UNIVERSITY OF MAKATI

Institute of Accountancy
J.P. Rizal Extension, West Rembo, Makati City

AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

LECTURE NOTES
TOPIC: PROPERTY, PLANT AND EQUIPMENT
These 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.

Initial recognition: at COST

Composition:

1. Purchase price, including import duties and 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 the
manner intended by management
- Costs of employee benefits arising directly from the acquisition of PPE
- Cost of site preparation
- Initial delivery and handling cost
- Installation and assembly cost
- Professional fees
- Costs of testing whether the asset is functioning properly

NOTE: Cost of relocating existing PPE or costs of reorganising part or all of an entity’s operations are not capitalised but expense
as incurred (re-arrangement costs)

3. Initial estimate of the cost of dismantling and removing the asset and restoring the site on which it is located and for which an
entity has a present obligation as required by law or contract

NOTE: Proceeds from selling samples produced and the cost of such samples when testing whether the asset is functioning properly shall
be included in profit or loss.

The proceeds are no longer deducted from the cost of PPE. If unsold, should form part of inventory

Subsequent recognition: either COST or REVALUATION model and should be applied to an ENTIRE CLASS of PPE.

COST MODEL: Cost less accumulated depreciation and accumulated impairment loss

REVALUATION MODEL: Revalued carrying amount

Acquisition of Property:

1. Cash Basis – cash price equivalent at the recognition date (plus direct attributable costs, if there’s any)

If acquired at a basket price – should be allocated on the basis of relative fair value

2. On account – invoice price

If subject to discount – invoice price minus the discount, regardless whether the discount is taken or not

3. On Installment basis – cash price equivalent and should not include any financing cost (i.e., interest)

If no available cash price – PV of all payments using an implied interest rate

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 4. Issuance of share capital
a. Fair Value of the property received
b. Fair Value of the share capital
c. Par/Stated value of the share capital

5. Issuance of bonds payable

a. Fair Value of bonds payable
b. Fair Value of asset received
c. Face value of Bonds payable

6. Exchange
- With commercial substance (with gain/loss on exchange)
a. Fair value of the asset given plus any cash payment (minus cash received)

b. Fair value of the asset received

- Without commercial substance (no gain/loss on exchange)

a. Carrying value of the asset given plus any cash payment (minus cash received)

Trade In (non-dealer acquiring the asset from a dealer)

a. Fair value of the asset given plus any cash payment

b. Trade in value of the asset given plus any cash payment (equals to fair value of the asset received)

7. Donation
- From shareholders
Should be recorded at the FAIR VALUE of the donated property (with the credit going to DONATED CAPITAL)

Any expense incurred in connection with the donation should be charged to donated capital.

However, direct attributable costs incurred subsequently to bring the donated asset to the location and condition should
be capitalised.

- From non-shareholders
Should be recorded at the FAIR VALUE when received or receivable

If unconditional - INCOME

If conditional – LIABILITY then income once

conditions are met

8. Construction
a. Direct materials
b. Direct Labor
c. Overhead specifically identifiable or traceable to the construction

Subsequent Costs – expenditures incurred during the ownership of the PPE (CAPITALISABLE COSTS)

1. Additions:
- Entirely new unit (DEPRECIATED OVER ITS USEFUL LIFE)
- Expansion, extension or enlargement of old asset
(DEPRECIATED W/EVER IS SHORTER between the remaining useful life of the ORIGINAL ASSET AND useful life of the
EXPANSION)

2. Improvements or Betterments:
- Modifications or alterations which increase the service life or the capacity of the asset

3. Replacements – substitution of equal or lesser quality

  Replacement of new asset

- Replaced part is separately identifiable and practicable

- Replaced part is not separately identifiable and practicable (USE THE DISCOUNTED COST OF THE REPLACEMENT AS THE
LIKELY ORIGINAL COST)

 Replacement of major parts – extraordinary repairs

 Replacement of minor parts –ordinary repairs

DEPRECIATION – systematic allocation of the depreciable amount of an asset over the useful life

1. The residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations
differ from previous estimates, any change is accounted for prospectively as a change in estimate under IAS 8.

2. The depreciation method used should reflect the pattern in which the asset's economic benefits are consumed by the entity; a
depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not
appropriate.

3. The depreciation method should be reviewed at least annually and, if the pattern of consumption of benefits has changed, the
depreciation method should be changed prospectively as a change in estimate under IAS 8

4. Depreciation should be charged to profit or loss, unless it is included in the carrying amount of another asset. Depreciation
begins when the asset is available for use and continues until the asset is derecognised, even if it is idle.

REVALUATION:

Frequency: no clearcut rule on frequency. Depends upon the changes in the fair value of PPE being revalued.
Application: Entire class of PPE

Basis of Revaluation:
1. Fair Value
2. Depreciated Replacement Cost – current purchase price minus corresponding accumulated depreciation

TREATMENT OF REVAL SURPLUS – credited as component of OCI

- If asset is retired or disposed – whole/remaining surplus is buried to retained earnings

- If being used – allocated or realised over the remaining useful life of the asset and being charged to R/E

For any reversal of revaluation surplus, shall be charged to:

1. Up to the extent of revaluation surplus

2. Any excess – revaluation loss/expense

DERECOGNITION:
Net Proceeds XXX
Less: Carrying value of PPE(XXX)
Gain or Loss on Sale XXX

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IMPAIRMENT:
Carrying Value > Recoverable Value

wherein RV is equal to whichever is higher between

 FAIR VALUE LESS COST TO SELL

 VALUE IN USE

Note: Any claim for compensation from third parties for impairment is included in profit or loss when the claim becomes receivable

OTHER ITEMS:

Amendments to PAS16 and PAS 41: Bearer Plants

Bearer plants should be accounted for in the same way as PPE (PAS16) instead of PAS41.

Requisites to be considered a Bearer Plant:

 A living plant that is used in the production or supply of agricultural produce

 Is expected to bear produce for more than one period
 Has a remote likelihood of being sold as agricultural produce, except for incidental scrap sale

For bearer plants, costs capitalisation should cease when the bearer plants reach maturity. Judgement may be needed to identify when
bearer plants reach maturity; and, hence, costs will cease to be capitalised and depreciation will commence.

Bearer plants need to be assessed for impairment under PAS 36 Impairment of Assets

Bearer plants included within PAS 16 will now be subject to the requirements of PAS 20 Accounting for Government Grants rather than
PAS 41 Agriculture

Land and Building

1. Land and an old building are purchased at a single cost

- Old building is usable – allocate between Land and building on the basis of relative fair value
- Old building is not usable- cost is allocated to Land only

2. Old building is demolished immediately to make room for construction of a new building
- Any allocated carrying amount of the USABLE old building is recognised as a LOSS if the new building is accounted for as
PPE or investment property.

- Any allocated carrying amount of the USABLE old building is CAPITALISED AS COST of the new building if the new building
is accounted for as inventory

- The demolition cost minus salvage value is CAPITALISED

a. as cost of the new building whether the new building is accounted for as PPE, investment property or inventory
b. as cost of land if the old building is demolished to prepare the land for intended use (and not construct for the new
building)
 DISCLOSURES REQUIREMENTS:
Information about each class of property, plant and equipment

For each class of property, plant, and equipment, disclose:

 basis for measuring carrying amount
 depreciation method(s) used
 useful lives or depreciation rates
 gross carrying amount and accumulated depreciation and impairment losses
 reconciliation of the carrying amount at the beginning and the end of the period, showing:
- additions
- disposals
- acquisitions through business combinations
- revaluation increases or decreases
- impairment losses
- reversals of impairment losses
- depreciation
- net foreign exchange differences on translation
- other movements

Additional disclosures

The following disclosures are also required:

- restrictions on title and items pledged as security for liabilities

- expenditures to construct property, plant, and equipment during the period
- contractual commitments to acquire property, plant, and equipment
- compensation from third parties for items of property, plant, and equipment that were impaired, lost or given up that is
included in profit or loss.

IAS 16 also encourages, but does not require, a number of additional disclosures.

Revalued property, plant and equipment

If property, plant, and equipment is stated at revalued amounts, certain additional disclosures are required:

- the effective date of the revaluation

- whether an independent valuer was involved
- for each revalued class of property, the carrying amount that would have been recognised had the assets been carried
under the cost model

the revaluation surplus, including changes during the period and any restrictions on the distribution of the balance to shareholders

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PRACTICE QUIZZER:

1. These are tangible assets that are used in business (used in production, supply of goods or services, for rental to others, and for
administrative purposes) and are utilized to be used for more than one period.
a. investment property
b. property, plant and equipment
c. intangible assets
d. financial assets

2. Which of the following is not considered an item of PAS 16?

a. property subject to depreciation, such as machinery and used for administrative purposes
b. property not subject to depreciation, such as land and used as a plant site
c. property subject to amortization, such as franchise acquired to obtain business rights
d. property used to develop and maintain biological assets and mineral reserves

3. Which of the following is not a major characteristic of property, plant and equipment?
a. The property, plant and equipment are tangible assets
b. The property, plant and equipment are used in business
c. The property, plant and equipment are subject to depreciation
d. The property, plant and equipment are expected to be used over a period of more than one year

4. Which of the following costs is capitalizable?

a. cost of introducing a new product or service
b. cost of opening a new facility
c. cost of conducting business in a new location or with a new class of customer
d. cost directly attributable to bringing the asset to the location and condition

5. Which of the following cost is not considered capitalizable?

a. cost of site preparation
b. initial delivery and handling cost
c. installation and assembly cost
d. initial operating losses

6. Initially, PPE is measured at cost; however, subsequently, PPE is measured at

i. cost model
ii. fair value model
iii. revaluation model
iv. net realizable value

a. I only
b. either I or II
c. either I or III
d. I, II, III and IV

7. Which of the following is NOT true if PPE is acquired on an installment basis and is beyond the normal credit terms?
a. if there is a cash price equivalent, its cost is equal to it with the difference between installment price and cash price be
recognized as an interest to be amortized over the credit period

b. If there is no cash price equivalent, its cost is equal to the present value of all cash payments with the difference
between installment price and present value of all cash payments be recognized as an interest to be amortized over
the credit period

c. Methods of amortization of the interest required by PFRS are straight line, outstanding method and effective interest
method
d. all of the above
8. When a group of assets is acquired for a lump sum price, the total cost should be allocated to the individual assets based on
their relative
a. fair value
b. assessed value
c. book value
d. appraised value

9. If property is acquired on account with available cash discount, the asset is equal to
a. invoice price minus the discount if taken only
b. invoice price minus the discount whether taken or not
c. invoice price plus the discount if taken only
d. invoice price plus the discount whether taken or not

10. If property is acquired through issuance of share capital, property shall be measured at

a. fair value of the property acquired

b. par or stated value of the shares
c. fair value of share capital
d. whichever is higher among ‘a’, ‘b’ or ‘c’

11. If property is acquired through issuance of bonds payable, property shall be measured at
a. fair value of bonds payable
b. face value of bonds payable
c. fair value of the property acquired
d. whichever is higher among ‘a’, ‘b’ or ‘c’

12. Which of the following statements under exchange transaction is not correct?
a. When a PPE is acquired in exchange for another asset and there is a commercial substance, its cost shall be measured
based on the fair value of the property given up.

b. There is a commercial substance when the cash flows of the asset received differ from the cash flows of the asset
transferred or the entity-specific value of the portion of the entity’s operations affected by the transaction changes as
a result of the exchange and the difference is significant relative to the fair value of the asset exchanged.

c. If the exchange transaction lacks commercial substance or none at all, the cost of the property received will be equal
to the cost of the property even if there is a commercial substance but the fair value of either the asset received or the
asset given up is not reliably measurable.

d. Even if the exchange lacks commercial substance or none at all, a gain or loss on exchange should be recognized in the
books as part of the going concern assumption.

13. Glenn and Ramir exchanged equipment; Glenn transferred equipment with a fair value of
P 600,000 and book value of P 700,000 to Ramir plus a cash payment worth P 200,000. In the books of Ramir, how will he
record the cost of the property received assuming that the cash flows of the asset received do not differ from the cash flows of
the asset transferred?

a. fair value of asset given plus cash payment

b. book value of asset given up plus cash payment
c. fair value of asset minus cash payment
d. book value of asset given up minus cash payment

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14. Which of the following items is incorrect when a PPE is received through donation?
a. if a PPE is donated by a shareholder, PPE shall be recorded at its fair value with the credit going to donated capital, if
significant.

b. if a PPE is donated by a nonshareholder, PPE shall be recorded at its fair value when they are received or receivable
with the credit going to an income account or a liability account.

c. Any expense incurred in connection with the donation such as registration and legal fees are capitalizable as these
enhance or increase the value of the asset.

d. None. All of the above items are correct.

15. Statement 1: Gain or loss from disposal from the derecognition of an item of PPE shall be determined as the difference
between the net disposal proceeds and the carrying amount of an item.

Statement 2: Any noncurrent asset classified as held for sale shall be excluded from PPE but presented in the current asset
section of the balance sheet and be depreciated from its remaining useful life.

Statement 3: Idle or abandoned property shall not be classified as held for sale and still be subjected to depreciation.

a. True, True, True

b. True, False, True
c. True, True, False
d. False, False, True

16. All of the following statements are incorrect, except

a. Depreciation is a matter of valuation of the property in recognition of the exhaustion of the cost of an item over its
useful life
b. The objective of depreciation is to have each period benefiting from the use of the asset bear an equitable share of the
asset cost
c. All of the properties shall be depreciated
d. Depreciation is always an operating expense.

17. All of the following statements are correct, except

a. Temporary idle assets shall be precluded from depreciation.
b. Depreciation ceases when the asset is derecognized
c. When assets are held for sale, depreciation shall be discontinued
d. Depreciation of an asset begins when it is available for use

18. Cost less salvage value is called

a. Book Value
b. Carrying Value
c. Depreciable Value
d. Amortized Cost

19. It is a decline in the market value of an asset so that its recoverable value is lower than its carrying amount
a. revaluation
b. impairment
c. depletion
d. depreciation

20. Recoverable value is equal to

a. fair value less cost to sell
b. value in use
c. higher between fair value less cost to sell and value in use
d. lower between fair value less cost to sell and value in use
21. How do we compute for value in use?
a. present value or discounted value of future net cash flows before tax
b. present value or discounted value of future net cash flows after tax
c. either ‘a’ or ‘b’
d. none of the above

22. All of the following statements are correct, except

a. An impairment loss should be presented as part of income statement
b. In the case of revalued asset. any impairment loss shall be charged to revaluation surplus with the excess going to
income statement
c. Finance costs and income tax expense shall be excluded in the computation of cost of disposal
d. increased carrying amount due reversal of an impairment shall not exceed the carrying amount that would have been
determined had there been no impairment; with the gain going to other comprehensive income

23. For companies that prepare financial statements in accordance with PFRS, plant, property, and equipment should be valued
using which models?
a. The cost model or the revaluation model.
b. The cost model or the fair value through profit or loss model.
c. The cost model or the fair value model.
d. The revaluation model or the fair value model.

24. Which is true about the revaluation model for valuing plant, property, and equipment?
a. Revaluation of assets must be made on the last day of the fiscal year.
b. Revaluation of assets must be made on the same date each year.
c. There is no rule for the frequency or date of revaluation.
d. Revaluation of assets must be made every two years.

25. When the revaluation model is used for reporting plant, property, and equipment, the gain or loss should be included in
a. Income for the period.
b. Gain from revaluation on the income statement.
c. A revaluation surplus account is other comprehensive income.
d. An extraordinary gain or loss on the income statement.

26. Under the PFRS revaluation model for accounting for plant, property, and equipment
a. Assets must be revaluated quarterly.
b. Assets must be revaluated annually.
c. Assets must be revaluated biannually.
d. There are no rules regarding the frequency of revaluation.

27. Under PFRS, when an entity chooses the revaluation model as its accounting policy for measuring property, plant, and
equipment, which of the following statements is correct?
a. When an asset is revalued, the entire class of property, plant, and equipment to which that asset belongs must be
revalued.
b. When an asset is revalued, individual assets within a class of property, plant, and equipment to which that asset
belongs can be revalued.
c. Revaluations of property, plant, and equipment must be made at least every three years.
d. Increases in an asset’s carrying value as a result of the first revaluation must be recognized as a component of profit or
loss

28. The cost of land to be used in the operations of an entity should include all of the following except
a. Commissions related to the acquisition of the land.
b. Property taxes to the date of acquisition assumed by the purchaser.
c. Excavation in preparation for the construction of a new building on the land.
d. The cost of survey of the land.

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29. Which of the following would be treated as revenue expenditure?
a. Extraordinary repair and maintenance on building
b. The replacement of major component of building
c. An addition to an existing building
d. Rearrangement cost

30. The cost of nonmonetary asset acquired in exchange for another nonmonetary asset and the exchange has commercial
substance is usually recorded at
a. Fair value of the asset given and a gain or loss is recognized
b. Fair value of the asset given and a gain but not a loss is recognized
c. Fair value of the asset received if it is equally reliable as the fair value of the asset given up
d. Either the fair value of the asset given up or the asset received, whichever one results in the large gain

31. All of the following statements are true in relation to the impairment test of an asset, except
a. The recoverable amount is the lower of value in use and fair value less cost of disposal
b. The recoverable amount is the higher of value in use and fair value less cost of disposal
c. If the recoverable amount is higher than carrying amount no impairment loss is recorded
d. If the recoverable amount is lower than carrying amount an impairment is loss recorded

32. The single cost of acquiring land and unusable old building is
a. Charged to the land only
b. Charged to the building only
c. Allocated between land and building based on carrying amount
d. Allocated between land and building based on relative fair value

33. The single cost of acquiring land and usable old building is
a. Charged to the land only
b. Charged to the building only
c. Allocated between land and building based on carrying amount
d. Allocated between land and building based on relative fair value

34. If an entity purchased a lot and an old building and immediately demolished the old building
and used the property as a parking lot, the proper accounting treatment of the carrying mount of the old building would
depend on
a. The contemplated future use of the parking lot.
b. The length of time for which the building was held prior to demolition.
c. The intention of management for the property when the building was acquired.
d. The significance of the cost allocated to the building in relation to the combined cost of the lot and building.

35. When land and an old building are acquired, the cost of immediately demolishing the old
building to prepare the land for the intended use should be
a. Accounted for as deferred charge
b. Charged to retained earnings
c. Charged to the land
d. Expensed immediately

36. Major spare parts and standby equipment which are expected to be used over a period of
more than one year shall be classified as
a. Expense
b. Inventory
c. Noncurrent investment
d. PPE
37. Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41) changes the accounting policy requirements for biological assets
that meet the definition of bearer plants. The amendment defines a bearer plant as “living plant that:
(Select the true statement/s)

Statement I: is used in the production or supply of agricultural produce

Statement II: is expected to bear produce for more than one period

Statement III: has a remote likelihood of being sold as agricultural produce, even for
incidental scrap sales

a. I, II and III
b. I and II only
c. II and III only
d. I and III only

38. Which of the following costs relating to noncurrent assets should not be capitalized?
a. Cost of site preparation
b. Installation and assembly costs
c. Replacement of small spare parts annually
d. Replacement of roof of building every 15 years

39. Donated equipment (from non-shareholders) for which the fair value has been determined shall be recorded as a debit to the
equipment account and a credit to

a. Income
b. Other Comprehensive Income
c. Retained Earnings
d. Share Capital

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