Property, Plant and Equipment part 1

Tangible assets

Used in business

Long-term in nature

Examples:

 Land used in business, as future plant site

 Building used in business

 Equipment used in business

 Furniture and fixture

 Bearer plants

Recognition

It is probable that future economic benefits associated with the item will flow to the entity

The cost of the item can be measured reliably

Example:
 Spare parts, stand-by equipment and servicing equipment are PPE if used long-term

 Safety & Environmental equipment are PPE since it is a requirement in order for other assets to obtain future economic benefits

Initial measurement

Cost – the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction or,
where applicable, the amount attributed to that asset when initially recognized in accordance with the specific requirements of other PFRs

Measurement after recognition:

Cost model – PPE are carried at cost less any accumulated depreciation and any accumulated impairment loss

Revaluation model – PPE are carried at revalued carrying amount

Comprises the following:

Purchase price – includes import duties, nonrefundable purchase taxes, less trade discounts and rebates

Direct costs of bringing asset to the location and condition necessary for it to be used in the manner intended by management

Initial estimate of dismantlement, removal and site restoration costs for which the entity incurs an obligation by acquiring or using the asset other than to

produce inventories

Directly attributable costs:

Costs of employee benefits from/based on acquisition of PPE


Costs of site preparation

Freight costs

Installation and Assembly costs

Testing costs

Professional fees

Costs expensed outright:

Costs of opening a new facility


Costs of introducing a new product or service

Costs of conducting business in a new location

Administration and other General overhead costs

Cessation of capitalization of costs
Capitalization ceases when PPE is in location and condition necessary for it to be operable as intended by management. Costs incurred in using or redeploying PPE are
not capitalized.

Classes of PPE

Land

Land and Buildings

Machinery

Ships

Aircraft

Motor vehicles

Furniture and fixtures

Office equipment

Bearer plants

Under the classes of Land & Building (separate or both), the following are not considered as PPE

Land/Building being sold in the ordinary course of business


Land/Building held for sale

Land held for long-term capital appreciation

Land held for a currently undetermined future use

Land/Building site held for construction or development for future use as investment property

Land/Building leased out under finance lease

Land/Building leased out under operating lease

PPE acquisition

Lump-sum – acquisition cost of two or more PPE at a lump-sum price is allocated to the individual assets based on their relative fair values at the date of purchase

Land & Building at lump-sum – purchase price of land and building is allocated to both based on their relative fair values at the date of purchase

 if building unusable, purchase price is allocated to land only

 if both are classified as inventory or investment property, there will be no allocation

Demolition cost

Is capitalized if it enhances the future economic benefits of the land (cost of site preparation; makes way for a new building)

If reason for demolition is not subject to PAS 16, it is expensed (cost of disposal)

If demolition is a prerequisite to the sale of land (Inventory), demolition cost is treated as cost to sell

If demolition occurs prior to classification of the land as “held for sale”, demolition cost is treated as cost to sell

Decommissioning and Restoration costs

Initial estimate of dismantlement, removal and site restoration costs for which the entity incurs an obligation by acquiring or using the asset other than to produce
inventories. Measured at fair value.

Acquisition of PPE through exchange

Through exchange for a non-monetary asset & exchange for a combination of monetary and non-monetary assets

Measurement depends whether transaction has commercial substance or not:

With Commercial substance – order of priority

1. fair value of the asset given up (+ cash paid or – cash received)

2. fair value of the asset received

 3. carrying amount of the asset given up (+ cash paid or – cash received)

Without Commercial substance

-PPE received is measured at the carrying amount of the asset given up (+ cash paid or – cash received). No gain or loss is recognized in an
exchange transaction that lacks commercial substance.

Acquisition through trade-in

Purchasing of a new asset in exchange for an old one plus cash to pay the balance. When a business purchases a new asset such as a motor vehicle, it is quite common
to trade in or part exchange an old asset to satisfy part of the new asset purchase cost.

Acquisition through issuance of own equity instrument (issuance of share capital)

Acquisition of assets through the use of shares, stocks and the like

Measured using the following order of priority:

Fair value of the asset received

1.
Fair value of the equity instrument issued
2.
Par value or stated value of the share capital
3.
Issuance of Bonds payable:

Measures the financial liability at fair value plus transaction costs that are directly attributable to the issue of the financial liability

Order of priority:

 Fair value of bonds payable

 Fair value of asset received

 Face amount of bonds payable

Acquisition through donation:

Donated capital – if the donor is an owner (shareholder). Any cost incurred attributable to the receipt of donation and transfer of ownership is offset to the donated
capital account

Income – donor is an unrelated party. Offset to the income recognized.

Government Grant – donor is the government