that is not of a scale economically feasible
for commercial production; and
d) Design, construction and testing of a chosen
alternative for new or improved materials,
devices, products, processes, systems or services.

 Recognition of an expense
 Expenditure on an intangible item shall be recognized as an expense when it is incurred unless:
a. It forms part of the cost of an intangible asset that meets the recognition criteria; or
b. The item is acquired in a business combination and cannot be recognized as an intangible asset. If this is
the case, it forms part of the amount recognized as goodwill at the acquisition date
 Other examples of expenditure that is recognized as an expense when it is incurred include:
a. Expenditure on start-up activities (ie start-up costs), unless this expenditure is included in the cost of an
item of property, plant and equipment in accordance with IAS 16. Start-up costs may consist of
establishment costs such as legal and secretarial costs incurred in establishing a legal entity, expenditure to
open a new facility or business (i.e. pre-opening costs) or expenditures for starting new operations or
launching new products or processes (i.e. pre-operating costs).
b. Expenditure on training activities.
c. Expenditure on advertising and promotional activities (including mail order catalogues).
d. Expenditure on relocating or reorganizing part or all of an entity.

 Other accounting issues

Particular
Legal fees
Cost of franchise
Leasehold improvement
Service concession
public and private projects
Organization cost
Internally developed
computer software
Microsoft, SAP, IBM Application
Purchased software
if it can Website development
demonstrate costs (SIC 32)
probable future
benefits - Equipment used in R&D
intangible assets
Accounting Treatment
a) Incurred for prosecuting or defending an intangible asset, whether successfully or
not, shall be expensed.
b) Incurred for registration and application of an intangible asset with the Intellectual
Property Office, capitalized as cost of intangible asset.
a) Capitalized cost includes the initial franchise fee plus directly attributable costs.
b) Periodic payments made by the franchisee to the franchisor is considered as an
outright expense
Classified as item of PPE. intangible asset- leasehold right
a) Intangible asset if the operator receives a right to charge for use of a public sector
asset. government first, private company second
first private company, second government
b) Financial asset if the operator receives an unconditional contractual right to receive a
specified or determinable amount of cash or another financial asset from the govern-
ment. if in the contract, the company receives the fix amount then its financial asset
Costs incurred in forming or organizing a business expensed immediately.
a) Before technical feasibility has been established is charged to expense.
b) After technical feasibility, [coding and testing, product master] shall be charged to
intangible asset.
c) Ready for sale [cost of production and packaging the software] shall be charged to
inventory. once duplicate after max production, becomes regular production
a) Intangible asset is it is for licensing or rental to others
b) Inventory if it is for sale
c) PPE if for use and integral part to the hardware use in HR Dept or Accounting dept., Microsoft
When entity is not able to demonstrate how it will generate probable future economic
benefits, all expenditure on developing such a web site shall be expensed when incurred.
PPE acquired for future use in a particular R&D project – PPE cost part of R&D costs
PPE used solely in a specific R&D project – PPE cost part of R&D cost deferred use -R&D
- PPE

PPE used in several R&D projects – Depreciation of PPE part of R&D costs

 Illustration 3: Determine whether the cost item is capitalized as intangible asset, outright expense or others.
expense a. Internally developed publishing titles and mastheads
intangible asset b. Acquired government license for a special type of operation
expense c. Organization cost to set up the business
others d. Cost of a building to be used for several R&D projects PPE item
expense e. Depreciation of item (d) R&D expense
expense f. Coding and testing costs in order to established feasibility of an internally generated software
intangible asset g. Coding and testing costs after the establishment of technological feasibility of an internally generated software
expense h. R&D cost (laboratory research, employee benefits of scientist and engineers)
intangible asset i. Patent applications and licensing fees
others j. Purchase cost of a software to be used as the entity’s accounting information system PPE
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expense k. Research cost (satisfying all the requirements for capitalization under PAS 38)
expense l. Cost of an equipment used specifically only for a particular R&D project R&D expense
others m. Leasehold improvement PPE
expense n. Litigation cost incurred for the unsuccessfully defense a copyright
intangible asset o. Purchase cost of a software to be leased out to clients
expense p. Litigation cost incurred for the successfully defense a copyright
intangible asset q. Customer list acquired from a third party
intangible asset r. Design cost of the trademark
expense s. Completion of detailed program design of internally generated software
expense t. Publicity cost to establish recognition of a trademark
expense u. Development cost (satisfying majority of the requirements for capitalization under PAS 38)
intangible asset v. Legal and administrative cost incurred in the application of a patent
intangible asset w. Initial fees to acquire a franchise right
expense x. Costs incurred but not specifically identifiable as research cost or development cost (satisfying all of the
requirements for capitalization under PAS 38)
others y. Duplication of computer software (internally generated) from product master inventory
others z. Packaging of computer software for sale (internally generated) inventory
intangible asset aa. Internal expenditure for internally generated website (satisfying requirements of PAS 38) with probable future
economic benefits
expense bb. Licensing cost to establish a new company part of organization cost
intangible asset cc. Cost of product master of an internally generated software
expense dd. Routine on-going efforts to refine and enrich existing products
intangible asset ee. Registration fees in the intellectual property office
intangible asset ff. Design cost incurred to add minor changes required by the Bureau of Patent
intangible asset gg. Additional development cost for the project applied for patent to ensure it is at operational stage

“But those who hope in the LORD will renew their strength. They will soar on wings like eagles;
they will run and not grow weary, they will walk and not be faint.” Isaiah 40:31

“Learn from yesterday, live for today, hope for tomorrow.” Albert Einstein

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