PAS 16 Property, Plant and Equipment

Definition/Major Characteristics
a. PPE are tangible assets (physical substance)
b. PPE are used in business (used in production, supply of goods or services, for rental and administrative purposes)
c. PPE are expected to be used over a period of more than (1) one year

NB: Major spare parts and servicing equipment when the entity expects to use them during more than 1 (one) period can qualify as PPE.
Otherwise, are usually carried as inventory and expensed when consumed.

Recognition
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
GR: @COST

Elements of Cost
a. Purchase price, including import duties and nonrefundable purchases taxes, after deducting trade discounts and rebates.
b. Directly attributable costs
a. Cost of employee benefits arising directly from the acquisition of PPE
b. Cost of site preparation
c. Initial delivery and handling cost
d. Installation and assembly cost
e. Professional fees
f. Costs of testing whether the asset is functioning properly
g. Dismantling cost (at PV), removal cost, and restoration cost

Costs not qualify for recognition

GR: EXPENSED OUTRIGHT
a. Costs of opening a new facility
b. Costs of introducing a new product/service, including cost of advertising and promotion
c. Costs of conducting business in a new location/class of customer, including costs of staff training
d. Administration and other general overhead costs
e. Costs incurred while an item capable of operating in the manner intended by management has yet to be brought into use or is o perated
at less than full capacity
f. Initial operating losses
g. Costs of relocating or reorganizing part of all an entity's operations

Measurement after Recognition

GR: An entity shall choose either to:
a. Cost model → carried at cost less any accumulated depreciation and any accumulated impairment loss.
b. Revaluation model → carried at revalued carrying amount = FV at the date of revaluation less any subsequent accumulated
depreciation and any subsequent accumulated impairment loss.

NB: The entity shall apply such accounting policy to an entire class of PPE.

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Cash Basis
GR: @Cash price equivalent at recognition date = (Cash paid + Directly attributable costs)

EXC: When several assets are acquired at a "basket price" or "lump sum price", it is necessary to apportion the
single price to the assets acquired on the basis of relative fair value/ appraised value/ assessed value

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On account subject to cash discount
GR: @Invoice price − Discount (Whether the discount is taken or not)

Journal entry

To record the acquisition:

Equipment XXX

Accounts payable XXX

To record the payment within the discount period:

Accounts payable XXX

Cash XXX

To record the payment beyond the discount period:

Accounts payable XXX

Purchase discount lost XXX

Cash XXX

NB: The recorded cost should be the net amount

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Installment basis
GR: @Cash price equivalent

NB: The excess of the installment price over the cash price is treated as an interest to be amortized over the
credit period.

Journal entry

To record the acquisition:

Machinery XXX
*Discount on note payable XXX

Note payable XXX

Cash XXX

*Discount on note payable = Installment price - cash price

To record the first installment payment:

*Note payable XXX

Cash XXX

*Note payable = Face amount

To amortize the discount on note payable:

Interest expense XXX

Discount on note payable XXX

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Installment basis (No available cash price)
GR: @PV of all payments using an implied interest rate

Down payment XXX

Add: PV of annual payment XXX
Add: Directly attributable costs XXX
Total cost of the asset XXX

Journal entry

To record the acquisition:

Machinery XXX
*Discount on note payable XXX

Note payable XXX

Cash XXX

*Discount on note payable = Note payable - PV of note payable

To record the first installment payment:

*Note payable XXX

Cash XXX

*Note payable = Face amount

To amortize the discount on note payable:

*Interest expense XXX

Discount on note payable XXX

*Interest expense = PV of note payable x implied interest rate

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Issuance of share capital
GR: @FV of the consideration received

(In order of priority)

a. FV of the property received
b. FV of the share capital (quoted price)
c. PAR value or stated value of the share capital

Journal entry

FV of PPE is used:
PPE @FV XXX

Share capital XXX

Share premium XXX

FV of the share capital is used:

PPE @FV of share capital XXX

Share capital XXX

Share premium XXX

Par value of the share capital is used:

PPE @PAR value XXX

Share capital XXX

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Issuance of bonds payable
GR: @FV + Transaction costs (directly attributable)

(In order of priority)

a. FV of bonds payable (quoted price)
b. FV of asset received
c. Face amount of bonds payable

Journal entry

FV of bonds payable is used:

PPE XXX

Bonds payable XXX

Premium on bonds payable XXX

FV of the asset received is used:

PPE XXX

Bonds payable XXX

Premium on bonds payable XXX

Face amount of the bonds payable is used:

PPE XXX

Bonds payable XXX

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Exchange - with commercial substance
GR: @FV

NB:
• In exchange with commercial substance, gain or loss is recognized entirely.
○ Loss on exchange = FV of asset given < CA of asset given
○ Gain on exchange = FV of asset given > CA of asset given
• An exchange transaction has commercial substance when cash flows of the asset received differ significantly from the cash
flows of the asset transferred.
• The entity shall consider if the amount, timing and risk of the cash flows from the new asset are different from the cash flows of
the old asset.

Journal entry (payor)

*PPE-new XXX
Accumulated depreciation XXX
Loss on exchange XXX

Equipment-sold XXX
Gain on exchange XXX
Cash XXX

*Cost of new asset (PPE-new) = FV of asset given + cash payment

Journal entry (recipient)

*PPE-new XXX
Accumulated depreciation XXX
Loss on exchange XXX
Cash XXX

Equipment-sold XXX
Gain on exchange XXX

*Cost of new asset (PPE-new) = FV of asset given − cash payment

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Exchange - with NO commercial substance
GR: @CA

Grounds:
a. The exchange lacks commercial substance
b. The FV of the asset given/received is not reliably measurable

NB: In exchange that lacks commercial substance, no gain or loss are recognized.

Journal entry (payor)

*PPE-new XXX
Accumulated depreciation XXX

Equipment-sold XXX
Cash XXX

*Cost of new asset (PPE-new) = CA of asset given + cash payment

Journal entry (recipient)

*PPE-new XXX
Accumulated depreciation XXX
Cash XXX

Equipment-sold XXX

*Cost of new asset (PPE-new) = CA of asset given − cash payment

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Trade In
GR: (in order of priority)

a. FV of asset given + any cash payment If FV of the asset given is determinable

b. Trade-in value of asset given + any cash payment If FV of the asset given is not determinable

Journal entry (FV approach)

*PPE-new XXX
Accumulated depreciation XXX
*Loss on exchange XXX

Equipment-sold XXX
*Gain on exchange XXX
Cash XXX

*Cost of new asset (PPE-new) = FV of asset given + cash payment

*Loss on exchange = FV of asset given < CA of asset given
*Gain on exchange = FV of asset given > CA of asset given

Journal entry (Trade-in Value approach)

*PPE-new XXX
Accumulated depreciation XXX
*Loss on exchange XXX

Equipment-sold XXX
*Gain on exchange XXX
Cash XXX

*Cost of new asset (PPE-new) = FV of asset given + cash payment

*Loss on exchange = Trade-in value of asset given < CA of asset given
*Gain on exchange = Trade-in value of asset given > CA of asset given

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Donation
To record contributions received from shareholders:

GR: Shall be recorded at fair value with the credit going to donated capital.

PPE XXX

Donated Capital XXX

NB:
• Expenses incurred e.g., payment of registration fees or legal fees shall be charged to the donated capital account.
• Directly attributable costs incurred subsequently shall be capitalized.

To record contributions received from non-shareholders:

GR: Shall be recorded at fair value with the credit going to income.

PPE XXX

Income XXX

NB:
• Capital gifts or grants (received or receivable) are generally subsidies and therefore recognized as income.
• If not subsidies the offsetting credit is a liability account until the initial restrictions are met. Once met, the liability is transferred to
income.

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Self-Construction
GR: The self-constructed PPE shall include:
a. Direct cost of materials
b. Direct cost of labor
c. Indirect cost and incremental overhead specifically identifiable or traceable to the construction.

EXC: IF the incremental overhead is not specifically identifiable, allocation of overhead may be done on the basis of direct
labor cost or direct labor hours.

NB:
• The cost of self-constructed asset is determined using the same principles as for an acquired asset.
• Any internal profit are eliminated in arriving at the cost of the self-constructed asset.
• The cost of normal amount of wasted material, labor and other resources incurred in the production of the self-
constructed asset is included in the cost of the asset.

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