Property, Plant, and Equipment

PPE

 Tangible items
 Held by an enterprise for use in the production or supply of goods or services
 For rental to others
 For administrative purposes
 Expected to be used for more than 1 period.

Example: land, property, land improvements, buildings, machinery, equipment, furniture,

improvements to leased facilities

1. Major spare parts and stand-by equipment

2. Land held as a future plant site
3. A building or a portion of the building that is owner-occupied
4. Bearer plants – a living plant (fruit trees and grape vines) that is used in the production or
supply of agricultural produce (more than 1 period; a remote likelihood of being sold as
agriculture produce

a. Initial measurement – cost

1. Purchase price
- Acquired by exchanging another asset: FV of the asset given up; FV of the asset received
- Acquired by issuing the entity’s own financial instruments; FV of the asset received; FV o
the financial instrument issued, whichever is more reliably determinable

2. Cost directly attributable – bringing the asset to the location

- Cost of employee benefit (acquisition or construction)
- Cost of site preparation
- Initial delivery and handling costs
- Installation and assembly costs
- Cost of testing
- Professional fees

3. Initial estimate of the costs of dismantling and removing the item and restoring the site on
which it is located
Specifications:

Land – landscaping and other property enhancements (permanent)

Land improvements – depreciable site enhancements (not permanent)

Purchase of land with an old building:

- single purchase price must be allocated to the building and land based on their FV

Leasehold improvements -improvements made by the lessee to lease property

Equipment – constructed by their own resources and the construction period takes a substantial period,
the cost includes borrowing costs capitalized

Natural resources (timber tracts and mineral and oil deposits – cost of equipment used in extracting
natural resources is not recognized as part of the cost of the natural resources

Bearer plant

b. Measurement after recognition

1. Cost model – Cost – accumulated depreciation – any accumulated impairment loss
2. Revaluation model – Revalued carrying amount (FV at the date of revaluation – subsequent
accumulated depreciation – subsequent impairment loss)

Acquisition of Property:

1. Cash basis
2. On account subject to cash discount
3. Installment basis
4. Issuance of share capital
5. Issuance o bonds payable
6. Exchange
7. Donation
8. Government grant
9. Construction

CASH BASIS

- Cash price equivalent at the recognition date

- Cash paid + directly attributable costs (bringing the asset to the location and condition
for the intended use)
- Several assets (Lump sum price) – apportion/allocate (FV)

ON ACCOUNT

- Subject to cash discount = cash – cash discount (whether the discount or taken or not)
INSTALLMENT BASIS

- Deferred beyond normal credit terms = cash price equivalent

- Excess of the installment price and the cash price = treated as interest to be amortized
over the credit period
- No available cash price? An amount equal to the present value of all payments using an
implied interest rate

ISSUANCE OF SHARE CAPITAL

- Gen. rule – FFV of the consideration received

- Order of priority: 1. FV of the property received 2. FV of the share capital 3. Par value or
stated value of the share capital

ISSUANCE OF BONDS PAYABLE

- Gen. rule – measure the financial liability at FV plus transaction cost

- Order of priority: 1. FV of bonds payable 2. FV of the asset received 3. Face amount of
bonds payable

EXCHANGE

- Measured at FV
- Measured Carrying amount if: 1. Lacks commercial substance 2. FV of the asset given or
the FV of the asset received is not reliably measurable
- Entity-specific value – PV off the cash flows an entity expects to arise from the
continuing use of an asset and from the disposal at the end of useful life
- Hierarchy:
1. FV of the asset given up
2. FV of the asset received
3. CA of the asset given up

Commercial substance

- event or transaction causing the cash flows of the entity to change significantly by
reason of the exchange
- Cash flows of the asset received differ significantly from the cash flows of the asset
transferred
- Amount, timing, and risk of the cash flows from the new asset are different from the
cash flows of the old asset

GOVERNMENT GRANT

- Subsidy, subvention, or premium

- Assistance by the government in the form of transfer of resources to an entity in return
for part or future compliance with certain conditions relating to the operating activities
of the entity
- including nonmonetary grant at fair value when there is reasonable assurance 1.
Conditions attaching to the grant 2. Grant will be received
 - Shall not be recognized on a cash basis

Classifications of government grant

a. Grant related to asset – shall purchase, construct, or otherwise acquire long-term asset
b. Grant related to income – residual definition

Presentation of grants related to asset

- SFP (either by setting up in the grant as deferred income or by deducting the grant in
arriving at the carrying amount of the asset.

Presentation of grants related to asset

- Other income , alternatively they are deducted in reporting the related expense

Accounting for a government grant

- Shall be recognized as income/expense

- The grant is taken to income over one or more periods in which the related cost is
incurred
- Giving immediate financial support to the entity with no further related costs shall be
recognized as income of the period in which it becomes receivable
- Change in accounting estimate = government grant becomes repayable because of
noncompliance with conditions
- Repayment of a grant related to income = applied first against any unamortized
deferred income and any excess shall be recognized immediately as an expense
- Repayment of a grant related to an asset = recorded by increasing the CA of the asset

CONSTRUCTION

Borrowing costs

- Interest and other costs that an entity incurs in connection with the borrowing of funds
- A. Interest expense (effective interest method)
B. Finance charge (finance lease)
C. Exchange difference (foreign currency borrowing)

Qualifying assets

a. Manufacturing plant
b. Power generation facility
c. Intangible asset
d. Investment property

Excluded:

a. Assets measured at FV (biological assets)

 b. Inventory (repetitive basis)
c. Assets ready for their intended use or sale

Accounting for borrowing costs

Rules (PAS 23)

1. Borrowing is directly attributable to the acquisition, construction, or production of a

qualifying asset = Required to be capitalized as a cost of the asset
2. Not directly attributable = expensed immediately

Asset financed by specific borrowing:

- Specifically for the purpose of acquiring a qualifying asset

- Actual borrowing cost during the period – any investment income (earned interest
income)

Asset financed by a general borrowing

- Generally used for acquiring a qualifying asset

- Capitalized borrowing cost = Average carrying amount during the period x capitalization
rate or average interest rate
- Shall not exceed the actual interest incurred
- Capitalization rate or average interest rate = total annual borrowing cost / total general
borrowings outstanding during the period
- Investment income is not deducted from capitalizable borrowing cost
- Interest expense = Actual borrowing – capitalized borrowing cost

Asset financed both specific and general borrowing

IMPAIRMENT

- fall in the market value of an asset so that the recoverable amount is not less than the
carrying amount in the statement of financial position
- Recoverable amount (decrease) Carrying amount (SFP) (increase)
- Accounting for impairment:
1. Indication of possible impairment: Internal sources or External sources

2. Measurement of recoverable amount

a. FV – cost of disposal vs value in use (whichever is higher)

3. Recognition of impairment loss

a. Recoverable amount (low) Carrying amount (high)\
b. Dr. Impairment loss Cr. Accumulated depreciation

REVALUATION

- Initial (cost)
- After recognition, the entity shall choose either the cost model or the revaluation model
- COST MODEL
LAND:
a. Cost – Accumulated depreciation – accumulated impairment losses
b. Any changes (increase) sa cost, ignore lang
c. Any changes (decrease) sa cost, recognize an impairment loss
d. Reversal of impairment – Dr. Accumulated Dep. Cr. Gain on reversal of impairment
(Revalued amount – Historical cost)

DEPRECIABLE ASSET:
a. Historical cost – Accumulated depreciation = Carrying amount
b. What if FV (high) Carrying amount (low) = Ignore the changes/ not impaired
c. What if FV (low) Carrying amount (low) = recognized impairment loss
(CA-FV/Recoverable amount)

Recoverable amount = FV – cost of disposal or value in use (whichever is higher)

REVALUATION MODEL

a. Carried at a revalued amount = FV at the date off the revaluation – any subsequent
accumulated depreciation and subsequent impairment losses

Treatment to revaluation surplus?

- CA (increase) because of revaluation = credited to revaluation surplus (OCI)
- it will be transferred to retained earnings when the surplus is realized
- whole surplus may be realized on the retirement or disposal of the asset
- revaluation surplus is allocated or realized over the remaining useful life of the asset
and reclassified through retained earnings (DEPRECIABLE ASSETS)
- Revaluation surplus is transferred to retained earnings only when the asset is sold
(NON-DEPRECIABLE ASSETS)