INTERMEDIATE ACCTG 1B (by: MILLAN)

PROPERTY, PLANT & EQUIPMENT

Overview on the topic:
Chapter Title Sub-topics___
15 PPE –Part 1 Initial recognition & measurement

16 PPE –Part 2 Subsequent measurement

Related standard:
 PFRS 16: Property, Plant and Equipment

INTERMEDIATE ACCTG 1B (by: MILLAN)

Chapter 15 PPE (Part 1)
Learning Objectives

 Measure the initial cost of a PPE and identify

the point where the capitalization of costs
ceases.
 Provide examples of the common classes of
PPE and state some of the peculiar costs
capitalized for each class.
 Identify the different modes of acquisition of
PPE and state the initial measurement of cost
for each mode.

INTERMEDIATE ACCTG 1B (by: MILLAN)

Characteristics of PPE
a. Tangible assets – items of PPE have physical substance
b. Used in normal operations – items of PPE are used in
the production or supply of goods or services, for
rental, or for administrative purposes
c. Long-term in nature – items of PPE are expected to be
used for more than a year

INTERMEDIATE ACCTG 1B (by: MILLAN)

Recognition
The cost of an item of property, plant and equipment shall be
recognized as an asset 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.

INTERMEDIATE ACCTG 1B (by: MILLAN)

Initial measurement
 An item of PPE is initially measured at its cost.

Elements of Cost
1. Purchase price, including non-refundable purchase
taxes, after deducting trade discounts and rebates.
2. 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 the
management.
3. Present value of decommissioning and restoration
costs to the extent that they are recognized as
obligation
INTERMEDIATE ACCTG 1B (by: MILLAN)
Cessation of capitalizing costs to PPE
 Recognition of costs in the carrying amount of an item
of PPE ceases when the item is in the location and
condition necessary for it to be capable of operating in
the manner intended by management.

INTERMEDIATE ACCTG 1B (by: MILLAN)

Measurement of Cost
 The cost of an item of PPE 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 PAS 23 Borrowing Costs.

INTERMEDIATE ACCTG 1B (by: MILLAN)

Cost of Land (Property)
1. Purchase price including other necessary costs such as broker’s commissions.
2. Closing costs, such as titling costs, attorney’s fees, and recording fees.
3. Costs incurred in getting the land in the condition for its intended use, such as
surveying, grading, filling, draining, and clearing.
4. Unpaid taxes prior to date of acquisition assumed by the buyer.
5. Assumption of any liens, mortgages, or encumbrances on the property
6. Special assessments for local government-maintained improvements, such as
pavements, street lights, sewers, and drainage systems.
7. Option paid to acquire the land.
8. Costs incurred to induce tenants to vacate premises and costs of relocating and
reconstructing property belonging to others.
9. Initial estimate of restoration costs for which the entity has a present obligation
10. Any additional land improvements that have indefinite useful life such as costs of
draining, clearing, grading, leveling and filling, surveying, subdividing, and other
permanent improvements.
INTERMEDIATE ACCTG 1B (by: MILLAN)
Land improvement

 Land improvements are enhancements to the land

which have definite useful life, such as private
driveways, walks, fences, parking lots, drainages and
water systems, and cost of trees, shrubs, plants and
other landscaping.

INTERMEDIATE ACCTG 1B (by: MILLAN)

Cost of purchased Building (Plant)
1. Purchase price including other necessary costs such as broker’s
commissions and legal fees.
2. Assumption of any liens, mortgages, or encumbrances on the
property
3. Option paid to acquire the building.
4. Unpaid taxes prior to date of acquisition assumed by the
buyer.
5. Costs incurred to induce tenants to vacate premises.
6. Costs of getting the building in the condition for its intended
use, such as remodeling, renovation, and other repairs prior
to occupancy.

INTERMEDIATE ACCTG 1B (by: MILLAN)

Cost of self-constructed Building (Plant)
1. Materials, labor, and overhead costs incurred during construction.
2. Architectural costs, supervision costs, and costs of building permit
3. Excavation costs
4. Insurance costs and safety inspection fees
5. Costs of temporary structures built during construction
6. Interest on borrowings made to finance construction (Borrowing costs are
discussed in Chapter 18)

INTERMEDIATE ACCTG 1B (by: MILLAN)

 Cost of self-constructed Building -
continuation
The following costs are not included in the cost of a self-constructed
building:
1. Internal profits or savings on self-construction
2. Cost of abnormal amounts of wasted material, labor, or other resources
due to inefficiencies
3. Costs of uninsured hazards or claims for uninsured accidents
4. Costs of private driveways, walks, permanent fences, parking lots, and
drainages and water systems that are not included in the building’s
blueprint

INTERMEDIATE ACCTG 1B (by: MILLAN)

Building improvement

 Building improvements refer to costs incurred

subsequent to occupancy of a purchased building or
subsequent to completion of a self-constructed building
that either increase the useful life of the building or
improve its current state.

INTERMEDIATE ACCTG 1B (by: MILLAN)

Cost of equipment
1. Purchase price including other necessary costs such as broker’s
commissions and non-refundable purchase taxes.
2. Freight, handling charges, and insurance on the equipment while in
transit
3. Cost of necessary special foundations or platform,
4. Assembling and installation costs
5. Costs of testing and conducting trial runs
6. The initial estimate of decommissioning and restoration costs for which
the entity has a present obligation

INTERMEDIATE ACCTG 1B (by: MILLAN)

Cost of equipment - continuation
 The following costs are not included in the cost of an equipment:
1. Cost of relocating the equipment after it has been put to the location
and condition originally intended by management.
2. Cost of training personnel who will be responsible in operating the
equipment.
3. Cost of dismantling and removing an old equipment belonging to the
entity prior to the installation of a new equipment.

INTERMEDIATE ACCTG 1B (by: MILLAN)

Lump-sum purchase

 The acquisition cost of a group of items of PPE acquired

on a lump-sum price (basket price) is allocated to the
individual assets based on their relative fair values at
the date of purchase.

INTERMEDIATE ACCTG 1B (by: MILLAN)

Demolition costs
 The accounting treatment for demolition costs depends on
the reason for the demolition.

Example:
Case: An old structure is demolished to make way for the
construction of a new building.

Accounting: The demolition costs are considered as costs of

site preparation under PAS 16.; and therefore, capitalized as
cost of the new building.

❖ Any proceeds from sale of salvaged materials from the

demolition are deducted from the demolition cost that is
capitalized to the new building.
INTERMEDIATE ACCTG 1B (by: MILLAN)
Acquisition through exchange
 If the exchange has commercial substance, the asset received from the
exchange is measured using the following order of priority:

a. Fair value of asset Given up Plus cash Paid/ minus cash received
b. Fair value of asset Received
c. Carrying amount of asset Given up Plus cash Paid/ minus cash received

 If the exchange lacks commercial substance, the asset received from the
exchange is measured at (c) above.

INTERMEDIATE ACCTG 1B (by: MILLAN)

Acquisition through issuance of own
equity instrument or debt instrument

The assets acquired is measured using the following order of priority:

1. Fair value of asset Received
2. Fair value of instrument Issued

INTERMEDIATE ACCTG 1B (by: MILLAN)

 Acquisition by donation
Items of PPE received as donation are measured at fair value and accounted
for as:
a. Income – if the donor is an unrelated party.
b. Donated capital – if the donor is an owner (shareholder).
c. Government grant, in accordance with PAS 20 Accounting for
Government Grants and Disclosure of Government Assistance. Accounting
(see Chapter 17) – if the donor is the government.

INTERMEDIATE ACCTG 1B (by: MILLAN)

INTERMEDIATE ACCTG 1B (by: MILLAN)
 APPLICATION OF
CONCEPTS
PROBLEM 6: FOR CLASSROOM DISCUSSION

INTERMEDIATE ACCTG 1B (by: MILLAN)

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INTERMEDIATE ACCTG 1B (by: MILLAN)