Marbella, Alyanna Mae M.

BSA4/CA426/MTH/5:30-7:00

PAS 16 PROPERTY PLANT AND EQUIPMENT

Summary:

Property , plant and equipment - are tangible assets that are held for use in 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. Accordingly, the major characteristics in the definition of property, plant and equipment are:
a. The property, plant and equipment are tangible assets, meaning with physical substance.
b. The property, plant and equipment are used in business, meaning used in production or supply of goods or
services, for rental purposes and for administrative purposes.
c. The property, plant and equipment are expected to be used over a period of more than one year.

Examples of property, plant and equipment

a. Land
b. Land improvements
c. Building
d. Machinery
e. Ship
f. Aircraft
g. Motor vehicle
h. Furniture and fixtures
i. Office equipment
j. Patterns, molds and dies
k. Tools
l. Bearer plants

Recognition of property, plant and equipment

An item of property, plant and equipment shall be recognized an asset when:

a. It is probable that future economic benefits associated with the asset will flow to the entity.
b. the cost of the asset can be measured reliably.

Measurement at recognition
- An item of property, plant and equipment that qualifies recognition as an asset shall be measured at
cost. Cost is the amount of cash or cash equivalent paid and the fair value of the other consideration
given to acquire an asset at the time of acquisition or construction.
Elements of cost
- The cost of an item of property, plant and equipment comprises.
a. Purchase price, including import duties and nonrefundable purchase taxes, after deducting trade
discounts and rebates
b. Cost directly attributable to bringing the asset to the lash and condition necessary for it to be
capable of operating in the manner intended by management.
c. Initial estimate of the cost of dismantling and removing tit item and restoring the site on which it is
located for which an entity has a present obligation.

Directly attributable costs

Examples of directly attributable costs that qualify for recognition include:

a. Cost of employee benefit arising directly from the construction or acquisition of the item of property, and
equipment.
 b. Cost of site preparation
c. Initial delivery and handling cost
d. Installation and assembly cost
e. Professional fee
f. Cost of testing whether the asset is functioning properly.

Costs not qualifying for recognition

Examples of costs that are expensed rather than recognized as element of cost of property, plant and
equipment are: a. Cost of opening a new facility
b. Cost of introducing a new product or service, including cost of advertising and promotion
c. Cost of conducting business in a new location or with a new class of customer, including cost of staff
training
d. Administration and other general overhead cost
e. Cost 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
f. Initial operating loss
g. Cost of relocating or reorganizing part or all of an entity's operations

Measurement after recognition

- After initial recognition, an entity shall choose either the cost model or the revaluation model as the
accounting policy for property, plant and equipment The entity shall apply such accounting policy to
an entire class of property, plant and equipment The cost model means that property, plant and
equipment are carried at cost less any accumulated depredation and any accumulated impairment
loss. The revaluation model means that property, plant and equipment are carried at revalued
carrying amount. The revalued carrying amount is the fair value at the date of revaluation less any
subsequent accumulated depreciation and subsequent accumulated impairment loss.

MEASUREMENT OF COST
Acquisition on a cash basis The cost of an item of property, plant and equipment is the cash price equivalent
at the recognition date. The cost of asset acquired on a cash basis simply includes cash paid plus directly
attributable costs such as freight, installation cost and other cost necessary in bringing the asset to the
location and condition for the intended use.

Acquisition on account
When an asset is acquired on account subject to a cub discount, the cost of the asset is equal to the invoice Ore
minus the discount, regardless of whether the discount is taken or not. Cash discounts are generally
considered as reduction dog and not as income.

Acquisition on installment basis

When payment for item of property, plant and equipment is deferred beyond normal credit terms, the cost is
the cash PO equivalent. In other words, if an asset is offered at a cash price and at an installment price and is
purchased at the installment price, the asset shall be recorded at the cash price. The excess of the installment
price over the cash Price is treated as an interest to be amortized over the credit period.

Issuance of share capital

Philippine GAAP provides that if shares are issued be consideration other than actual cash, the proceeds shall
be measured by the fair value of the consideration received. Accordingly, where a property is acquired
through the issuance of share capital, the property shall be measured at an amount equal to the following in
the order of priority':
a. Fair value of the property received
b. Fair value of the share capital
c. Par value or stated value of the share capital

Issuance of bonds payable

PFRS 9, paragraph 6.1.1, provides the asset acquired by issuing bonds payable is measured in the following
order:
a. Fair value of bonds payable
b. Fair value of asset received
c. Face amount of bonds payable

Exchange
PAS 16, paragraph 24, provides that the cost of an item of property, plant and equipment acquired in
exchange for a non-monetary asset or a combination of monetary and non-monetary asset is measured at fair
value plus any cash payment. However, the exchange is recognized at carrying amount if the exchange
transaction lacks commercial substance.
Commercial substance
Is a new notion and is defined as an event
or transaction causing the cash flows of the entity to change significantly by reason of the exchange. An
exchange transaction has commercial substance when the cash flows of the asset received differ significantly
from the cash flows of the asset transferred.
Construction
Cost of self-constructed asset is determined using the same principle as for an acquired asset.
The cost self-constructed property, plant and equipment includes:
1. Direct cost of materials
2. Direct cost of labor
3. Indirect cost and incremental overhead specifically identifiable or traceable to the construction

PAS 16,, provides that the cost of abnormal amount of wasted material, labor or overheard incurred in the
production of self constructed asset is not included in the cost of the asset.

Derecognition
means that the cost of the property, plant and equipment together with the related accumulated
depreciation . shall be removed from the accounts. PAS 16, paragraph 67, provides that the carrying amount,
an item of property, plant and equipment shall be derecognized on disposal or when no future economic
benefits are expected from the use or disposal. The gain or loss from the derecognition of an item of property
plant and equipment shall be included in profit or lose. Gains shall not be included in 'revenue but treated as
other income. The gain or loss arising from the derecognition of an item property, plant and equipment shall
be determined as between the net disposal proceeds and the carrying amount of the item.

Fully depreciated property

A property is said to be fully depreciated when the carrying amount is equal to zero, or the carrying amount is
equal' the residual value.
In such a case, the asset account and the related accumulated depreciation account are closed and the
residual value set up in a separate account. . However, it is not uncommon for an entity to use an asset after it
has been fully depreciated.
The cost of fully depreciated asset remaining in service and in the related accumulated depreciation
ordinarily be removed from the accounts.
However, entities are encouraged but not required disclose fully depreciated property.

Concept of depreciation
Depreciation is defined as the systematic allocation of the depreciable count of on asset over the useful life.
Depreciation is not so much a matter of valuation. Depreciation is a matter of cost allocation in recognition of
the exhaustion of the useful life of an item of property, plant and equipment.
The objective of depreciation is to have each period benefiting from the use of the asset bear an equitable
share of the asset cost.
Depreciation in the financial statements Depreciation is an expense. Depreciation may be a part of the cost of
goods manufactured or an operating expense. The depreciation charge for each period shall be recognized as
expense unless it is included in the carrying amount of another asset.
Depreciation period
The depreciable amount of an asset shall be allocated on a systematic basis over the useful life. Depreciation
of an asset begins when it is available for use, meaning, when the asset is in the location and condition
necessary for the intended use by management. Depreciation ceases when the asset is derecognized.
Therefore, depreciation does not cease when the asset becomes temporarily. Temporary idle activity does
not preclude depreciating the asset as future economic benefits are consumed not only through the usage but
also through wear and tear and obsolescence.

Factors of depreciation
In order to properly compute the amount of depreciation, three factors are necessary, namely depreciable
amount, residual value and useful life.
Depreciable amount
Depreciable amount is the cost of an asset or other arm substituted for cost, less the residual value. Each part
of an item of property, plant and equipment with cost that is significant in relation to the total cost of the item
shall be depreciated separately. For example, it may be appropriate to depreciate separately the airframe,
engines, fittings (seats and floor coverings) tires of an aircraft. The entity also depreciates separately the
remainder of the item and the remainder consists of the parts of the item that are individually not significant.
Residual value
Residual value is the estimated net amount currently obtain in the asset is at the end of the useful life. The
residual value of an asset shall be reviewed at least each financial year-end and if expectation differs from
previous estimate, the change shall be accounted for as a change in an accounting estimate. The residual value
of an asset may increase to an amount equal to or greater than the carrying amount. If it does, the
depreciation charge is zero unless and until: residual value subsequently decreases to an amount below the
carrying amount. Depreciation is recognized even if the fair value of the asset exceeds the carrying amount as
long as the residual value does not exceed the carrying amount.

Useful life- useful life is either the period over which an asset is expected to be available fora use by the
entity, or the number of production or similar units expected to be obtained from the asset by the entity.
Factors in determining useful life
a. Expected usage of the asset- Usage is assessed by reference to the asset's expected capacity or physical
output.
b. Expected physical wear and tear-This depends on the operational factors such as the number of shifts the
asset is used, the repair and maintenance program, and the care and maintenance of the asset while idle.
c. Technical or commercial obsolescence-This arises from changes or improvements in production, or change
in the market demand for the product output of the asset.
d. Legal limits for the use of the asset, such as the expiry date of the related lease.

Depreciation method - The depreciation method shall reflect the pattern in which the future economic
benefits from the asset are expected to be consumed by the entity. The depreciation method shall be
reviewed at least at every Year-end. If there has been a significant change in the expected pattern of economic
benefits, the method shall be changed to reflect the changed pattern. Such change shall be accounted for as a
change in accounting estimate. A variety of depreciation methods can be used. Depreciation methods include
straight line, production method and diminishing balance method.

Straight line method

Under the straight line method, the annual depreciation charge is calculated by allocating the depreciable
amount equally over the number of.years of useful life. In other words, straight line depreciation is a constant
charge over the useful life of the asset. The straight line method is adopted when the principal cause of
depreciation is passage of time. The straight line approach considers depreciation as a function of time rather
than as a function of usage. Production method
The production or output method assumes that depreciation is more a function of use rather than passage of
time. The useful life of the asset is considered in terms of the output it produces or the number of hours it
works. Thus, depreciation is related to the estimated production capability of the asset and is expressed in a
rate per unit of output or per hour of use. The production method is adopted if the principal cause of
depreciation is usage.
Diminishing balance or accelerated methods
The diminishing balance or accelerated methods provide higher depreciation in the earlier years and lower
depreciation in the later years of the useful life of the asset. Thus, these methods result in a decreasing
depreciation " charge over the useful life. The accelerated depreciation is on the philosophy of producing
more revenue in the earlier years than the later years. The accelerated methods include sum of years' digits
method and double declining balance method.