⮚ Initial estimate of dismantling costs
FINANCIAL ACCOUNTING
Accounting for Property, Plant, and Equipment
Overview of the Handouts:
1. Definition, nature, and classes
2. Recognition
3. Initial Measurement (Cash purchase, on
account purchase, purchase on a
deferred payment contract, issuance of
securities, donation or discovery,
self-instruction, exchanges
non-monetary and monetary assets)
PROPERTY, PLANT, AND EQUIPMENT (PPE)
✔ Tangible assets
✔ Used in business (held for use in
production, for rental to others, or for
administrative purposes)
✔ Expected to be used during more than
one period (long-term, fixed asset)
Examples
▪ Land
▪ Land Improvement
▪ Building
▪ Machinery
▪ Ship, Aircraft, & Motor Vehicles
▪ Furniture & Fixtures
▪ Office Equipment
▪ Bearer Plants
When do we recognize PPE as an asset?
✔ When the asset has a probable future
economic benefit to the entity
✔ When the asset can be reliably
measured
INITIAL MEASUREMENT
Property, plant, and equipment shall be
measured initially at COST.
Elements of Cost
⮚ Purchase Price
⮚ Directly attributable costs
Directly Attributable Costs
● Costs of employee benefits arising
directly from the acquisition of PPE
● Site preparation cost
● Initial delivery and handling cost
● Installation and assembly cost
● Professional Fees
● Testing cost
SUBSEQUENT MEASUREMENT
of
After initial recognition, an entity must choose
which accounting policy for PPE it will apply.
❖ Cost Model
❖ Revaluation Model
ACQUISITION OF PROPERTY
▪ Cash basis
▪ On account subject to cash discount
▪ Installment basis
▪ Issuance of share capital
▪ Issuance of bonds payable
▪ Exchange
▪ Donation
▪ Government grant
▪ Construction
A. Acquisition on a cash basis
Cost = Cash price equivalent @ recognition date
However, when the given is the “lump sum
price”, it is necessary to apportion this price to
the assets acquired based on their relative fair
value.
Example:
Lump sum price – 7,500,000
Land @FV – 2,000,000
Building @FV – 4,000,000
Total FV of Land and Building – 6,000,000
Allocated cost (Land) = 7,500,000 x (2/6)
= 2,500,000
Allocated cost (Building) = 7,500,000 x (4/6)
= 5,000,000

B. Acquisition on account
Cost = Invoice price – discount
Regardless of whether the discount is taken or
not, the cost should be the net amount.
Generally, cash discounts are considered a
reduction of cost and not as income.
Note: When the discount is not taken, it should
be charged to the “purchase discount lost”
account, which is shown as other expenses.
C. Acquisition on installment basis
Cost = Cash price
Cash price – price when paid in cash
Installment price – price when paid in
installment
The excess of the instalment price over cash
price is treated as an interest to be amortized
over the credit period.
Journal entry to amortize the discount on note
payable:
Interest Expense XX
Discount on note payable XX
What if there is no available cash price?
Then, Cost = Present value of all payments
using an implied interest rate
D. Issuance of share capital
Cost shall be measured in order of priority:
a. Fair value of property received
b. Fair value of the share capital
c. Par value or stated value of the share capital
E. Issuance of bonds payable
Cost shall be measured in order of priority:
a. Fair value of bonds payable
b. Fair value of asset received
c. Face amount of bonds payable
F. Exchange
Cost = Fair value of monetary and nonmonetary
asset
However, if the transaction lacks commercial
substance and the fair value of the asset is not
reliably measured, the cost is equal to the
carrying amount.
G. Donation
Cost = Fair value of the property received
It should be credited with the account:
If from shareholders – Donated Capital
If from nonshareholders – Income from
donation
Note: Expenses incurred in connection with
donation (legal fees etc.) shall be deducted to
the donated capital account. While, directly
attributable costs shall be capitalized.
H. Government Grant
Cost = Fair value of the property received
“Non-monetary grants, such as land or other
resources, are usually accounted for at fair
value, although recording both the asset and the
grant at a nominal amount is also permitted.”
[IAS 20.23]
I. Construction
Cost shall include:
▪ Direct material cost
▪ Direct labor cost
▪ Indirect cost and incremental overhead
Note: If incremental overhead is not specifically
identifiable, overhead shall be allocated based
on direct labor or direct labor hours.
Saving or Loss on Construction a. Laptops, cherry orchards, trademarks.

Saving on construction = actual cost of b. Land, building, pineapple.

construction < purchase price from outside
c. Machinery, livestock, sugar cane.
parties
d. Apple trees, patterns, mineral resource
Loss on construction = actual cost of
property.
construction > purchase price from outside
parties

QUESTIONS: 3. A manufacturer plans to open a new

factory. Fortunately, a plant site was donated
1. When do an entity recognize a property,
by a city to him. What is the amount of plant
plant, and equipment acquisitions?
site that should be recorded on the
a. It is certain that the item's associated future manufacturer's books?
benefits will flow to the entity.
a. The nominal cost of taking the title to it.
b. It is probable that the item's associated
b. The value assigned to it by the director of the
future benefits will flow to the entity, and the
company.
cost can be measured reliably.
c. The market value of the plant site.
c. It is possible that the item's associated future
benefits will flow to the entity, and the cost can d. None of the above.
be measured reliably.

d. The cost can be measured reliably.

2. Which of the following include examples of

property, plant, and equipment?