IAS 16 PROPERTY, PLANT, AND EQUIPMENT

Property, Plant, and Equipment Major Characteristics

● Tangible assets
○ It has physical substance as to differentiate it from IAS 38 Intangible Assets.
○ It is tactile
● Held for
○ Use in production or supply of goods or services
○ Rental to others
○ Administrative purposes - e.g., building HQ, maintenance and security services.
○ In short, PPE, in its nature, is used for business purposes.
● Expected to be used during more than one period
○ Since long-lived assets ang kaniyang nature, dapat ang useful life niya ay more than a year.

Recognition Principle
● Initial Recognition: PPE is recognized at cost.
○ Purchase price, including import duties and non-refundable or non-recoverable purchase tax
■ So, kung refundable like input vat, not capitalizable.
■ Trade discounts and rebates are deducted from the purchase price to get the capitalizable cost.
○ DACs - costs that are necessary to bring the assets to the location and condition.
■ Minsan, ang problem ay nagbabanggit ng “re-arrangement costs” which are costs related to the
relocation of PPE (literal transfer of PPE from one place to another) or cost of re-organizing the entity’s
operations (may be due to restructuring).
● These costs are not capitalizable. Existing na kasi yung mga items of PPE kapag naiincur sila.
Hence, expensed outright sila, so part sila ng OPEX.
○ Initial estimate of dismantling costs/removal cost/restoration cost
■ This is a result of a legal and constructive obligation.
■ Best seen in mining and oil companies. After nila magdrill drill sa ground or sea, they are required to
restore the asset to its original state (i.e., yung appearance bago nila ginamit; kung paano nila nakita
before operations).
■ Yung costs na to, qina-quantify bago iset up ang PPE to estimate how much ang magiging costs in
the future; cinacapitalize yung cost na to as part of the PPE.
○ Dati, kapag nakakapagproduce ng samples as a result of the test run, dinededuct siya sa cost ng PPE (yung
mismong proceeds ang dindeduct). But now, any net proceeds (i.e., net of the cost of samples) is charged
to P/L (other income).
■ Kung hindi mabebenta, magiging part nalang siya ng inventory.
■ Cost of testing is still capitalizable. The cost of the samples yung hindi capitalizable kasi ninenet na
sila sa proceeds then pupunta sa P/L.
○ How to determine if an expense should be capitalized:
■ If this expense prolongs the useful life of the asset.
■ If this expense is necessary to imrove the performance (e.g., nagincrease sa production)
● Subsequent recognition: Company may choose at YE to recognize the entire class of PPE using cost or revaluation
model.
○ Cost model = Initial cost less accumulated depreciation and accumulation IL = Net Book Value which is
presented in the SFP.
○ Revaluation model = Revalued CA.
■ You can either use the depreciated replacement cost or the fair value. Compare this to the initial
cost; difference will go to the OCI under revaluation surplus.
○ Explanation of class of PPE
■ Class of Machineries. Dapat kung revaluation model ka sa Machinery X, dapat sa lahat na ng
machineries mo revaluation model ka na din. For the rest of the classes (i.e., Class of Buildings, Class
of Equipment) you are free to use the cost model. Basta dapat one class, one valuation model, but
not required naman na sa buong PPE account, pwede magkaiba ng model ang magkaibang class.

Acquisition of PPE
● Cash basis - most common; kung magkani purchase price plus any DACs would be the cost.
 ○ Lumpsum acquisition: If “basket” of PPE, allocate the purchase price plus DACs using their fair value (i.e., add
all their fair values to get denominator. Numerator is the fair value of each item then multiply with the cost to
get their share of cost.)
● On account - the cost is based on the invoice price (no trade discounts).
○ If may vat, remove lang.
○ If may cash discounts pa, whether taken or not, ibawas siya sa cost.
● Installment basis - this happens when we don’t have readily available cash, but we already recognize sa cash price
equivalent niya.
○ Any difference between the cash price equivalent and sa installment price should be charged sa finance
cost, then such finance cost is amortized over the term of the loan (not the useful life of the PPE).
○ We don’t recognize sa installment price kasi merong interest component yon.
○ If walang cash price equivalent, it is computed using the implied interest rate as PV of all payments.
● Issuance of share capital
○ Order of priority as to the fair value of the PPE that will be capitalized
■ FV of property received - then credit OSC at par and any difference will be credited to Share
Premium.
■ FV of the share capital - any difference between the FV and par of the shares will be credited to
Share Premium,
■ Par or stated value of the share capital - no Share Premium.

■
● Issuance of bonds
○ FV of bonds payable - any difference between the FV and face of the bonds will be charged to Premium
on Bonds.
○ FV of assets received
○ Face value of bonds payable
● Exchange
○ With commercial substance; we recognize a G/L on exchange.
■ Ang cost of PPE (in order of priority)
● FV of asset given plus any cash payment or less any cash received.
● FV of asset received.
■ Merong G/L kasi ang dinedebit nating asset ay based on FV while yung ginigive up nating asset ay
based on BV.
■ Commercial substance - merong change/fluctuations sa cash flow ng company as a result of the
exchange; this may also be called change in entity’s specific value.
○ Without commercial substance; no G/L.
■ The cost of the PPE shall be debited based on the BV of the asset given plus any cash payment or
less any cash received.
○ Trade-in - you are a non-dealer company transacting with a dealer company. Bale may igigive up kang
used unit, and makakatanggap ka ng new unit from the dealer. Naturally, required ka mag cash top-up.
■ Order of priority as to the cost debited to the PPE
● FV of the asset given plus cash payment.
 ● Trade in value of the asset given plus cash payment. This will equate to the FV of the asset
received.
● Donation
○ From shareholders
■ DR: PPE at FV of the donated property. CR: Donated Capital.
■ Yung mga maiincur na expenses to which are necessary to bring or transfer the ownership shall be
charged to the donated capital. Common mistake na icapitalize or iexpense sila, but the standard
says na dapat idebit nalang siya sa donated capital.
● This type of expense kasi, hindi siya nakakaprolong ng useful life or nakakaimprove ng
performance. Ang purpose niya lang talaga is to transfer the ownership from the donor to
the donee.
● But if DACs, capitalizable pa din.
○ From non-shareholder
■ In terms of valuation, based pa din naman sa FV of property donated. Nirerecord na agad to once
received na or receivable na siya.
■ Ang maiiba lang is yung credit kasi it’s whether an income or a liability.
■ If the donation if unconditional - credit to income.
■ If the donation is conditional - credit to a liability. Once conditions are met (i.e., the conditional
donation becomes unconditional) then credited to income na.
■ A common example of this is government grant.
● Construction
○ DM
○ DL
○ OH - specifically identifiable or traceable to the construction

Amendments to IAS 16 and IAS 41: Bearer Plants

● Instead of presenting it as part of IAS 41 Agriculture, bearer plants are accounted using the IAS 16 PPE.
● Bearer plants
○ A living plant that is used in the production or supply of agricultural produce - “factory principle” so para
siyang machinery or manufacturing plant na nagpproduce ng agricultural items.
○ Is expected to bear produce for more than one period - like PPE, dapat more than one period ang useful
life. This is why kapag annual crops, since annual lang, not part of IAS 16 sila.
○ Has a remote likelihood of being sold as agricultural produce, except for incidental scrap sale - we are
maximizing its benefit until the end of its useful life, so there is no case na ibebenta mo si bearer plant sa
ordinary course of business mo unless nalang na kapag tapos na ang kaniyang useful life or wala ng benefit
na makuha sakaniya, ibebenta nalang natin siya to get the scrap value.
● Similar to construction in progress, habang hindi pa tapos, we continuously capitalize costs. Same sa bearer plant;
based sa professional judgment, if hindi pa niya narereach ang maturity, magcacapitalize lang nang
magcacapitalize. Once mature, subject na siya to depreciation.
● Bearer plants are tested for impairment.
● If under government grant ang bearer plant, then we use IAS 20 Accounting for Government Grants.
● Minsan, bearer plants are dual-purpose:
○ Consumable
○ Bearer
○ E.g., rubber tree. The extract or sap is pwedeng gawing rubber. The wood of the rubber tree is pwedeng
timber.
○ In this case, it is treated under IAS 41. Limited lang talaga dapat sa pagiging bearer para mapasok sa IAS 16.

Land and Building Concerns

● Land and old building are purchased at a single cost
○ Old building is usable - allocate the price between the land and building based on FV.
○ Old building is not usable - cost is only attributable to land. Ignore na si old building kasi not usable naman
siya so wala siyang benefit kaya di siya asset.
○ If silent, treat as usable kasi the intention is as if meron pa din siyang value kung di naman niya sasabihin na
wala ng use sayo. Hindi kasi logical na bumili ka ng old building tapos wala naman pala sayong value.
● Old building is demolished immediately to make room for construction of a new building
 ○ The allocated CA of the usable old building is recognized as a loss if the new building is PPE or IP.
○ The allocated CA of the usable old building is capitalized as cost of the new building if the new building is
inventory.
○ “Immediately” the standard is silent as to the time span kasi, so ang tinitignan nalang dito ay yung intention;
kung may intention ba yung company na magconstruct ng new building.
● The demolition costs MINUS the salvage value is capitalized as
○ Cost of the new building whether the new building is PPE, IP, or inventory.
■ Basta you have the intention to build this new building.
○ Cost of land if the old building is demolished to prepare the land for intended use (and not for construction
for the new building)
■ If wala ka naman talaga icoconstruct doon.
■ Yung cost of old building dito ay charged to loss pa din kasi hindi pa din naman to inventory.

Subsequent costs
● Additions
○ Entirely new unit
○ Expansion, extension, or enlargement of old asset
● Improvements or betterments
○ Alterations or modifications which increase the service life or the capacity of the asset
● Replacement - substitution of equal or lesses quality
○ Replacement of new asset
■ Not separately identifiable and practicable - use the discounted cost of the replacement as the
likely original cost.

Depreciation
● Depreciation is not a valuation principle/method; it is simply the allocation of cost over its useful life.
● Changes in accounting estimates
○ Residual value, useful life, pattern of consumption of benefit (i.e., change in depreciation method) are
considered prospective changes.
■ Current and future periods lang ang impacted.
● Depreciation based on revenue is inappropriate because different ang revenue flow sa pattern of consumption ng
cost ng asset.
● Depreciation goes to P/L as a charge against income unless they are inventoriable types of depreciation in which
they are to be capitalized as part of the asset.
● Depreciation begins when the asset is available for use. Doesn’t matter kung idle lang siya or inabandon na, kasi
kahit di mo naman ginagamit meron pa ding passage of time, so nababawasan pa din ang kaniyang economic
value. If reclassified to NCAHFS, doon magsstop ang depreciation.

Impairment
● When the CA is higher than the recoverable amount, there is an impairment. If it’s the other way around, walang
recovery na irerecognize. Nakakapagrecognize lang kapag may previously recorded na IL.
● The recoverable amount is the higher between the FVCTS (like net selling price) and the VIU (discounted cash flows
or the benefit that you can extract from a property through out its UL; this should be pre-tax).
○ Why pre-tax? What we are calculating is IL kasi na papasok din naman sa P/L. If post-tax ginamit, itatax ulit
natin siya once pumaosk na siya sa IL. This is to prevent double taxation.

Revaluation surplus (sa video ng IP & BA niya to diniscuss)

● If the asset is retired or disposed, the whole/remaining balance of the surplus will go straight to RE.
● If the asset is being used, the RS would have a piecemeal realization over the UL of the asset that will go to the RE.

Additional:
PROPERTY, PLANT, AND EQUIPMENT

• Valix Prac Acc 1

o Problem 42 – 8
▪ In the absence of any statement, the overhead is allocated on the basis of direct labor.
o Problem 42- 14
 ▪ Cash price without trade in less cash paid with trade in = trade in value (trade-in allowance)
• Is this like a discount or cost reduction?? Or like the value of the old equipment na ie-
exchange? Idk pota.
• If fair value is not given, use cash price without trade in as the initial cost.
o Problem 43-9
▪ Policy is to treat grant as reduction of the cost of asset
• In the computation of depreciation, government grant is deducted with the residual
value.
• The amount of government grant is also deducted from the cost of the asset to get the
carring value at YE.
o Problem 43-10
▪ Residual is ignored in the computation of depreciation and carrying value of an asset if declining
balance is used as a method for depreciation.
o Problem 43-11 and Problem 43-12
▪ Government grant becomes repayable
• Loss = amount of grant – deferred income balance
• Depreciation for the year it becomes repayable
o Original depreciation + cumulative additional depreciation
o Problem 44-1
▪ Purchased a land and a building at a lump sum price.
• Nagconstruct ng new building – purchase price is allocated full sa land.
o Problem 44-6
▪ Cost of building – imputed interest on construction costs is not included.
▪ Cost of building – includes landfill for building site, clearing of trees from factory site, timber sold,
and land survey.
o Problem 44-7
▪ Cost of relocationg squatters
o Problem 46-5
▪ Cash proceeds from the sale of the old machine replaced - ignored
▪ Also, cost of removing old machine that is replaced – accounted for as loss on the retirement of
the old machine
o Problem 46-9
▪ Repairs and maintenance expense:
• Continuing and frequent repairs
• Repainted the building
• Partial replacement of roof tiles.
o Problem 47-2
▪ “construction cost totaled 12,000,000 and was incurred evenly during the current year
• Sa pagcompute ng WAAE, dinivide lang by 2.
o Problem 47-14
▪ Borrowing costs
• Interest expense if ang construction period ay for two periods and hindi December and
end ng construction period. For example, if April 1 ang end, the interest (both specific and
general borrowings) after the construction period ay included na as part of interest
expenses.

Valix Book:
LAND LAND IMPROVEMENT BUILDING EXPENSE
Landfill for building Cost of fencing the Cost of relocating squatters Cost of windows broken by
property vandals
(Timber Sold) Driveway and walk to new Cost of lighting and signage
building from street as aprt of
building plan
Clearing trees from Excavation Payment of claim for injuries
factory site
Land survey Supervision by management Legal cost of injury claim
Assessment by city Insurance premiums during Payment of medical bills of
government for construction employees
drainage project
(Fair value of odl Cost of remodeling Cost of removing the old
building) – if demolished machinery
 Legal cost of conveying Plans and specifications – Cost of training personnel
land factory building who will operate the
machine
Mortgage assumed with Payment for strengthening the Repairs due to damage
accrued interest floor to support the weight of during shipment
the new machine
Delinquent property Interest charges paid to
taxes supplier for deferred credit

EQUIPMENT
Cost of safety rails and platform
surrounding machine
Cost of water device to keep machine
cool
Cost of site preparation
Consultants used for advice
Safety inspection cost prior to use

Other Notes:
• Purchase price of land with a building – if razed or demolished for construction of a new building, allocate sa land
lahat.
• To confirm: If purchased at a lump sum price (land with building):
o If walang given na fair value ni old building, allocated lahat sa land
o If meron pero nademolish si old building, allocate sa kanilang dalawa but the allocated cost of the old
building is recognized only as a loss.
• Cash proceeds from the sale of the old machine replaced – ignored
• Component depreciation
o Component is replaced – depreciated over the remaining life of the main machine (asset was initially
recorded in two accounts)
• Under the composite method, no gain or loss is recognized from the derecognition of asset.
• Revaluation surplus balance on the date of disposal or sale is transferred to retained earnings
• Impairment loss – kasama sa accumulated depreciation
• Cost to clear the land
o For intended use ng land – capitalize sa land
o To make room for the construction of building – capitalize sa building
• Loss on premature retirement of old machinery – not capitalized
• Operator of the old machine laid off due to acquisition of new machine – not capitalized
• Subsequent expenditures
o Capitalized:
▪ Purchase of collating and stapling attachment
o Repairs and maintenance expense
▪ Continuing and frequent repairs
▪ Repainted the plant building
▪ Partial replacement of roof tiles
• Composite depreciation
o Composite life = total depreciable amount / annual depreciation
o Composite rate – total annual depreciation / total cost
o Under composite depreciation, no gain or loss is recognized on the derecognition of an asset

Questions:
• A land and a building is acquired through the issuance of shares. And sabi ni sir, sa cash acquisition lang pwede
mag-allocate. Pero sa Problem 45-4, nag-allocate kahit acquisition of shares.
• Cost of removing old machine that is replaced – hindi ba siya capitalized?
• Subsequent expenditures – if required by ordinances ba capitalized kahit hindi nagprorolong ng useful life?
• Safety fence surrounding the equipment – capitalized or not
• Known and unknwon costs.
• Wheb asked about actual interest, does it include specific interest?
• Cost of relocating sqautters – land or building
• Lighting and signage – land improvement or outright expense?
Practical Auditing book
• Trinidad Company – the useful life used in the computation for depreciation of new machine (traded) is based on
the original UL, not the remaining life.
o Probably because new na yung natanggap, so dapat 10 years pa rin. It doesn’t make sense nab ago pero
kulang na ang useful life.
o Accumulated depreciation is based kung how many months na siya nagagamit. Any acc dep from the
traded machine is not included kasi nga naderecognize na siya.
o Gain or loss (trade)
(Fair value – cash payment) – carrying value.
1. In case a PPE was acquired through multiple modes, such as note issuance and share issuance at the same time,
but the cash price equivalent was also given, will the cash price equivalent serve as the initial cost and override the
sum of the individual computations for each mode of acquisition? Aljon: Yes. Use cash price as the basis
2. When related to revaluation model, specify the need to reclassify Revaluation Surplus to Retained Earnings
periodically. What if there’s no explicit statement saying that we need to reclassify? How will we treat Revaluation
Surplus? Aljon: we always need to book realisation of reval surplus (with R/E as the other leg) on an annual basis for
depreciable property while 100% realisation for non-depreciable property (i.e. land) upon disposal of the asset.

1. In acquisition through purchase, if there is a “cash allowance” granted due to inferior quality of the asset, is that
cash allowance deductible from the purchase price, therefore reducing the initial cost of the asset purchased?
Aljon: should be deducted to arrive with the cost of the newly-acquired asset
2. Is the cost of training employees whose work is related to operating an item of PPE capitalizable to the cost of the
PPE? Aljon: should be treated as expense. Training cost is related to using the machinery when it has been put
already into working condition; hence it is an expense
3. If an employee (operator of the old PPE) was laid off due to the retirement of the old PPE item, is the gratuity paid
to that employee capitalizable to the new PPE? Aljon: No
4. Suppose an item of machinery is being re-installed. Are the following treatments correct?
1. If the machinery is already machinery of the company, meaning it already exists in the records of the
company, the reinstallation cost is expensed. Aljon: Correct
2. If the machinery is newly acquired but secondhand machinery, meaning we are still computing for its initial
cost, the reinstallation cost is capitalized. Aljon: Correct
5. If a mortgage attached to an asset was assumed by the company upon the purchase of that asset, what is the
correct treatment for the mortgage assumed? (i.e., is it capitalizable, deductible from the cost, or ignored?) Aljon:
added to cost of the PPE (i.e. Dr. PPE P 100 ; Cr. Mortgage Payable P20; Cr. Cash P 80)

1. What if it has an imputed interest (i.e., the mortgage amount given in the problem already includes
interest), shall the interest be added, deducted, or ignored concerning the initial cost of the PPE? Aljon:
added to cost of the PPE (i.e. Dr. PPE P 105 ; Cr. Mortgage Payable P20; Cr. Interest Payable P5 ; Cr. Cash P
80)
6. Suppose it is the company’s policy not to record depreciation on the year of acquisition (year 1). If the
depreciation method used is a time-based method, will the given useful life of the asset be reduced by one year
even if there was no depreciation for that year?

1. E.g., In 2022, a company acquired a P100,000 building with 10 years of useful life and no salvage value. It is
the company’s policy not to record depreciation in the year of acquisition. In 2023, if a time-based method
is used, which is correct?
1. Depreciate the building over 10 years?
2. Depreciate the building over 9 years?
7. In changes in estimates, if ever a subsequent expenditure on an asset was capitalized and added to the carrying
value of such an asset, what will be the gross cost presented in the FS? Aljon: your question is "COST" so option 1

1. Is it the original cost of the asset plus the subsequent expenditure capitalized?; or
2. Is it the carrying value of the asset plus the subsequent expenditure capitalized?
8. In the acquisition of Land and Building, if only the fair value of the old usable building is given, will it be correct if the
purchase price allocated to the

1. The old building is equal to its fair value. Aljon: If only 1 fair value is give, use residual approach... give the
known fair value to the old bldg; then whatever difference will be allocated to Land (as its assumed fair
value)
2. Land is the residual amount of the purchase price after deducting the fair value of the building?
9. “Testing cost before the machinery was put into regular operation, including P10,000 in wages of regular machinery
operator.” {a problem from Atty. Valix}, is the P10,000 wages capitalizable as well (meaning there is no need to
remove it from the cost of testing)? Aljon: Yes, capitalisable since cost of employee benefits arising directly from the
construction or acqusition of an item of PPE is capitalisable
10. Is the residual value not adjusted for inflation, meaning if there are given amounts for the residual value and the
inflation-inclusive residual value, we still use the residual value without the inflation when depreciating an asset?
Aljon: correct, please remember 'stability of the peso' accounting assumption of your INTACC
11. If a subsequent expenditure (i.e., addition) is mandated by the law but it did not increase the efficiency, useful life,
or productivity of the asset, is it still capitalizable? Will it be depreciated over the remaining useful life of the asset?
Aljon: can you specify a subsequent expediture which is mandated by law but doesn't exhibitt capitalsation
characteristics? If will not increase the useful life or improve the productivity of the asset, then there's no reason for
your capitalise it.
12. If there is an addition to an existing asset (i.e., a new floor added to a building), will that addition be depreciated
over the original useful life of the asset or the remaining useful life of the asset? Aljon: If it's a new unit, depreciate it
over its useful life but if it's only an expansion or extension of an old asset (just like your example), depreciate it over
the useful life of the expansion or the useful life of the remaining useful life of the asset of which it is part, whichever
is lower.
13. Parking lots adjoining building, is it capitalizable to the building or is it a land improvement? Aljon: Land
improvements
14. Are the materials spoiled during construction of an asset capitalizable? Aljon: If abnormal, treat as expense.. if
normal, part of PPE
15. If silent as to whether it is a cost of negligence or a requirement, is safety inspection capitalizable to the building?
Aljon: if related to building construction, capitalisable.. if not, then expense
16. Is cost of moving an asset into place capitalizable? Aljon: If asset is newly acquired and needed to bring it to
intended location, capitalisable... If related to an existing asset and part of operation, this is expense
IAS 20 GOVERNMENT GRANT

● Government grant - subsidy, subvention, premiums coming from the government.

○ It is the assistance of the government to the companies (transfer of resources) in exchange for compliance
in the future (which relates to the operating activities of the company).
● Government grant is only recognized when these 2 conditions are met:
○ Reasonable assurance that the entity will comply with the conditions of the grant.
○ The grant will be received. {virtually certain}
● Government grant (even the non-monetary type) is recognized at FV. It should not be recognized at cash basis kasi
hindi yon consistent with the GAAP. Hence, accrual basis dito kaya kahit virtually certain palang and wala pa
talagang narereceive, nirerecord na natin.

Classifications
● Related to asset
○ The purpose of the grant is for you to purchase, construct, or acquire a long-term asset.
○ You can either present the grant as deferred income or ideduct mo yung grant sa mismong cost ng asset.
● Related to income
○ Parang residual lang siya e, meaning kapag hindi ka related to asset, edi to income.
○ Since income, presented as either other income or deduction sa related expense.
■ The grant is taken to income over one or more period in which the related cost is incurred. So kung
paano mo naiincur ang related expense, ganon mo din irerecognize yung income.
a. Related expense on fulfilling the condition. Meron kasing cases na may specific expenses kang
maiincur sa grant to fulfill the condition.
● E.g., the government granted you P10M to secure the environment for 3 years. In year 1, you
incurred P500,000, year 2, P1M, and year 3, P1.5M, for a total of P3M in 3 years. Allocate the
P10M grant based on the costs (e.g., 500/3M x 10M = P1,666,667 ang income from the P10M
grant for year 1, and so on.)
b. Depreciable assets - in proportion to the depreciation of the related assets.
● E.g., you acquired a facility to help farmers using the P10 grant. The cost is P5M with 3 years
UL. The depreciation pattern is P1M, 2M, and P2M over the UL. Ang pagrecognize ng income
ay based lang din sa depreciation pattern. So, Y1 income is (1M/5M) x 10M = 2M.
c. Non-depreciable assets - recognize income over the periods which bear the cost of meeting the
conditions.
● E.g., land was acquired and the condition took 3 years to fulfill. The P10M will be divided into
three years; kung gaano katagal yung cost of meeting the condition.
● E.g., you were given a Land worth P10M as a grant. The condition is for you to construct a
refinery. The refinery has 5 years UL. So yung P10M grant can be recognized as income over
5 years.
○ Upon receipt: Dr. Land; Cr: Deferred income 10M.
○ YE: Dr. Deferred Income P2M (P10M/5); Cr. Income 2M.
d. Receivable as compensation for expenses or losses already incurred for giving immediate financial
support.
● E.g., government grant due to covid and for immediate financial support siya; recognize as
income agad sa period na it becomes receivable.

Repayment of Government Grant

● Binabalik natin yung grant kay government kasi hindi natin nafulfill yung condition (non-compliance), so may breach
of covenant kaya need ibalik.
● This is treated as change in accounting estimate.
● If we initially recognized the grant as:
○ Related to income - kung may natitira ka pang deferred income, you have to release it by debiting it then
credit to cash. Then any difference between the grant and the balance of the deferred income would be
your expense.
○ Related to asset - we are to increase the CA of the asset or decrease the deferred income balance.
■ Remember, kapag kasi related to asset, tinetreat natin siya as deferred income or deduction sa cost
ng asset. Hence, mas mababa yung depreciation na nakukuha natin due to the grant. So, kapag
 nagfail tayo to meet the condition, yung mga depreciation na would have been charged had the
grant not been received, ichacharge siya as expense.

Grant of interest-free loan

● Ito yung nagpapautang si government but mas mababa sa market rate ang interest na ibibigay niya or totally no
interest. If this is the case, we treat it as a government grant.
● Yung government grant na to ang basis niya ay yung difference ng should-be market rate and the rate na binigay
sayo ng government.
○ E.g., the actual market rate is 12% but ang binabayaran mo lang ay 4%, then you have to disclose the 8%
government grant interest.

Disclosures
1. Accounting policy adopted for grants, including method balance sheet presentation - if you’re going to use related
to asset or income, if you’re deducting the government grant sa cost ng asset or you present it as deferred income,
disclose them.
2. Nature and extent of grants recognized in the FS
3. Unfulfilled conditions and contingencies attaching to recognized grants
● You do not need to disclose the name of the government agency that gave the grant, the date of sanction, and the
date when the cash was received. Hindi sila required disclosures.

Government assistance
● Government grants do not include government assistance kasi their values cannot be reliably measured.

PRACTICE QUIZZER THEORY: Better to watch kapag may quizzer na tayo on hand haha. {21:07 to 29:15 under IAS 20
Government Grant and IAS 23 Borrowing Cost Video}

Additional:
PAS 20 GOVERNMENT GRANT

• Government grant – aka subsidy, subvention, or premium.

Recognition and Measurement

•
• Shall not be recognized on a cash basis – not consistent with GAAP.

Classification of government grant

Accounting for government grant

• GG shall be recognized as income on a systematic basis.
• The grant is taken to income over one or more periods in which the related cost is incurred.
• Grant in recognition of specific expenses shall be recognized as income over the period of the related expense.
 • Grant related to depreciable asset shall be recognized as income over the periods and in proportion to the
depreciation of the related asset.

• Grant related to nondepreciable asset requiring fulfillment of certain conditions shall be recognized as income over
the periods which bear the cost of meeting the conditions.

• A government grant that becomes receivable as compensation for expenses or losses already incurred or for the
purpose of 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.

Repayment of Government Grant

• Accounted for as change in accounting estimate.
IAS 23 BORROWING COSTS

● Ito yung mga interest and cost na naincur as a result ng loan arrangement which is necessary to construct an asset,
specifically a qualifying asset.
● Scope of borrowing costs
○ Interest expense
○ Finance charges related to finance leases (since finance lease is a liability)
○ Exchange differences as adjustment to interest cost, especially kapag meron kang foreign currency
denominated loan kasi yung interest mo nakadepend sa foreign currency, so it will be part of your interest
cost.
● Qualifying assets - necessarily takes a substantial period of time to exist and for it to be ready for its intended use.
Dahil sa matagal siyang gawin, there is a need to borrow funds, and yung interest na maiincur dito ay the borrowing
cost.
○ Includes plant facility, building, power plants.
○ Excludes:
■ Assets that are measured at FV, like BA, investments through OCI, trading securities, investment in
debentures
■ Those assets that take substantial period of time but they are repetitive, meaning they are inventory
manufactured in a large quantity (e.g., bulk; wine, whiskey)
■ Assets that are ready for their intended use or sale when acquired. (e.g., yung airplane na matagal
gawin ay binili mo. hindi mo naman siya cinreate e, and by the time na binili mo siya, ready na siya,
so kahit substantial time man ang itake niyan sa paggawa sakaniya, hindi siya qualifying asset.)

Treatment of Borrowing Costs

● It is capitalized as long as it is directly attributable to the acquisition, construction, or production of a qualifying asset.
● It is expensed if not related to the statement above.

Measurement
● Specific borrowing - yung loan is specifically identified doon sa construction ng isang asset.
○ The formula of the capitalizable borrowing cost is the actual borrowing cost. Whatever interest you incur in
this specific borrowing, ito ay capitalizable na. However, if ever na may investment income, idededuct yon.
● General Borrowing - hindi siya specifically related sa isang asset; para siya sa lahat.
○ The capitalizable borrowing cost is the lower between the actual interest incurred and the calculated
average borrowing costs. The actual interest incurred is already given (yung stipulated sa contract na dapat
mong bayaran), so sinosolve here ay yung average borrowing cost.
○ Investment income - hindi dinededuct sa borrowing costs under general loan
■ Parang normal lang na interest to; yun nga lang, yung principal and period of time mo is the average
CA of the asset during the period x the capitalization/average interest rate.
● Principal = CA of the asset
● Time = the average of the CA of the asset (ia-average natin yung CA ng asset like EPS)
● Rate = computed by us pa. Total borrowing costs divided by the total general borrowing
outstanding during the period. Parang total interest expense divided by the total loan to get
the rate.
○ E.g., ang total interest mo sa lahat ng general borrowings mo ay P300,000. Ang total
ng lahat lahat ng general borrowings mo ay P8M. P300,000 / P8M = 3.75%
capitalization rate.
○ Once naidentify mo na tong rate, multiply lang with the average CA of the asset
then icompare siya sa actual interest. Lower is yung kukunin.
■ Unlike sa specific borrowing, yung mga investment income dito ay iniignore lang since hindi naman
natin alam saan sila specifically naging income.

Commencement of capitalization
● Dapat all three of these conditions are present:
○ When the entity incurs expenditure for the asset
○ When the entity incurs borrowing costs.
○ When the entity undertakes activities that are necessary to prepare the asset for the intended use or sale.
Cessation of capitalization
● Kung merong commencement, meron ding stop.
● Generally, kapag fully completed na si asset, nagsstop na tayo magcapitalize ng borrowing costs.

PRACTICE QUIZZER THEORIES: Same video pa din, but #16 na {39:50 till the end.}
IFRS 6 EXPLORATION FOR AND EVALUATION OF MINERAL RESOURCES

Wasting Assets
● Natural resources that are physically consumed and irreplaceable (their differentiating trait from other assets).
○ Examples: coal, precious metals, and timber
○ They can be replaceable but they would take substantial amount of time to be regenerated.
● There is really no standard guiding wasting assets, and ang pinakamalapit na is IFRS 6 talaga.
● Composition of the cost of wasting assets
○ Acquisition cost - purchase price.
■ if your wasting assets include a land area, that land should be set up as a different account as a PPE
or investment property. Hindi siya dapat ipresent as part of the acquisition cost, hence, yung land
value ay ibabawas sa purchase price.
■ Verbatim: “For calculation purposes, the land value na kasama sa price na pinangbayad mo to
obtain the property can be treated as a residual value ng acquisition cost para makuha yung
depletable amount na kailangang ispread out during the life of the natural resources.”
○ Exploration cost - the expenditure incurred before the technical feasibility and commercial viability of the
mineral resource. To put it simply, this is the cost incurred in an attempt to locate the natural resource that
can be extracted from the area.
■ Exploration - search for mineral resources, including minerals, oil, natural gas, and other similar non-
regenerative resources after the entity has obtained legal rights to explore in a specific area and
the technical feasibility and commercial viability of the extraction.
■ Legal right - before ka magextract, makikipagtransact ka muna sa either public or private entity
kung sino man ang may ownership sa isang lugar. Syempre need mo ng permits from the
government na may jurisdiction sa area na yon.
■ Hence, exploration cost is the cost incurred between the time na nagkaroon ka ng legal right to
explore up until nadetermine mo na may value nga yung isang location.
■ Any cost incurred beyond the technical feasibility and commercial viability, hindi na siya sakop ng
exploration and evaluation. This will fall under the development cost.
■ Basically, yung mga costs na to ay your effort in finding out kung may value ba talaga ang mga
pinaggagagawa mo.
■ This does not include the following:
● Expenditures before legal right - expensed outright.
● Expenditures after technical feasibility and commercial viability - development cost (which
is another composition of the cost of wasting assets)

● Examples of exploration and evaluation expenditures:

●
 ■ The treatment for these costs actually depends sa company policy (whether icacapitalize ba or
not). Though merong mga approaches to know ano ang dapat nilang treatment sa exploration or
evaluation cost:
● Successful effort method - capitalize only if successful; if not, expense.
● Full cost method - lahat ng costs incurred sa time frame (legal right to technical feasibility)
ay capitalized, whether successful or not.
■ Kung ittreat man as asset yung exploration and evaluation of mineral resources, initially recognized
as cost yan then either cost or revaluation model siya subsequently {parang PPE or intangibles lang}.
○ Development cost - after madetermine ang technical feasibility and commercial viability, any cost na
maiincur ay dito na papasok.
■ Tangible development cost - it’s like PPE in terms of classification.
● E.g., heavy equipment to improve the area. Treat this as PPE and subject din siya sa
depreciation policy.
■ Intangible development cost - sinasama as cost of the wasting asset na eventually magiging part
ng depletable cost.
● E.g., drilling, construction of wells
○ Estimated restoration cost - the cost you will incur in the future to bring back the property to its original
condition.
■ For this to be valid, dapat may present obligation whether coming from law or a contract.
■ In terms of calculations, it must be discounted.
○ Lahat ng to ay ang cost ng wasting asset which eventually will be the basis for depletion.

Measurement and classification:

● Initially, at cost
● Subsequently - cost model or revaluation model

Depletion
● It’s basically depreciation, ang kinaiba lang is yung underlying asset. This focuses kasi sa wasting asset which is not
under IAS 16.
● Again, it’s not a valuation principle, but only an allocation principle kasi inaallocate lang naman natin yung value ng
asset over its useful life. But since output method siya, over the period the natural resource is extracted or produced.
○ Hence, if there is a shut-down, meaning wala talagang extraction na naganap for a particular time, then
we use the straight-line.
● Whatever depletion ang makukuha natin for the year, yun na ang cost ng material used in production, and it’ll be
your finished product eventually. In short, in terms of presentation, depletion cost is an inventoriable cost. Nagiging
part siya ng finished product na ginagawa.

Rules in depreciating mining properties - shorter of UL of the mining property and the UL of wasting assets.
● If shorter ang mining property (the PPE) - use straight line.
● If shorter ang wasting assets - use output method.
● EXCEPTION: If movable naman yung property and can be used again in future projects, use yung service life
ng property and use straight line.

Maximum Dividend

● NOTE: Ang accumulated depletion ay hindi talaga nagiging source ng dividends. Nagkataon lang na ito ang
ginagamit na basis to determine how much capital can be legally returned to the shareholders. Basis lang siya, pero
hindi talaga siya ang binibigay na dividend kay shareholders.
PROBLEM SOLVING: VALUATION AND ACQUISITION OF PPE
 ● Annual crops related to agricultural activity is under IAS 41.
● Bearer animals related to agricultural activity is still under IAS 41.
● Capital appreciation is IAS 40 Investment Property.
○ Dalawa lang naman ang purpose ng IP because stand-alone unit siya and not held for operations or admin
purposes siya. For earning rentals and capital appreciation lang siya.
○ IP is also just buildings and land. Hence, equipment and machineries held for rentals or capital appreciation
are under IAS 16.
○ If the land and buildings are leased under a finance lease, derecognized in the books.
● If sale in the ordinary course of business then its IAS 2 Inventories.
● R&D Building is PPE.
● IFRS 5 is NCAHFS. May sarili siyang line item sa current assets so tatanggalin na natin siya from PPE, hence, not included
sa PPE.
● The dogs are used in business operations. Like zoo animals, sila mismo yung ginagamit for business operations.
● Kapag ang equipment ay leased:
○ Operating - IAS 16.
○ Finance - derecognized in the books. Hindi siya nirereport sa books dahil na kay lessee yung asset.
● Kahit displayed lang, the plants are still being used for business operations. Hence, pasok siya sa IAS 16.
● The bearer plant is included in the PPE in the amount of P370,000.
○ Yung naka kabit na P120,000 sakaniya, still IAS 41 yon kasi agricultural produce siya. Yung mismong biological
asset na plant lang ang concern ng PPE, not the bunga.

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● The land and building were acquired at basket price. So iallocate natin yung price na yon based on their FV to get
the share of cost. Second bullet says usable pa naman si old building kasi.
○ Simple prorata lang na B = 300 x 150/300; L = 300 x 50/300.
● Sa books, we can see na ang narecord lang ay yung P4,000, but hindi pinansin yung P1,000 na sales sa cost, but
dapat kasi net amount. So, dapat P3,000 ang nakalagay.
○ Since may cinonstruct na new building after the demolition of the old one:
■ Capitalized tong P3,000 na to sa new building.
■ As for the old building P75,000, write-off na siya at the allocated amount kasi nga nademolish na
siya. Recognize siya as loss since as PPE yung tinayong new building.
● Sa legal fees:
○ Yung P2,500, expensed siya.
○ Yung P2,000, it’s DACs to the land so capitalized siya.
○ Yung P1,500, DACs also to the building.
● As for the fire insurance, erroneously charged at full amount siya sa cost ng land and building. There is a principle that
says the insurance is only capitalizable up until completion. After the date of completion, charged to P/L na siya.
○ Nacomplete yung building on 08/01. Hence, from 05/01 to 07/31, doon lang capitalized yung insurance sa
new building. 08/01 to 12/31 is expensed na.
● Special tax is binabayaran ni land owner para sa improvements na ginagawa ni government para doon sa area
kung nasaan yung land. Since improved na yung area, indirectly tumataas yung value ng assets mo there but you
shouldn’t benefit at the expense of others kaya binabayaran mo yon. This is capitalizable sa land.
● The partial building construction payment is already capitalizable sa building. So is the other half sa 08/01.
● Uninsured hospitalization is expensed. Since parang negligence kasi to ng company, hindi siya aligned sa mismong
business construction; abnormal cost kasi to.
● Yung insurance premiums for accidents during construction naman, capitalizable siya as cost of the building kasi
kumbaga part siya ng plano mo while you were constructing.
● General expenses:
○ President’s salary na P15,000 is expensed kasi walang kinalaman sa PPE. Headquarter’s cost to.
○ Cost of broken windows destroyed by barbarians na P5,000 is also expensed outright. Part ito ng other
expense, abnormal cost kasi ulit siya.
○ Plant superintendent P10,000 is capitalizable sa building.
■ If plant superintendent lang walang sinabi kung may kinalaman siya sa new building, expensed siya.
Also, if naincur to after the construction, expensed outright na din. Ito kasi, during siya kaya
cinapitalize natin.
● As for the fences, since hindi siya part ng original blue print, it will be a separate asset under land improvements. May
own cost siya and depreciation kumbaga.
○ However, if kung part ng original blueprint, capitalized siya sa building.
● Yung mga asset write-up, hindi natin sila nirerecognize as part ng PPE. Any losses or savings on construction ay di
talaga kasama as cost ng PPE kasi for managerial reporting lang naman sila.
○ Since this is cost model kasi, iniignore natin ang appreciation of value.
● At YE, since sinabi na tapos naman na yung building, we are to record depreciation for the building and the land
improvement.
○ Since si building ay completed lang nung August, from 08/01 ang pagdedepreciate.
○ Si fences naman, from 09/01 ang depreciation niya.
 ● Yung old building, zero na siya kasi nga demolished na siya. Recorded as loss pa yung inallocate sakaniyang amount
na P75,000.

○
● As for the P1,000 sale of salvaged materials, hindi na talaga siya dapat ipresent sa P/L.
○ This means na if ever may given na unadjusted amount ng P/L, dapat tanggali doon si P1,000.
○ In this problem kasi, we are asked ano ano yung mga dapat isama sa P/L; since hindi na nga dapat to
kasama, hindi siya sinama sa solution.
○ Based sa problem, ang ginawa kasi ni accountant ay Dr: Cash P1,000; Cr: Other Income P1,000. But it should
be Dr: Cash P1,000; Cr: PPE P1,000. Pinapababa niya talaga ang PPE cost. Yung demolition cost lang talaga
mismo ang cinacapitalize.

✧･ﾟ: *✧･ﾟ:* *:･ﾟ✧*:･ﾟ✧

● Option fees are expenses paid to agents for us to have the right (not the ownership) to acquire properties. Whatever
amount ang magmamaterialize (i.e., magpupush through sa acquisition), siya yung icacapitalize natin. Yung mga
hindi naman nagmaterial (or nagamit), expensed outright.
○ Sa tatlong may options siya, isa lang talaga binili niya. Hence, P1,000 lang ang capitalizable while yung
P2,000 ay expensed na agad.
● As for the loans, kung sinabi niya sana magkano ang ginamit sa PPE, yun sana ang allocated cost to PPE, but then
silent lang siya so cash proceeds from a bank lang siya. Hence, wala siya for PPE.
● Settlement agent for title search, stamp duties, and settlement fees are title costs. Capitalizable sila as part of land.
● Payment of arrears in rates on building and land are property taxes.
○ Normally kasi, expensed outright to, but kapag may mga unpaid taxes na inassume mo as the acquirer of
the PPE, icacapitalize siya as part ng PPE acquired. Since demolished ang building eventually, capitalized
nalang siya sa land.
● Again, cost of demolition (net of proceeds) ay capitalized sa new building kung magtatayo ng building. Dito,
magkahiwalay lang sa solution yung demolition and proceeds pero pinagoffset pa din naman sila.
● Yung payment to council ay building related siya so capitalize natin there.
● As for the fences, for safety purposes kasi siya saka sinabi naman na sa mismong construction site siya ginawa and
not merely sa land lang. Hence, capitalized siya sa building.
 ● The external driveways, parking bays, and safety lighting ay land improvements. Hindi kasi sila mismo related sa
building construction.
● Safety inspection is required para marelease some of the titles needed sa pagconstruct so icapitalize dapat to sa
building.
● Freight and insurance sa equipment ay capitalized sa equipment.
● Installation costs sa equipment ay capitalized pa din.
● Yung safety equipment surrounding equipment ay equipment pa din.
● Yung kaninang cinonstruct na safety fence ay tinatanggal na. The cost is building related pa din.
● Fences surrounding the factory, ito na talaga yung fence para sa factory, and wala na kinalaman sa construction
kasi different asset na to. Hence, land improvements na sila.
○ Yung sa problem 2 kasi, hindi sinabi saan located yung fences kaya kinailangang i-emphasize na wala siya
sa blueprint. Dito sa problem 7, sinabi na surrounding the building siya, so outside the building na, kaya
different asset na to.
● Advertisements ay isang expense. Opening ceremony is also expensed.
● Subsequent costs na yung payments to adjust equipment. Their aim is to prolong the useful life or improve the
production and performance kaya they are capitalized.

✧･ﾟ: *✧･ﾟ:* *:･ﾟ✧*:･ﾟ✧

 ● The goal is to determine how much ang individual costs ng mga naacquire at a basket price. They are land, building,
machinery, and equipment.

✧･ﾟ: *✧･ﾟ:* *:･ﾟ✧*:･ﾟ✧

 ●

✧･ﾟ: *✧･ﾟ:* *:･ﾟ✧*:･ﾟ✧

● Yung invoice price, dapat tanggalin sakaniya yung vat kasi nga refundable yon. Then yung invoice price excluding
the vat, ididiscount pa yon, regardless of whether the discount was taken or not.
● We then add the DACs. Freight and insurance, testing and installation are DACs.
● The removal cost of the old welding machine is expensed kasi wala naman siya kinalaman talaga sa new machine
na inacquire. Kasi nagreremove ka or nagrerelocate ka dito, so re-arrangement cost to, which is expensed.
● The welding supplies is supplies so hindi siya PPE.

●
○ Debited si input vat kasi nga need siya tanggalin sa price.
○ Assuming net method, tinanggal na sa cash paid yung cash discount again.
○ Then if ever na hindi mo pala nameet yung discount period, babayaran kay supplier yung cash discount.
But hindi pa din mawawala yon sa capitalized costs ng PPE.

✧･ﾟ: *✧･ﾟ:* *:･ﾟ✧*:･ﾟ✧

 ● No explanation si sir dito.
● Rae’s attempt to make it make sense lol: Machinery 1 = P1M x 2.4 = P2.4M. Repair cost is not capitalizable so expensed
siya.
○ Machine 2 = P4M x .71 = P2,840,000.

✧･ﾟ: *✧･ﾟ:* *:･ﾟ✧*:･ﾟ✧

● Legal fee is capitalizable to land. Liability insurance during construction is capitalized to building.
● Excavation is for building. Again, the assessment is capitalized to land.
● Interest is usually under borrowing costs. But as an overview, any interest na maiincur (or loan arrangement) to fund
the construction is capitalized. But, once done na ang construction, expensed outright na ang mga following interest
incurrence.
● The lighting and signage are land improvements. If sinabi sana na fixture siya sa building and nasa blueprint sila,
capitalized sila sa building.

●
● The entries for the demolition costs and the proceeds of salvage items may be net or gross.
 ○ Gross:
○ Though usually net na talaga siya ineentry, so automatic nakabawas na sa dinebit na building initially.

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● Sir Roque said yung repairs daw ay major repairs, namali lang daw siya ng type and nakalimutan yung major.
● Dalawang types of acquisition ang present which are issuance of shares and donation.
○ Sa land and building, issuance of shares siya. The correct entry is:

■
■ Namali kasi si client and ang narecord niya ay P9M for the land and building.
■ Hindi ito basket price in which the cost is allocated based on FV kasi sa cash acquisition yon
applicable. This is through shares.
● Yung major repairs ay capitalizable to the building.
○ Kapag for example replacement lang ng minor parts, expense lang siya kasi ordinary repair lang; isipin mo
to as “maintenance” of the PPE and it could even be day-to-day service sa PPE. Kapag replacement of a
major part, extraordinary/major repair na yon so capitalizable siya; ito naman ay usually one-off.
● Yung remodelling ay capitalized din because may new part ng asset ang nagresult. Bale modification to that
increased the capacity of the building.
● As for the donation, at FV ang pasok niya sa PPE. But then may binayaran kasi si client na related expense, so dapat
ioffset yon sa donation, but not expensed (P/L). Bale ang babawasan is yung mismong donated capital, so hindi siya
mapupunta sa P/L.

○
○ But then again, wala namang kinalaman yung donated capital sa cost of PPE, kasi we still record yon sa FV.
 ●

✧･ﾟ: *✧･ﾟ:* *:･ﾟ✧*:･ﾟ✧

● Typo ulit si sir so assume nalang daw na the inventory is PPE hahaha.
● The problem lacks commercial substance. Pero papakita na din ang mangyayari if may commercial substance for
comparison.
● WITH commercial substance: They have to identify the FV of the assets they own then less any cash received and
add cash paid to get the “cost” of the assets they received.

○
● WITHOUT commercial substance: book value of the assets they own then less cash received and add cash paid
again.

○
○ No gain or loss din dapat.
 ○

✧･ﾟ: *✧･ﾟ:* *:･ﾟ✧*:･ﾟ✧

PROBLEM SOLVING: DEPRECIATION

a. Straight line

b. SYD
● Depreciable amount yung starting point natin sakaniya.
● Then we have an adjustment factor na ititimes sa depreciable amount to get the depreciation for the year.
○ The adjustment factor is computed as the sum of total useful life (e.g., if 3 years ang useful life, 3+2+1 = 6.) as
the denominator, then yung number of remaining useful years as the numerator (e.g., Y1 = 3 years, Y2 = 2
years, Y3 = 1 year).
○ Pwede din (Useful life x (Useful life +1)] ÷ 2.
● Since same pa naman ng depreciable amount, in the problem, pwedeng pag add nalang yung numerators to get
two years worth of depreciation at once.

●
● Note: I don’t get yung stand ni Sir Roque sa what if SYD ang gamit then mid-year na-acquire yung asset (around
21:00 time stamp). Sabi niya kasi nung una, yung makukuha mong depreciation expense using the normal SYD
method, iprorate nalang sa n/12 sa from acquisition month to YE. Then nung inulit nung student yung question,
biglang sinabi ni sir na gawin daw number of months yung SYD.
○ So, I guess we have to have a question: What if mid-year na-acquire ang asset and SYD ang depreciation
method? Paano ang computation ng depreciation expense niya sa Y1 and sa subsequent years?

c. Double declining
 ● Hindi cinoconsider ang salvage value when calculating depreciation during the earlier years. Sa end lang ng useful
life cinoconsider ang salvage value.
● We are getting the double declining rate or simply the depreciation rate.
○ Annual depreciation rate = 1 ÷ Useful life.
○ DD Depreciation rate = annual depreciation rate x 2. (if for example 150% declining rate, multiply the annual
by 1.5)
● As for the depreciation, yung carrying amount ang imumultiply sa DD rate. Bale sa Y1, cost. Y2 and onward, cost less
accdep na.

●
● Or Sir Roque’s way na cost x depreciated portion x DD rate.
● At the end of the useful life, dapat yung huling amount na idedepreciation ay equal or greater than the salvage
value. Bawal na mas mababa siya sa salvage value.

d. Production or output method

● The depreciable amount is divided by the expected units of output to get the depreciation rate per unit of
production.
○ This depreciation rate is multiplied by the units produced in a year to get the depreciation for that year.

●
● If ito ang gamit na method then naging idle yung asset, it will result to a change in estimates kasi hindi na pwedeng
magdepreciate gamit ang method na to kung wala namang napproduce.

✧･ﾟ: *✧･ﾟ:* *:･ﾟ✧*:･ﾟ✧

● Ang given ay yung beginning balances for 2021.
● Wala pang UL ang leasehold improvements kasi 2021 pa siya na-acquire.

● Exchange transaction ang first transaction. Since unknown yung FV na we owned, our next option is use the FV of the
asset that we received as a reference to determine the cost of the new asset.

○
○ In inputting this, that’s a P300,000 increase sa truck but also P225,000 decrease sa truck then P157,500 sa
accdep.
● As for the machine destroyed by fire, IAS 16 says that if there is any recovery or indemnification as a result of a
destroyed property and nakuha mo yung proceeds from that issuance company, ittreat mo yung difference
between the proceeds and carrying amount sa P/L, so in substance, treat as disposal of property.
○ Before i-scrap out yung machinery, we have to determine muna yung depreciation expense niya for 2021,
which is worth 3 months.
 ○
○ In determining the accdep of the machine, don’t forget to use its assigned depreciation method. In this
case, straight-line siya with 10 UL, then 5 years na ang nakalipas.

○
○ Kapag ininput na to, simply remove the machinery from the records at its cost. Then i-add muna yung
depreciation expense for the year saka palang imiminus yung updated accumulated depreciation sa
accdep records.
● Letter C na yung acquisition of leasehold improvements.
○ When depreciating leasehold improvements, we chose the shorter between the useful life and the lease
term.

○
■ Since mid-year na-acquire, we count UL and lease term as months.
■ Ang ginawa ni sir is pinagminus niya muna yung Dec. 31, 2027 and May 1, 2021. 2027 - 2021 = 6 years
x 12 = 72 months. 12 - 5 = 7 months. 31 - 1 = 30 days = 1 month. Total of lease term is 80 months. As for
the UL, it’s 8 years x 12 = 96 months.
■ Hence, ang gagamitin ay 80 months, the lease term.
■ In depreciating the leasehold, we have P2.1M x 8/80 or P2.1M / 80 x 8/12 = P210,000.

○
○ In inputting this sa ating records, simply add the cost and the accdep to their respective ledgers.
● Letter D. Simply add the total capitalizable amount sa ledger ng machinery and equipment then idepreciate for the
year yung newly acquired and i-add yon sa accdep (pero sa YE pa naman to).

● Letter E says na kung wala sanang nangyaring transactions for delivery equipment during the year, ang depreciation
niya sana ay P225,000. But then nagkadisposal kasi tayo.
 ○ Hence, ang gagawin is ibabawas yung cost ng dinispose na asset doon sa beginning balance ng delivery
equipment. Then ibabawas din yung depreciation expense for the year nung dinispose na equipment sa
“would have been” depreciation expense na P225,000.
○ Under SYD, since 2 years old na yung dinispose kanina, we’d have P225,000 (cost of the asset disposed, not
the would-have-been depreciation) x 2/10.
○ After matanggal ng disposed asset sa would-have-been depreciation expense, pwede na irecord yung
depreciation expense for the year nung delivery equipment sa accdep ledger.

○
○ But take note, yung P225,000 ay para sa existing assets under delivery equipment na as of beginning 2021.
But since may newly acquired truck, hindi pa siya kasama sa P225,000 na to kaya we have to depreciate
that. That’s P300,000 x 4/10.
● After all these, calculate the depreciation na for all other assets na hindi pa nacocompute ang depreciation expense
nila for the year.
○ For the machinery, we have to consider the existing assets in the beginning of the year and the newly
acquired one.
■ New: P3,875,000 / 10 x 6/12.
■ Existing: (11,250,000 - P287,500) /10.
○ For buildings, wala namang transaction na nangyare sakaniya for the year so depreciation lang talaga siya
under 150% declining.
■ Declining rate = (1/25) x 1.5 = 6%. {Rae’s technique from int acct 2 = 1.5 / 25 years = 6%}
■ Depreciation = (P15M - P3,288,750) x 6%.
 ●
● As for the net G/L, loss on exchange (P17,500) + P50,000 = P32,500 net gain.
✧･ﾟ: *✧･ﾟ:* *:･ﾟ✧*:･ﾟ✧

● Here, nagkaroon ng improvements sa asset then nagkaroon ng change in accounting estimates.

○ After 2 years, nagkaroon ng improvement which is to be capitalized.
○ Get the CA ng the asset as of Jan. 1, 2022 then saka icacapitalize yung cost of improvement to get the
revised CA.
■ Hindi gumagana yung cost x remaining UL / UL kapag may residual value.
■ Anyway, yung revised CA ay idepreciate until 2025. As of 2022, 38 years nalang ang useful life so
doon nakadivide ang revised CA less salvage.
○ 2025, we change the total life.
■ Since from the beginning to, 30 less lapsed years na from 2020. So, 30 years - 5 years = 25 years new
useful life.
■ Ang verbally sabi lang ni sir ay “from the date of acquisition” daw to, but hindi ko sure if yon ba ang
i-assume if silent ang problem like in this case (i.e., walang sinabi talaga sa problem na from
acquisition). So, question to ulit.
● QS: If silent as to whether the change in useful life is from the date of acquisition, shall it be
assumed that way?
 ●

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● For the revaluation model, you either use the depreciated replacement cost or the fair value, whichever is available
at YE.
○ The replacement cost is the current cost or current purchase price of the asset if we’re going to buy it from
the market today. The catch is we have to identify its initial cost, accdep, and depreciated amount.
○ In this problem, FV naman ang sample.
○ In case na both given sila, we use the FV. The logic kasi is kapag hindi available ang FV, then we use the
replacement cost. Hence, if parehas sila given, the FV overrides.
● The difference between the cost and the revalued amount is the RS. Kapag kasi FV ang given, compare lang agad
sa BV.
○ To computed for the “revalued cost”, Cost / BV x FV. P3,125,000 / P2,031,250 x P2,843,750 = P4,375,000
revalued cost. Difference ng FV and revalued cost ay the revalued accdep.

○
● There two ways of entries in the revaluation model. The proportional approach and the elimination method.
 ○
○ Sa elimination, tatanggalin mo muna yung accdep na original against its PPE. So parehong bababa si
accdep and PPE in the amount of the accdep. Then saka mo ipapasok yung RS; in the end, mag-arrive ka
pa din naman sa revalued amount.

○
○ If silent, use yung proportional approach kasi yun daw ang mas nagmamake sense.
● Sa pagdedepreciate, ang basis na is the revalued amount. Then there would be a piecemeal realization of the RS,
meaning based sa useful life, ittrasnfer nating ang surplus to RE. Applicable to kapag ang nirerevaluate ay
depreciable PPE.
○ The logic kasi here is depreciable nga yung PPE account niya so syempre yung related surplus sakaniya
which is capitalized, dapat unti untiin din i-”depreciate” but instead sa P/L, diretcho na sa RE kasi OCI ang
RS.

○
● If depreciable asset ang nirerevaluate then silent as to what method ang gagamitin sa pagtransfer, use the
piecemeal realization sa pagtransfer ng OCI to RE.
○ Although very rare naman daw na lumpsum approach ang gagamitin. In fact, nagagamit lang siya kapag
idederecognize mo na yung revalued PPE, so ililipat mo ng buo yung RS to RE. But if usual operations lang,
piecemeal.
✧･ﾟ: *✧･ﾟ:* *:･ﾟ✧*:･ﾟ✧

● In this problem, replacement cost naman ang given. Unlike sa FV, cinocompare lang yung FV ang BV ng asset, here,
sa cost mo sila ipagcocompare na talaga. Then use ratio and proportion lang ulit to get the replacement accdep
and replacement BV.
○ “Replacement BV” = BV / Cost x Replacement cost.
■ P18M / P30M x P40M = P24M.
○ Difference of replacement cost and replacement BV is replacement accdep.
○ Difference of the BVs is the RS.

○
● Note na yung UL ng building is 25 years upon acquisition. But then, if we check, naglapse na ang 10 years. Hence,
15 years nalang ang gagamitin for both the depreciation and the piecemeal realization.
● Note also na ang piecemeal realization ay only applicable sa building and not sa land because building lang ang
depreciable. So, P6M lang ang mapipiecemeal.
○ But kapag kinukuha yung amount ng RS as of YE, P7.5M pa din balance niya then less lang yung piecemeal
transfer. Bale sa basis ng piecemeal transfer lang mawawala yung P1.5M but nasa RS pa din siya kapag
balance na ang concern.
 ●

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● The catch here is may revisions sa UL and sa residual value ng asset. Tax is also provided.
● Sa pagkuha ng accdep ni replacement cost, dapat nakaparallel siya doon sa cost model. Hence, kung 40% (4 years
/ 10 years) used up na si cost model, dapat pati accdep ni replacement cost ay worth 40% na din.
● Another catch is yung accdep under cost model is based pa din sa original residual value and life. But then, in getting
the BV as of Jan. 2021, yung cost less new residual value na ang magiging new depreciable amount, so dito na
imiminus yung original accdep to get yung BV na icocompare sa replacement BV.

● Or
○ Kaya lang ginawa yung unang table is because gusto ipoint out na mas valid kapag ang pinagcompare
na amounts ay yung nagamit na yung new residual value. Bale kahit pa yung revalued amount vs BV and
yung corresponding depreciable amounts nila using the new residual value, same na P3.2M pa din naman
ang makukuha. But sa record, under cost model, kapag hinanap ay BV sa 2021, yung P6.8M daw ang
isasagot.
 ○
● Since may tax given, we have to recognize a deferred tax related to the revaluation surplus because under taxation,
wala namang nirerecognize na RS, so may difference between financial reporting and taxation reporting. Temporary
taxable difference, particularly. Hence, yung P3.2M RS, 70% lang ang papasok sa RS, then the 30% would be DTL.
● In getting the depreciation, we now use the new residual amount and the new UL which is assumed to be revised
from the start. Hence, the UL is 8 years nalang.
● Yung piecemeal realization, ang magiging basis na din ay yung after-tax amount.

●
○ Yung P10M is revalued amount na (nagkataon kasing same siya sa initial cost). Ito yung P15M less P5M sa
taas.

✧･ﾟ: *✧･ﾟ:* *:･ﾟ✧*:･ﾟ✧

● This is IL under the cost model.

● Ang gagamiting number of years sa PV ay yung remaining UL, meaning 8 years ang UL then naglapse ang 3, so 5
years nalang ang remaining. Ito na ang ipapangkuha ng depreciation and the PV factor.
○ SInce per year yung cash inflow, dapat PV of OA ang gamit.
 ○Both the annual cash inflow and the residual value ang naka-PV, but since sa end of UL lang naman
“nakukuha” si residual value, PV of 1 lang siya.
○ Ignore the tax lang.
○ In the comparison, the VIU is higher so siya ang recoverable amount.
● The depreciation expense was a typo; dapat daw 2023 instead of 2022.
○ Ang idedepreciate is yung recoverable amount na ha.

●
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● This is IL under the revaluation model.

● Ang gagamitin na is the revalued amount as of Dec. 31, 2022 then icocompare siya sa recoverable amount.
● Sabi ng standards, if merong IL under revaluation model, don’t charge immediately sa IL. Use up muna the RS, then
pag ubos na, saka palang magcharge sa IL. Hence, “decline” palang ang meron.
○ Iupdate muna ang amount ng RS then doon ichacharge yung decline.
○ Kapag after offsetting ay yung RS pa din ang mas mataas, then the IL is 0. (like in this problem)
 ○
○ Answer to #1 is 0.
● Came 2025, icompare lang ulit ang revalued amount at its BV then ang recoverable amount.
○ Again, iupdate muna ang RS before deciding kung may IL ka ba or wala.
○ Now that the decline is higher than the RS, yung difference nila ng RS ay yung papasok sa P/L as the IL.

○
○ Answer to #2 is P75,000.
● If ever mid-year nangyari yung decline, di muna need i-valuate yung RS. Sa YE talaga tayo nagpipiecemeal. Unless
na nga lang kung fiscal year in which mid-year din ang YE. But technically, the fiscal year is YE pa din.

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 ● This concerns CGUs (cash generating units), a group of assets that generate cash inflows from continuing usage. It
can be a department, a product line or a factory.
● The idea is before siya idispose, we have to assess for its impairment.
● Yung P1,750,000 is for everyone. The IL shall be prorated to the assets using their carrying values.
● When it comes to IL, kailangan muna iabsorb ni goodwill ang IL, then kung ano ang matitira ay yun ang iaallocate
sa CGUs.
○ Syempre, excluded na ang GW sa pagaallocatan ng IL. Hence, ang denominator nalang sa factor ay the
total carrying amount of the CGU without the goodwill.

○
● Meron kasing info na ang building daw, dapat P1M ang fair value niya. Hence, kailangan natin iadjust to. Any
adjustments sa particular asset na to ay iaabsorb ng remaining assets based pa din naman sa carrying amounts nlila.

●
○ Ang nakarecord sa books natin ay yung right most column ng recoverabl value, then yung ichacharge sa
P/L ay yung right most IL column din.

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● The BV to be comapred with the recoverable amount is P1.8M.
● In computing for 2022 depreciation, ang recoverable amount less the residual value if any ang gagamitin as
depreciable amount.
● Concerning the recovery,
○ If cost model ka, you can’t go above the lower of the recoverable amount, and the BV with impairment.
{CONFIRM IF LOWER, LABO NI SIR E}
○ It’s a three-way comparison. Kasi the BV had there been no IL (depreciate like the initial pattern) would be
the limit.
○ Yung difference between the recoverable amount and the BV had there been no IL ay ignored lang. At
most, pwede lang siya idisclose pero di mo siya pwede ipresent sa SFP.
 ●
● As for #4, typo ulit, 2024 daw dapat, not 2023.
○ Kapag cost model, ang basis is yung BV had there been no IL na in depreciating the asset.
○ Kapag revelation model naman, the basis would be the recoverable value.
■ Additionally, need irecognize yung increase between the recoverabl value and the BV had there
been no IL, then record as RS. (huh? 2:57:00)

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● The only transaction that happened in 2019 was the acquisition of the trucks. Then idepreciate sila as is.

○
● The replacement of tires is only a minor repair; hindi siya major or overhaul or extraordinary cost. Hence, expensed
outright siya.
● The depreciation is 20% by unit basis; so kapag kinuha na yung accdep ng truck 3 na ittrade in with truck 5, it’s
P400,000 {cost} x 20% x 1.5 years = P120,000 accumulated depreciation.
○ Since naderecognize na si truck 3, tatanggalin din ang cost niya sa records natin pati yung updated accdep.
Then add truck 5 cost sa records.
○ Since hindi naman given ang FV ni truck 3 (the property given up), ang gagamitin nalang natin sakaniya ay
yung trade-in value niya. But since given naman na yung cost ng asset received, yun na mismo ang
gagamitin natin as cost.
■ Yung trade-in allowance kasi is applied to the purchase price of the new asset, and yung difference
(remaining sa purchase price) ay yung babayaran ni buyer in cash.
■ In this problem, required si buyer magpay ng P400,000 para sa truck 5 as a result of P425,000 cost less
P25,000 trade-in allowance.
■ Any difference between the cost of the new asset and the BV of the asset (less cash paid) given up
will be treated as G/L on exchange. In short, G/L would be the difference between the value you
have received and the value you have given up.
● In this case, you received P425,000. But you had to give up P280,000 BV of asset and P400,000
cash.

○
● For truck 4, reconditioning is normally expensed. But if meron proceeds na nakuha from insurance, then we can offset
yung proceeds to lessen the expense. Hence, the net difference of P1,000 nalang ang mapupunta sa P/L.

○
● For the sale of truck 2, we first have to update its accdep.
○ Depreciation for the year is P80,000 X 9/12 = P60,000 + P80,000 = P140,000 accdep. I-add to sa accdep
records.
○ BV would be P260,000 with a selling price of P300,000, so gain on sale of P40,000.

○
○ Then iderecognize both the cost and the accdep under truck to, so by 2020, 0 na ang truck 2. So is truck 3
kasi tinrade siya kay truck 5.
● For year-end 2020, depreciate.
○ Ang natitira nalang ay trucks 1, 4, and 5. Si truck 5 ang may ibang cost, so maiiba siya ng deprex and
accdep. Also, half-year lang si truck 5.
 ○
● For truck 6, exchange siya kay truck 1. But then hindi na naman given ang FV, so ang gagamitin natin na cost for the
new asset ay yung mismong FV of the new asset na.
○ Update again the depreciation expense for truck 1.
○ Since mas madami na naman ang BV and the cash payment, magkakaroon ng loss on exchange.

○
● The repainting is a normal expense, hence, hindi siya capitalized to truck 4.

○
● Si truck 7, binili natin siya then pina-rent sa iba. Hence, tayo pa din naman ang owner kaya satin pa din ang
depreciation.

○
● For the depreciation of 2021, ang existing nalang ay trucks 4 to 7.

1. What is the loss on trade-in of truck 3? P255,000.

 2. the correct cost of truck 5 is P425,000.
3. The book value of truck 5 at December 31, 2021 is P297,500.
4. What is the loss in trade-in of Truck 1? P145,000.
5. The correct cost of truck 6 is P500,000.
6. The carrying value of Truck 6 at December 31, 2021 is P425,000.
7. The gain (loss) on sale of truck 2 is P40,000 gain.
8. The book value of truck 4 at December 31, 2021 is P160,000.
9. The 2021 depreciation expense is understated by P146,000.
● The computed depreciation is P296,000 kasi as of 2021, but per record is only P150,000.
Super blurry answer sheet:

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PROBLEM SOLVING: BORROWING COSTS

● We first get the average carrying amount of the assets. Multiply by the number of months the asset was outstanding
over 12 ang actual expenditure sa asset.
○ Whatever average CA that we compute, don’t forget to deduct any principal amount related to a specific
borrowing. In this case, wala kasi wala namang specific borrowing. After deducting, ang makukuha na ay
yung “amount related to general loan”.
■ Bakit need pa ideduct ang principal amount related to the specific loan (if any) from the average
CA of the asset? Kasi yung qualifying asset kasi, lumalabas na funded siya both by a specific and a
general loan. Hence, kung may specific loan ka, kailangan mo muna ibawas from the average CA
yung kaniyang portion kasi meron siyang sariling way to compute yung capitalizable borrowing cost
niya. Yung matitira ay for the general borrowing na which we are left to determine ano ang
capitalizable cost.

■
■ Once tapos nang makuha yung CA, imumultiply na siya sa capitalization rate.
● In getting the capitalization rate, parang interest rate lang din naman to.
○ Basically, we just have to calculate the interest of all the existing loans. Yung actual annual interest nila ang
gagamitin.
○ Then divide the total actual interest sa total principal. In this problem, that’s P4.2M actual interest divided by
P30M principal.

○
 ○ Then ito na yung imumultiply sa average CA to get the borrowing cost related to general loan. However,
hindi pa stop dito kasi we still have to compare it sa actual interest and choose who’s lower.
○ In this case, we have P1,260,000 borrowing costs related to general loan vs P4.2M actual interest. We choose
P1,260,000.
○ If ever may specific loan, we add it sa kung ano mang lower. Then the sum would finally be the capitalizable
borrowing costs.

○
○ Any difference between the actual interest of P4.2M and the borrowing cost related to general loan of
P1,260,000, which is P2,940,000 is expensed. Bale yung P1,260,000 lang ang allowed tayo icapitalize since siya
lang ang related sa qualifying asset.
○ The difference between the P4.2M actual interest and the 1,260,000 capitalizable interest is now the interest
expense that will be presented in the P/L
■ Ina-allow tayo to capitalize a portion of the interest since in concept, itong interest cost ay used
naman to fund the construction of the qualifying asset.

○
● If tinanong how much is the CA of the building as of 2020, simply add the total expenditures and the capitalizable
borrowing costs.

●
✧･ﾟ: *✧･ﾟ:* *:･ﾟ✧*:･ﾟ✧
● There is a specific and a general loans in this problem. This also spans 2 years.
● We get the average CA first. Then since we have a specific loan na, deduct the principal of it to get lang yung for
the general loan.
○ For 2020, sa P3M lang tayo magsstop kasi sa 2021 na yung remaining P1M.
● Since isa lang naman yung loan under general loan (sa problem 1 kasi, 2), kung ano man ang interest rate niya, yun
na din ang capitalization rate.
● Get the borrowing cost related to the general loan then compare sa actual. In this problem, P300,000 is lower.
● To get the specific loan, simply multiply the principal with the rate of the specific loan. If ever sana may investment
income, then ibabawas sa makukuhang product. But wala naman here, so as is lang.
● For year 2020,

○
● For year 2021, yung buong P9M which was the total expenditure for 2020 is 12/12 na sa average CA, then yung P1M
ay x 6/12 nalang.
○ HOWEVER, we have to include yung capitalizable borrowing costs na nakuha na natin sa P9M kasi
“expenditure” na din naman siya ng 2020. Hence, (P9M + P500,000 capitalizable borrowing costs) x 12/12
ang beginning average CA then add yung July.
● Still idededuct pa din ang specific loan sa average CA to get ang for the general loan.
● The cost of the building is the tota expenditures (P10M) plus all the capitalizable borrowing costs of P500,000 and
P1,160,000.
 ●
● If may unang natapos between the loan term and the construction of the qualifying asset, ang icacapitalize lang ay
yung time na both existing sila.
○ E.g., nacomplete na yung building pero tuloy-tuloy pa yung loan
■ In the calculation of borrowing costs, hindi mo pwedeng kunin ang buong interest kasi nacomplete
na yung building midyear.

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● Ang kinaiba ng problem na to sa previous problems ay this one finished construction Sept. 30, 2017, so mid-year.
● Year 2016

○
● As is lang ang computation sakaniya because wala namang extraordinary.
● For 2017, remember na it was completed on Sept. 2017, so 9 months lang ang need icapitalize, hence, siya ang
denominator for the average CA.
○ Remember na yung sa expenditure for 2016 ay including na ang P900,000 capitalizable cost then 9/9 which
is the whole construction period for the year. Yung July 2017 ay 3 months nalang.
○ Yung kinukuha nating interest (borrowing cost - gen. loan) is 9/12 kasi annual interest ang meron. Kaya lang
9/9 yung sa expenditure is because 9 months worth of expenditure lang naman yon. But don’t forget to
compare pa din ito using 9/12 actual interest rate.
 ○ Specific loan is also 9/12.

●
● If ever tinanong how much is the expensed portion of the interest expense, ang pagcocompare sa 2017 ay yung
12/12 ng actual interest, and yung 9/12 lang na capitalizable borrowing cost. 12/12 yung actual kasi for the whole
year naman yun e, yung 9/12 lang naman ang nag-end came Sept. basically, yung 3/12 sa general loan ay expense
na in 2017.
● Sa rare case na si specific loan ay magcontinue even after the completion, expensed na din siya.

○
■ According to sir, the 1,929,000 is the unavoidable interest.
■ Question regarding the specific loan: if silent, assumed ba na kapag nag-end na ang construction,
nagmature na rin ang specific loan?
● Answer ni sir: not necessarily. Sasabihin daw if ever.
● Capitalization rate
○ Kahit ilang years ang construction period, same lang ang capitalization rate per year, unless magkaroon ng
change sa funding structure.
○ Change in funding structure is treated as a change in accounting estimate, so prospective ang approach
and magkakaroon ka ng bagong capitalization rate for the year.

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● Hindi sinabi ang date of completion so we assume na by YE hindi pa siya completed.
● The capitalization rate was computed as follows:

○
○ In this case, ang lower ay yung actual, hence, yung P1.3M ang gagamitin concerning the general loan. No
investment income pa din so as is si specific.

●
● In getting the interest expense that will be charged to P/L, difference lang agad ng capitalized general loan
borrowing cost and ng actual. But since, no difference (P1.3M - P1.3M) then walang expensed.

○
○ Hindi always 0 kapag actual interest ang lower ha.
● As for the cost of the building, total expenditures plus all capitalizable borrowing costs.
 ○
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● Take note na March 1 ang start ng expenditure ha, not January.

○ BUT January nagstart yung mismong construction, so ang pagcapitalize natin sa expenditure ay over 12
months pa din.
○ It’s just that yung start ng mismong expenditure ay March so yung expenditure na yon ay outstanding for 10
months over 12 months.

○ Similar sa isang previous problem (Norma company), if ever naman na natapos yung construction mid-year,
maaffect niya ulit yung denominator kasi hindi na 12 months yung duration ng construction.
○ If ever na silent (but ayaw ni sir to) and hindi binanggit na January daw nagstart ang construction, then that’s
the time na we can assume na March ang start ng construction din so the denominator would be over 10
months.
● Capitalization rate: This is also the answer to #2.

○
○ Lower pa din si borrowing costs than the actual interest.
● Avoidable interest rate is synonymous with capitalizable borrowing costs. Hence, the answer is the total capitalizable
borrowing costs, meaning specific and general related na.
● The “actual interest” in question #4 is all the interest incurred, meaning the specific plus the actual interest on the
general loan.
● As for #5, difference again ng actual interest and computed interest for the general loan.
○ Two ways to compute (apparently)
■ “Actual interest” = the specific interest + the actual interest on the general loan. Less the total
capitalizable borrowing costs.

●
■ Pwede pa din naman yung actual interest on the general loan less the computed interest on the
general loan, same amount lang makukuha.
PROBLEM SOLVING: WASTING ASSETS

● Depletion expense is yung portion ng depletion na will eventually be treated as expense kasi “papasok” siya sa
COGS.
● We first get the total cost of the wasting asset.
○ As for the development cost, ang intangible lang kasi ang cinconsider natin kasi if related na sila sa PPE then
treated under IAS 16 sila. In this problem, yung production equipment na P15M ay excluded sa development
cost kasi magiging under siya ng PPE.
○ Meron kasing residual value given; sa end daw ng extraction, the property can be sold for P5M. Kapag
ganto, ileless natin to sa total cost to get the depletable cost (which is basically the depreciable cost).
○ Yung depletable cost na to, divide siya sa total units expected to be extracted to get yung per unit depletion
niya. Ito ngayon yung ititimes sa extracted mineral and sa sold minerals.
■ Sa extracted, 600,000 units x P8 = P4.8M would be your total depletion.
■ Yung sold units, siya ang pupunta sa COGS. That’s 450,000 x P8 = P3.6M. This is also the depletion
cost.

●
○ 600,000 units produced x 8 (depletion per unit) = 4,800,000
● This 4,800,000 will be your total inventoriable depletion cost.
● Out the 4,800,000, 3,600,000 (sold portion) will go to yur COGS.
✧･ﾟ: *✧･ﾟ:* *:･ﾟ✧*:･ﾟ✧
● This is a 2-year problem so magiiba ang estimates natin dito.
● For year 2020, based tayo sa 4M estimates at the time of purchase.

○
● For 2021, nagkaron kasi ng new survey kaya nagkaroon ng revised estimate. Treat as change in accounting estimate.
○ We first get the difference between the 2020 depletable cost and the 2020 depletion to get the 2021
depletable cost. Ito ngayon yung magiging basis ng revised units.
○ Ang binigay kasi for 2021 ay ending estimates (4,200,000). Hence, we have to add back yung naextract for
year 2021 (800,000) to get yung beginning units estimated for 2021 talaga (5,000,000).
○ Get the revised depletion rate per unit as is. Multiply lang sa units mined to get the depletion cost.

○
● Yung mga unsold but extracted units ay inventoriable cost, so mapupunta sila sa inventories. Yung mga unsold ay
basically ending inventory. Direct materials siya.
● Kapag nagshut down, walang depletion expense kasi wala ka naman nabenta.
○ Ang nagiging straight line ay yung mining equipment kapag nagshut down.
● Yung 800,000 units sold in 2021 ay different from the 500,000 in 2020. So, yung depletion expense (COGS) ng 2021 ay
based sa 1.68 and not 2.4. No FIFO assumption unless the problem says so; if hindi naman specified, FIFO daw kapag
si sir ang masusunod amp e bakit sa problem na to specific identification and not FIFO?? I hate this.
○ For year 2020, 0 ang depletion expense kasi wala naman sold. 2021 is yung 1.68 x 800,000 units sold
● If ang tanong ay depletion expense:
 ○ For 2020, 0 kasi wala namang nabenta
○ For 2021, it will be 800,000 x 1.68 = 1,344,000
● Clarification:
○ If total depletion, it refers to kung ilan ang naproduce
○ If depletion expense, yun yung mapupunta sa COGS (kung ilan ang nabenta)

✧･ﾟ: *✧･ﾟ:* *:･ﾟ✧*:･ﾟ✧

● Depletion cost for 2020,

○
● To get the inventoriable depreciation, we first get the annual depreciation of the assets in the mining area.
○ Rules in depreciating the assets ang susundin.
■ UL of the building is 15 years.
■ UL of the wasting assets is 5 years. {4M ang estimate and we assume na makakapag extract siya ng
800,000 tons per year, so pag dinivide, we get 5 years}.
 ■ Shorter ang UL for the wasting assets
■ UL of the machinery is 4 years, and 5 sa wasting. We use the 4 years using straight line.
○ In getting the inventoriable depreciation, 80% of the building (since 80% lang ang related to production),
then 100% sa machinery.

■
○ QS: Why SL ang ginamit sa building e shorter ang wasting assets, so diba dapat output method?
■ Apparently, same lang naman daw kasi since yung 5 years ay kinuha natin using the estimate and
the units extracted.
■ Bale output method = P400,000 / 4M x 800,000.
■ If ever sana na 2nd year na to, ang gagamitin for the output method is the new estimate and the
new extracted units na din so may change in accounting estimates.
● Question regarding depreciation: What if iba ang amount na naproduce for the second
year? Ano ang gagamitin to determine anong useful life ang gagamitin to compute for the
depreciation of the assets used in mining?
○ This is a change in accounting estimate. In Y2, dapat gamitin na ang bagong
estimate.
● As for the inventory, yung direct materials niya is the depletion cost during the year. DL is given, and OH is yung given
then add yung depreciation na inventoriable.
○ Sa total cost na macocompute, we have to get pa the inventory per unit. Simply divide lang naman sa units
extracted (800,000).
○ In getting the ending inventory, difference between the extracted and sold then times with the inventory per
unit.

○
● As for the COGS, units sold times the inventory per unit lang.
○ Total sales is units sold times yung given na sales price na P4.4 per unit.
○ Yung OPEX ay isang given and yung nacompute natin na related to depreciation kanina.

○
● As for the dividends, apply RACU.
○ Since Y1 palang, the RE will surely come from the NI palang; but ending balance of RE ang gamit here so
updated na. Isa palang din ang nasa accumulated depletion.
 ■ QS: What if beyond Y1 na? Ano na ang composition ni accumulated depletion? Nakabawas ba
sakaniya ang depletion expense or puro cost lang?
● Ang sinabi lang ni sir is kung ano yung nasa balance sheet; it includes all the prior depletion
costs. But I’m still confused if net ba dapat ng depletion expense.
■ Yung liquidated capital ay basically nirereturn na capital kay shareholders, but since Y1 nga to, 0 pa
siya.
■ As for the unrealized depletion in ending inventory, depletion rate x ending inventory units.
○ In concept, ang accumulated depletion ay hindi talaga yan nagiging source ng dividend. Nagkataon lang
na yan ang ginagamit as a basis to determine how much capital can be legally returned to shareholders.
Ginagamit lang as basis pero hindi naman talaga siya binibigay as dividend.

✧･ﾟ: *✧･ﾟ:* *:･ﾟ✧*:･ﾟ✧

● Per month ang given na estimates and July nagstart so 6 months yon.
● Yung “residual value” ay yung allocable to the land. May sarili kasing presentation yung land, so parang lumalabas
na out of the total acquisition cost, yung land value ang hindi mo makukuhanan ng natural resources.
○ May two options sa pag valuate ng property since may land attachment siya:
■ Yung land, magiging IP or PPE, and yung matitirang cost ay cost ng wasting assets nalang.
■ Or pwedeng ipresent yung land value as wasting assets but para makuha mo yung depletable cost,
ittreat mo nalang siya as residual value.
● In this problem, ito ginawa natin, so kapag cost ng asset ang hinahanap, ang isasagot ay
P16.4M pa din.
■ Bottom line, tignan mo ano ang treatment ng company.
● As for the depreciation, ang shorter ay yung sa wasting assets [1.8M / (25,000 tons x 12)].
○ Since for 2020 lang naman, x 6/12 pa siya.

●
✧･ﾟ: *✧･ﾟ:* *:･ﾟ✧*:･ﾟ✧

● 2019 is our first year of operations. Hindi pa din naman nagbabago yung 2016 estimate na 4M tons so yun pa din
naman ang gagamitin in getting the depletion rate per unit.
● 2020 talaga yung depletion na hinahanap natin.
○ Yung 2019 depletable cost, iless sakaniya ang 2019 depletion, then iadd ang 2020 costs which is the
development cost lang naman to get the 2020 depletable cost.
○ In 2020, nagiba din yung estimate, but it’s “in addition” to the original estimate. Ang gagawin here is 4M +
new estimate 3M less yung naextract na nung 2019 (5,000) = 6,995,000 ang bagong estimate. You then get
the new depletion rate per unit.
○ Question: bakit narecognize as depletion expense yung 780,000 (for year 2020) and 2,425,000 (for year 2021),
e related naman siya sa production at walang sinabi kung nabenta? And According to sir, may depletion
expense lang kapag may nabenta.
 ○
● For 2021 depletion naman, 2020 depletable cost lang again less the 2020 depletion. Add 2021 costs.
○ Hindi naman nagbago ang estimate so simply deduct lang yung na-extract nung 2020. So from the revised
estimate of 6,995,000 less 1M 2020 extraction, we get 5,995,000 estimate for 2021.

○
● As for the depreciation expense, yung buildings constructed in 2018 ang idedepreciate dito.
○ Since wala daw binanggit na UL ng asset, diretcho daw tayo sa output method agad.
○ For 2019, yung 4M estimate ang gagamitin. 6,995,000 for 2020, and 5,995,000 for 2021.
○ Same process lang with the depletion; get the depreciable cost then less the depreciation to get the new
depreciable cost. Then divide by their respective estimates.
■ However, in 2020 kasi, nagkaroon ng improvements pa so add yon sa depreciable cost. Yung no
residual ay for only for the improvements; hence, we don’t need to add back the P250,000 residual
na nirecognize na natin 2019 palang.
 ■
○ For the 2021 depreciation, same process lang din. No improvements for 2021 naman.

■
IAS 41 AGRICULTURE

● This is the management of the entity of the biological transformation and harvest of BA for sale or
for conversion into agricultural produce or into additional BA.
○ Management - ang agricultural activity ay dapat may presence ng human intervention. Kapag
kasi acts of God ang cause ng isang biological asset and without any human intervention, then
hindi siya pasok sa IAS 41 Agricultural Activity.
■ E.g., ocean fishing, yung mga isda sa ocean ay wala namang nagmamanage doon so
hindi siya pasok sa IAS 41. But yung fish culture, yun ay isang agricultural activity.
■ E.g., wild life hunting is also part of acts of God dahil yung mga biological assets don ay
hindi naman through human intervention.
○ Biological transfortion - kaya need ng human intervention kasi ito naman talaga ang goal natin.
Maraming ways ang transformation; pwedde via growth, improvement in quality, increase in
quantity, procreation that results to additional biological assets.
■ Basically, we harvest for sale or we produce more biological assets.
● Scope of IAS 41
○ Biological assets - living plants and naimals
○ Agricultural produce - harvested product of an entity’s BA (result of transformation). Ways of
harvest:
■ (Detachment) Idedetach mo siya as in tatanggalin mo yung produce doon sa mismong
BA - e.g., mamimitas ka ng grapes sa vineyard mo
■ (Cessation of life) Tatapusin mo yung life ng BA - e.g., meron kang pig then kinatay mo
○ Government grant related to agricultural activity - hiwalay siya sa IAS 20 (which is the general
rule for grants) kasi kapag related nga sa agricultural activity yung government grant, then
iaaccount mo siya under IAS 41.

Recognition
● Initial
○ BA - FVCTS
○ Agricultural produce at the point of harvest - FVCTS always.
■ This means na hindi nawawalan ng FV si agricultural produce. Since fresh siya, may
ready market na magaaccept sakaniya.
■ Does this mean ang BA ay nawawalan pala ng FV? Yes, hence, kung hindi determinable
ang FV niya, merong alternative measurement as detailed below.
■ Nagsstop ang pagiging agricultural produce niya after harvest, kasi mamimili ka na
saan siya pupuntang account.
● Subsequent
○ BA - FVCTS; alternatively, cost less accdep less acc. IL (cost mode) hence subject din siya sa
depreciation so it’s important that we keep track kung determinable pa ba ang FV niya. Like IP,
by the time na bumalik na ang kaniyang FV, we reclassify nalang ulit from cost to FV model.
○ Agricultural produce (after harvest) - depends on whether this becomes BA or inventory.
■ E.g., kung July 1 ka nagkaroon ng agricultural produce, syempre at YE, hindi na siya
agricultural produce so dapat may iba ka ng measurement sakaniya. After harvest,
ikaw mamimili kung BA pa ba siya or inventory na.
● CTS excludes transportation, finance cost, and income taxes.

Types of BA
● Bearer - we are after sakaniyang agricultural produce.
○ E.g., grapevines, once napick na natin ang grapes, si vines ay yung bearer BA natin.
 ● Consumable - we are after sakaniya talaga (i.e., we kill it), siya talaga ang produce natin.
○ E.g., narra tree, kikill mo siya to create lumber as your produce.
○ E.g. pigs but hindi ka after sa piglets niya, sa mismong mother pig ikaw interested so
consumable yon.

FV hierarchy (PFRS 13)

● Before kasi, external or independent valuation pa ang ginagamit natin, but now we have a legit way to
calculate FV under PFRS 13.
● Level 1 - quoted prices in an active market for identical assets
○ Quoted means meron talaga nangyayaring trading or bentahan for that specific product.
● Level 2 - include quoted prices for similar assets in an active market, and quoted prices for identical or
similar assets in a market that does not exist
○ Hindi siya yung mismong product natin but similar or identical naman, and still traded sila.
○ E.g., meron kang cow, but ang benchmark mo is the market for carabaos.
● Level 3 - lowest among the three and unobservable inputs are usually developed by the entity using the
best available information from the entity’s own data.
○ Walang market so walang external way to know its FV but meron kang historical basis; ang FV
na gagamitin mo is sarili mong model so internally-generated input ito. May team na
naghahandle talaga nito (called market risk team).
○ Inaallow naman siya but lowest nga lang talaga.

Gains and losses

● Any difference between the initial and subsequent recognitions would go to P/L.
○ This P/L shall be divided into price change and physical change.
○ Hindi naman siya required hatiin talaga, encouraged lang siya.
○ Suggested formula personally from sir Roque:

○
○ Sa price change, you assume na hindi nagchange ang kaniyang age to get yung “imaginary FV”
or yung FV at the end using initial recognition’s age.

○
○ Sa physical naman, yung nakuhang “imaginary FV” ay icocompare naman doon sa FV at the
beginning of the period. Then add lang any newborn.
○ Add both the price and physical changes, yun ang papasok sa P/L.
Government grant related to agricultural activity
● Again, the general rule is IAS 20, but if related nga kasi sa agricultural activity, then IAS 41 siya and
shall be measured at FVCTS when the grant becomes receivable.
○ Anong difference? Yung valuation. Ang IAS 20 kasi, under cost model siya and dinedepreciate.
Unlike sa IAS 41, FVCTS, bale FV approach.
● Although same naman ng recognition
○ Non-conditional - recognized as income
○ Conditional - liability (deferred income) muna then income once the conditions attached are met.

Amendments to IAS 16 & IAS 41

● Bearer plants are IAS 16.
○ Hence, ang bearer animals, IAS 41 siya. Plants lang ang 16.
○ Substance over form kasi; ang use ng bearer plant ay similar sa usage ng manufacturing plant
or plant facility, kasi parang factory set-up, meaning produce lang nang produce ng goods.
● As discussed sa PPE lecture, mekong requisites para maclassify as bearer plants under IAS 16 ang
isang bearer plant. Refer nalang there.
● Kapag dual purpose ang bearer plants, then this is IAS 41 pa din. (e.g., rubber tree, we its sap to make
rubber which is its agricultural produce, so di natin siya papatayin, but pwede din gamitin ang lumber
niya as consumable plant, meaning pinapatay na natin siya)
● Yung bearer plant ay yung biological asset itself. So, if nagkakaroon ng agricultural produce si bearer
plant, then that agricultural produce ay IAS 41 pa din. Ang part lang ng IAS 16 ay yung plant mismo,
but any offspring ay sa IAS 41 pa din.
● Other items concerning bearer plants:
○ Cost capitalization ceases when the bearer plants reach maturity. Maturity means namumunga
na siya; kapag immature pa ang plant or hindi pa siya namumunga, we just treat it as if it’s a
CIP, meaning capitalize lang nang capitalize and wala pang depreciation. Once fully mature
(based on our judgment) na siya, then pwede na natin idepreciate.
○ We also assess for IL, considering the CA and the recoverable value.

PRACTICE QUIZZER {1:58:40 under the Oct. 15 Lecture Vid

Additional:

IFRS 6 DEPLETION

Exploration and evaluation of mineral resources

• Search for mineral resources AFTER the entity has obtained legal right to explore in a specific area.
• Determination if the technical feasibility and commercial viability of extracting the mineral resources.

Exploration and evaluation expenditures

• Expenditures incurred by an entity in connection with the exploration and evaluation of mineral resources BEFORE
the technical feasibility and commercial viability of extracting a mineral resource.

•
 •
• Exploration and evaluation asset is either tangible or intangible

Measurement and classification

• Measured initially at cost
• Subsequent – cost model or revaluation model

Wasting assets
• Natural resources
• Material objects of economic value and utility to man produced by nature.
• Cannot be produced by man
• 2 main features
o Physically consumed
o Irreplaceable

Cost of wasting asset

• Acquisition cost – price paid to obtain the property containing the natural resource
• Exploration cost – incurred before technical feasibility and commercial viability.
o Two method:
▪ Successful effort method
• Exploration related to dry holes or unsucceesful discovery is expensed in the period
incurred.
• Large and successful oil entities
▪ Full cost method
• The cost of drilling dry holes is part of the cost of locating productive holes.
• Small oil entitties
• Development cost
o Cost incurred to exploit or extract the natural resource that has been located through successful
exploration
o Either:
▪ Tangible equipment – not capitalized as cost. Set up in a separate account and depreciated
▪ Intangible development cost – capitalized.
• Examples: drilling, sinking mine shaft, and construction of wells.
• Estimated restoration cost.

Depletion
• Systematic allocation of the depletable amount of a wasting asset over the period the natural resource is extracted
or produced.
• Depletion is classified as part of the cost of production or cost of sales

Depreciation of mining equipment

• SHORTER between useful life of the equipment and the useful life of the wasting asset
• If useful life of the equipment is shorter, use straight line
• If useful life of the wasting asset is shorter, use the output method of depreciation.

Clarify if true: If the mining asset is movable (e.g., equipment), use units of output as the depreciation method. If the asset is
immovable (such as building), use straight line as the depreciation method.
 •

Wasting asset doctrine

- Capital liquidated is deducted from the shareholders’ equity.

Questions:
- Clarify if true: If the mining asset is movable (e.g., equipment), use units of output as the depreciation method. If the
asset is immovable (such as building), use straight line as the depreciation method.
- Kailan ginagamit ang units of output method to depreciate building related to wasting assets instead of straight
line?
IAS 40 INVESTMENT PROPERTY

● This is only land and building (or a part of). Hindi siya pwede maging equipment and machineries.
Hence, immovable properties lang ang under IAS 40.
● Its purposes:
○ Earn rentals
○ Capital appreciation
○ Both for earning rentals and capital appreciation
● It is not:
○ Used in production or supply of goods and services (IAS 16)
○ Used for admin purposes (IAS 16)
○ Sold in the ordinary course of business (IAS 2)
○ Bottom line, these are under IAS 16 or 2 because they are used directly for business
operations.
● IAS 40 is stand-alone from the normal operations of a business kasi it can generate its own cash nang
wala siyang kinalaman sa primary business or main purpose ng buisness. In a way, it’s an incidental
income.
● Hindi rin sakop ni IAS 40 ang
○ IFRS 6 (Non-regenerative or non-renewable assets like minerals and other natural resources
that are extracted from the ground).
○ IAS 41 Agriculture Activity, which includes biological assets.
○ IFRS 5 NCAHFS, which are assets held for sale that are not in the ordinary course of business.
● Owner-occupied property is IAS 16.
○ Make sure held by the owner or the lessee under a finance lease.
● Examples of IAS 40;
○ Land held for long-term capital appreciation. (If short term sale in the ordinary course, that’s
inventory.)
■ Meron ka pa din naman intention ibenta siya kaya nga pinapataas mo ang value niya.
However, hindi short-term ang pag benta mo sakaniya and hindi din in the ordinary
course of business.
■ Bottom line, kahit may intention ka ibenta ang land, kung hindi naman within the bounds
of IAS 2, edi dito siya.
○ Land held for a currently undetermined future use.
■ Hindi mo pa alam kung gagamitin mo ba siya sa operations (IAS 16) or ibebenta mo siya
in your business (IAS 2). As long as di mo pa alam, it’s like you’re only holding it for
capital appreciation, hence, pasok sa IAS 40.
○ A building owned by the entity (or held under a finance lease), and leased out under one or
more operating leases.
■ We are the lessor, and leasing is not our primary operations. If kasi primary
operations naman pala natin ang leases, then PPE to. Ang point kasi ng IAS 40 is
incidental income lang siya.
■ Kapag held under a finance lease, tayo naman si lessee dito. But pinapaupahan pa natin
siya so sub-lease ang situation.
○ A vacant building but is held to be leased out under one or more operating leases.
○ Property that is being constructed or redeveloped for continued future use as investment
property.
■ You already have a clear view of how you will use a property that is being constructed
and that is as investment property.
● Exclusions:
 ○ Property intended for sale in the ordinary course of business (or in the process of construction
or development for such sale).
○ Property being constructed or developed on behalf of third parties.
■ Hindi naman kasi tayo ang owner dito.
○ Owner-occupied property, including
■ Held for future use as owner-occupied (for admin or production)
■ Held for future development and subsequent use as owner-occupied
■ Occupied by employees (whether or not the employees pay rent at market rates); this is
called a headquarters, which is still for administrative purposes.
■ Owner-occupied properties awaiting disposal. (IFRS 5)
○ Property that is leased to another entity under a finance lease.
■ We are the lessor, but the one recognizing the property in their books is the lessee kasi
finance lease siya. Hindi tayo ang mag-eearn ng rent here so beyond IAS 40 to.
■ Para kasi tong capital lease or installment acquisition of a property, rather than a rental
approach.

Recognition
● We recognize when
○ It is probable that the future economic benefits (associated with the IP) will flow to the entity
○ The cost of the IP can be measured reliably.
● Dapat both ito ay present; probable and measurable.

Measurement
● We initial recognize at cost with any transactions costs being capitalized.
○ Cost + DACs.
○ Actually, kung pano magacquire ng IAS 16, same lang sa IAS 40.
○ Hence, we acquire using
■ cash basis (consideration = cost; basket price method also applies)
● What if may isang hindi given ang FV (basket method)? The standard says we
use residual approach. Magallocate ka muna doon sa may mga existing FV.
Kung ano yung matitira, yun na yung sa natitirang property. {this also applies to
all types of assets acquired at a basket price, not only to IAS 40}
■ on account - we use the invoice price, so discounts are always deducted whether taken
or not.
■ Installment - cash price equivalent; since deferred settlement term siya so merong
included na interest portion. You have to split ano yung value ng property lang and ano
ang sa interest. Hindi dapat kasama si interest sa value ng property, baka maoverstate
kasi si property.
■ issuance of shares or bonds - observe the hierarchy.
■ Exchange - same principle with and without commercial substance.
■ Donation - record at FV and credit to donated capital.
■ Construction - consider DM, DL, OH.
● Property interest held under a lease and classified as IP is initially measured as what was prescribed
for a finance lease under IFRS 16 Leases, where in a lessee is required to recognize an ROUA and a
lease liability.
○ Property interest - tayo si lessee and sinub-lease natin to another lessee yung isang property.
○ Dati, ang property interest ay always at FV, which is the lower of the FV of the property and the
PV of minimum lease payments (lumang approach, IAS 17 Leases). But now under IFRS 16
Lease, ROUA is initially recognized at cost.
 ■ The cost of the ROUA is yung cost of a lease from IFRS 16
● PV of lease payment - over the lease term.
○ The logic is kung magkano ang total cost na ilalabas mo, meaning the
consideration na ibabayad mo throughout the lease term, yun dapat ang
value ng ROUA.
● Lease payment made at or before commencement date less any leas incentive -
ito yung mga advanced payments.
● Initial direct cost incurred by the lessee - ito yung mga transactions costs na
shinoulder ni lessee to finalize the lease term. Since cash payment to ni lessee,
treated siya as part of the cost.
● Estimate of costs of dismantling and restoring the underlying asset for which the
lessee ha a present obligation.
● Subsequent measurements
○ We have the option to choose whether FV model or cost model.
■ Either way, we have to apply it to all IPs, meaning kung FV or cost ang isa, FV or cost
na din lahat, including ROUA na din to ha.
■ This means pati yung ROUA, finofollow na din niya yung accounting policy na ginagamit
for IPs. Kasi nga before hindi (i.e., always FV).
■ Hindi deducted ang CTS sa FV ha.
○ Under FV model, in the case na ang FV is not determinable para sa isang IP, the entity shall
use the cost model to account for that IP. Kailangan nila basically magdeviate from their
accounting policy. Pero hindi ibig sabihin na lahat ng IP ay iaadjust na din to cost model. Kung
ano lang ang hindi determinable ang FV, yun lang ang irerecognize under cost model.
■ If dumating na yung time na determinable na ang kaniyang FV, pwede na siya ireclassify
sa FV model ulit.
■ Under FV model, any difference between the initial recognition and the FV at the end of
the year would be unrealized gains or losses that would go to P/L.
● Subsequents costs incurred after initial recognition
○ Improvements, betterments, additions - capitalizable din sila like sa PPE.

Partly IP and Partly owner-occupied property (OOP)

1. Separable and could be sold/leased out separately (clearly identifiable sino ang IAS 16 and 40) - treat
the properties as IP and OOP separately.
2. Inseparable (not clearly identifiable which is which so we use our professional judgment) - if only an
insignificant portio is held for manuf or admin purposes, treat as IP.
● What’s significant or insignificant is based on our judgment.
● Kung ginagamit mo siya more as IP, then IP ang whole property, but if mas lamang ang manuf
or admin use niya, then OOP siya as a whole.
3. Ancillary services - suport services like security and maintenance; “add-on” services sa major services
mo.
● Insignificant - IP.
● Significant - OOP. if kasi significant, then hindi nalang incidental yung pagbibigay mo ng safety
and maintenance, primary operation mo na yan.
● (From Rae’s int acct 3 notes: If silent, assume na it’s IP kasi it means insignificant lang to PPE
yung ancillary.)
● E.g., hotels providing security and maintenance: OOP because dapat significant sa operations
nila ito.

Property leased to an affiliate (Intracompany rentals: parent-subsidiary)

 1. Separate or individual FS ni parent - IP.
2. Group entity (conso FS) - OOP. Kasi since one company lang naman sila ni subsidiary kung group
entity ang paguusapan, edi siya “din” si subsidiary, so yung pinapaupa niya kay subsidiary ay parang
pinapaupa niya sa sarili niya. Hence, used for operations.

Derecognition (we derecognize when any of them are met)

● Disposal
● Permanently withdrawn from use - hindi mo na talaga siya gagamitin.
● When no future economic benefit are expected from the IP.

● Net selling price {meaning selling price less CTS} less CA of the asset = Gain or loss to P/L.
○ Sa valuation kanina, hindi net yon ha, meaning FV lang talaga ang gagamitin under FV model.
Hindi natin imiminus ang cost to sell or selling expense kahit pa given sa problem. Sa actual
disposal lang tayo nagtatanggal ng costs.
○ Sa CA ng asset, depends what model ang gamit mo.
■ If model ang gamit, yung usual na cost less accdep less acc. IL. This means na dapat
updated ang accdep kahit pa mid-year nangyari ang sale.
■ If FV model, yung FV of the last reporting period. Hence, kung mid-year ang sale then
may given na FV as of that date, ignore lang. Yung FV as of latest reporting period ang
ibabangga natin sa net selling price.
● Hindi ito ang sinabi ni sir. Ang sabi kasi ni sir is, “Kung April 1 ang disposal, we
use the Dec. 31 FV assuming calendar year.” pero wala siyang minention if may
given FV ba sa April 1.
● But itong principle na ignore lang yung FV sa disposal date ay galing kay ma’am
Ireneo from our int acct 3.

Transfers of IP (change in use from IP to OOP or Inventory, or vice versa)

● Under cost model, transfers from IP to OOP or inventory shall be made at carrying amount.
○ As in tinransfer mo lang ang cost with the accdep.
○ E.g., IP to inventory or PPE

■
● Under the FV model, transfer shall be made at FV, and the FV would be the deemed cost for
subsequent accounting under IAS 16 or IAS 2.

○
○ Note: ignore lang the negative sign. Excel thingy nalang yan ni sir.
● OOP to IP under FV model, difference is treated as RS.
 ○
○ During the year of reclassification, the RS would be part of the OCI. Then cumulatively lang sila
doon as part of the equity until madispose yung property. Bale kung wala namang intention na
ireclassify siya from FV to cost, then nasa OCI lang si RS hanggang madispose yung property
then buo na siya ililipat sa RE.
○ If naman irereclassify ang IP from FV to cost, yung RS ay pwede na din i-piecemeal realization,
so ma-”dedepreciate” siya over the UL of the IP. Yung portion na marerealize will go to RE.
● Inventory to IP under FV model, difference is (FV gain or loss yata) in P/L.
● When IP under construction is completed and to be carried at FV, difference between the FV and CA
(of the CIP yata) shall go to P/L.

PRACTICE QUIZZER (1:03:05 to 1:14:20 under the IP and BA video Oct. 15 Lecture video)

Question:
If cost of model ang gamit prior to transfer from PPE to IP, may piecemeal realization?
PROBLEM SOLVING: INVESTMENT PROPERTY

✧･ﾟ: *✧･ﾟ:* *:･ﾟ✧*:･ﾟ✧

● Building under finance lease, wala siya sa SFP ni lessor kasi si lessee ang magrereport.
● Building under operating lease is providing security and maintenance; classified as insignificant ang
security and maintenance to the lesses, hence, this is IP.
● Equipment under operating lease is PPE kasi land and building lang ang IP.
● Kapag ang building ay under construction pa, ang titignan natin ay yung intention sakaniya once done
na siya. In this case, for sale daw, so hindi to IP.
● Constructed on behalf of third parties, that’s inventory kasi hindi naman tayo ang owner.
● Yung building occupied by employees, regardless of whether nagbabayad sila or not, or actually kahit
below or above or at market rate ang binabayad nila, wala tayo paki, kasi OOP talaga to since admin
purposes ang related sa employees.
● Yung building used as office, yung 25% is IP. Identifiable sila.
● Used as store and factory ay admin purpose.
 ●
● Ang catch sa ancillary service ay hindi ka magbibigay ng too much effort sa security and maintenance
kung hindi naman yon ang primary service mo, hence kung insignificant, IP.

✧･ﾟ: *✧･ﾟ:* *:･ﾟ✧*:･ﾟ✧

● Yung NCAHFS ay wala. IFRS 5 kasi siya. Yung mga held for sale in the ordinary course of business,
wala din since inventory siya.
● 40% to IP and 60% to PPE ang building for admin purposes.
● Finance lease is neither din.
 ●

✧･ﾟ: *✧･ﾟ:* *:･ﾟ✧*:･ﾟ✧

● Conso FS ang concern here, meaning yung mga intra-rentals ay cinoconsider. Since conso FS nga, yung
mga nilelease natin to our subsidiaries under operating lease would be PPE na.
● Yung building used as office but leased out to tenants yung majority; since tenants naman and majority
pa, this is IP.
 ● Kung separate FS, yung office owned by the susidiary, di papasok sa separate FS ni parent.
○ If ever na subsidiary leasing it to another subsidiary pa, sa separate FS sa pov ni lessor
subsidiary, it’s IP. But conso, OOP pa din.

✧･ﾟ: *✧･ﾟ:* *:･ﾟ✧*:･ﾟ✧

● Kapag cost model, may depreciation; FV, wala. Cost lang din ang may IL; this is because it is believed
na dapat na-account na sa FV assessment ang IL before pa magbigay ng FV data. Also, kapag under
FV model, we compare yung FV from year-end to year-end to determine if merong FV gain or loss which
will go to P/L naman (like trading securities).
● Under cost model
○ Year 1, no IL since mas mababa pa naman si CA. Same with Y2.
○ Y3, magdecline na from the CA to the recoverabl amount so we have to recognize yung IL. From
here on, yung recoverabl amount na ang magiging CA.
○ Before disposal, we update the depreciation first.
■ Take note, may change in estimates since nagiba yung depreciable amount natin. That’s
P30M / 7 X 6/12 since July ang disposal.
 ○

○
● Under FV model
○ Y1, nagincrease from P50M cost to P54M FV kaya we recognize an UG of P4M. We don’t deduct
the CTS kasi no actual sale pa naman.
○ Y3 naman, ang icocompare sa selling price less CTS ay yung FV as of the latest BS date. Hence,
kung may FV sa day of disposal, ang gagamitin is yung latest reporting period.
○ Di sinagot ni sir yung questions mismo haha solution lang.
 ○

✧･ﾟ: *✧･ﾟ:* *:･ﾟ✧*:･ﾟ✧

● Remember na LCNRV ang inventory. Ang FV as of recla date ang gagamitin as the “cost” ng IP. For YE,
we still remeasure ang FV.
 ○
● For the land and building,
○ Kapag OOP na building to IP, RS yon so OCI ang pasok niya and not P/L.
○ But sa YE remeasurement, yun ang P/L. Hence, hindi na binigyan ni sir ng entries yung June 30,
and dumiretcho nalang siya sa YE.

✧･ﾟ: *✧･ﾟ:* *:･ﾟ✧*:･ﾟ✧

● This is a transfer from OOP to IP. Since galing siya ng PPE, merong assessment for IL, then once
nireclassify na siya using FV, any recoveries should not exceed the IL previously recorded sakaniya
even if under PPE pa siya that time.
● Equity portion = revaluaion surplus.
● 820 ang denominator and since accdep naman na hinahanap, plus nalang yung sa numerator so that’s
190/820 x depreciable amount.

○
● Computation of IL as of 2020

○
● Before we account for the new acquisition, iupdate muna natin ang accdep nung existing building natin.
The resulting CA is yung icocompare sa FV in transfering it to IP.
○ Since yung recoverable amount na ng 2020 ang new CA, we need to adjust din yung
adjustment factor because 35 years nalang ang useful life. 2 years lang din ang numerator.
Hindi naman nagbago ang residual value, so yun pa din gagamitin,

■
● We first have to recover but then ang recovery is only up to the IL, then any excess revaluation surplus.
Hence, we’re comparing 3 items: the revalued amount (FV), the “had there been no impairment”
amount, and the CA with the impairment.
○ To get the had there been no impairment, we adjust ulit yun adjusting factor, worth 7 years.

■ until 34 yung numerator, di lang nakita.

■
○ Ang pagrerecover ay CA had there been no IL vs the CA with impairment. Yung increase from
the CA with IL to CA without IL ay yung “recovery”. Then yung increase from CA had there been
no IL to the revalued amount ay yung RS.
 ○

Additional:

IAS 40 INVESTMENT PROPERTY

• Investment property – land and/or building (or part of a building) held by the owner to earn rentals or for capital
appreciation.

Examples of IP:
• land held for long-term capital appreciation
• land held for a currently undetermined future use. (presumed to be held for capital appreciation)
• building owned or held as ROUA and leased out under 1 or more operating leases.
• Building that is vacant that is held to be leased out under 1 or more operating leases.
• Property that is being constructed to be used as an IP

Measurement of IP
• Initially recognized at cost.
• Subsequent – fair value model or cost model
o Shall apply to ALL of tis investment property
o Fair value model – any gain or loss arising from the changes in fair value is recognized in P/L
o Cost model – check for impairment
▪ If carrying amount > recoverable amount (higher between fvcts and value in use), there is an
impairment loss.

Ancillary services
• If these services are insignificant – investment property

Transfers to and from other classifications:

• Shall be made when and only when there is a change in use :
o Commencement of owner occupation (IP to PPE)
o Commencement of development with a view to sale (IP to inventories)
▪ Real estate dapat ang company
o End of owner occupation (PPE to IP)
o Inception of an operating lease to another party (inventories to IP)

Transfers using the FV model

a) From investment property (to PPE or IP) – fair value (updated) is the deemed cost in its new classification
b) From PPE to IP
o Fair value > carrying amount = revaluation surplus (may be transferred to RE upon disposal)
o Carrying amount > fair value = recognized in P/L as revaluation loss (or impairment loss if walang balance
ang RS), unless there is an existing balance in the revaluation surplus
c) From inventory to IP
o The investment property is recorded at fair value, while the inventory is derecognized at its carrying
amount.
Transfers using the cost model
o No change in the carrying amount and cost of the property transferred
o No gain or loss recorded at the date of reclassification

Derecognition:
o (Selling Price – cost to sell) – carrying amount = gain/loss (P/L)

Notes (dean book)

o Parent company leased out a building to its subsidiary under an operating lease – PPE
o Revaluation surpus
o Recognized only if the reclassficiation is from PPE to IP
▪ If gain to be recognized in P/L ang tanong and ganito ang transaction, zero ang magiging sagot.
o Problem 5-2
o Decrease in fair value due to harvest
▪ Walang effect sa P/L because ang paghaharvest ay gain and the decrease in FV is a loss, so
mago-offset.

Upon reclassification of NCAFHS to OOP, if the lower between the carrying amount as if no reclassification was made and
the recoverable amount is greater than the CV of the NCAFHS, would the recovery be subject to a limit? Or is the recovery

Notes (Ocampo)
o Problem 3
o Potential plant site – investment property
o Employees paying market rent – kahit nagbabayad ng rent or not, it is still PPE.
o Problem 8
o [fair value model]Transfer from PPE to IP – no gain or loss (revaluation surplus lang)
o Cost model – no gain or loss, in all cases?
o Problem 9
o Nagkakarevaluation surplus lang pag may transfer from PPE to IP, hind isa change in fair value (if fair value
model)

Prac Acc Valix

• Problem 39-1
o If fair value model ang gamit, no depreciation is recognized. So in Year 1, cost ang ikocompare sa fair
value to get the gain/loss, not the carrying amount.
• Problem 39-2
o Land held for future factory site - PPE
 INTANGIBLES (IAS 38)

- The main thing that differentiate intangible assets with other assets is that it has no physical substance
at all.
- Identifiability - the intangible asset can be distinguished from unidentifiable asset, which is goodwill.
- There are two types of intangible: identifiable and non-identifiable
- Essential characteristics: (pano masasabi na identifiable?)
a. Separable - you can sell, transfer, and exchange these assets separately or together with
other assets.
b. It must arise from contractual or legal rights
- Control - proof of ownership. hindi mo masasabing pagmamay-ari if wala kang control
- Control is the power of the company to obtain the economic benefits flowing from that intangible
asset and it will restrict others to enjoy the same benefit
- Paano natin maeexercise ang control over that intangible asset?
- Patent - legal enforceability
- Keep it as a secret from other competitor
- Future economic benefit
- Mahirap iprove ang economic benefit since intangible siya so kapag sinabi mong may economic
benefit yan based on professional judgment, the judgment should have a basis or external
evidence.
- Measurement
- Initially at cost. Subsequently, at cost model or revaluation model
- We can only use revaluation model if may active market. If wala, use cost model.
 - Acquired goodwill is a valid intangible asset. However, internally generated goodwill should not be
presented as intangible asset.
- Acquisition by government grant
- Example: licenses, broadcast rights, import licenses, and other similar items.
- Direct attributable costs: licensing fee or legal fees

Quizzer 1:
Solution:

- Pre-opening costs - are startup costs

- Treated as an expense.
- Pre-opening, pre-operating, startup, and organization costs are all treated as expenses.
- Training, customer loyalty, and market share
- Training costs - treated as expense since hindi natin alam ano magiging benefit niya sa company
in the future.
 - Customer loyalty - wala tayong control over customers so hindi natin masisigurado na
ipapatronize nila ang company.
- TV advertisements are outright expensed.
- Website development costs - use to stimulate sales and to promote the company; treated as
expense
- Investment in associate
- Meron siyang sariling line item so hindi part of intangible asset.
- Initial and continuing franchise fees
- Franchise - contract-based intangible asset
- Any lumpsum payment na ibabayad for the purchase of the franchise plus direct attributable costs
are considered as the initial cost of the intangible asset. Any contingency fee or continuing fees
na babayaran mo on a periodic basis are expensed outright
- Two phases in developing asset
- Research phase - expense as incurred
- Development phase - capitalizable pero merong criteria na need mammet before we
classify the development cost as intangible asset.
- Costs in defending a patent
- Costs in relation to litigation, regardless of whether prosecuting or defending a patent, is
expensed because it does not enhance the value of the asset.
- Computer software
- If the software is an integral part of a machinery and it cannot operate without this software,
then the machine and software is treated as PPE
- If the software is standalone, treat the machine as PPE and treat the software as an
intangible asset.
- Operating system
- Integral part
- Amount paid to a lessor…
- Lease rights are not classified as intangible assets.
- Cost on improvement
- This is a leasehold improvement under IAS 16 (PPE)

PATENT

- If hindi madetermine if incurred during research or development phase ang cost, treat it as a research
expense.
- Subsequent expenditures
- Cost of litigation - expensed outright kasi it does not enhance the value of the asset.
- Competitive patent
- Inaacquire natin ang patent ng competitor
- This competitive patent, dinadagdag natin sa value ng old patent and inaamortize natin sila both
based on the remaining life of the old patent.

- Compare carrying value with its recoverable value

- Recoverable value = higher between value in use and fair value less cost to sell
- Carrying value > recoverable value = impairment.

- Kapag internally developed asset, ang initial costs niya ay legal and licensing fees npara masecure ang
patent.
- 2011 to 2013 costs
- Treated as expense
- 2014 Amortization
- Shorter between useful life and legal life
- Dec. 10, 2016 item
- Expense
- Acquisition of a competitive patent
- Amortized over the remaining life of the old patent.
- If ang tanong sa #5 ay TOTAL LOSSES, the 125,000 legal fees must be included. Amortization expense
is a direct operating expense, so hindi siya kasama. Pero kapag ang tanong ay TOTAL P/L, isasama
siya.
Solution:

- “Worhtless by December 31, 2021” - this means na may remaining 2 years na lang sa useful life ng
patent.

TRADEMARK
- Two types of intangible assets
1. Intangible asset with definite life - limited useful life which means subject sila to amortization.
2. IA with indefinite useful life - walang amortization but subject to impairment assessment at year-
end.
- Impairment
- Compare carrying value with its recoverable value

- Initial cost is the lumpsum payment plus direct attributable costs.

- Franchise

- Franchise can be an intangible asset with limited life or intangible asset with indefinite life.
- Since given ang implicit rate, it is considered as non-interest bearing note.
- Interest expense = initial carrying value of the note x implicit rate
- Patent

- Since non-interest bearing, we need to compute the present value of the note.
 - Trademark

- Since hindi subject to amortization ang trademark, the carrying value at year-end is still 1,200,000.
- Value in use - present value of cashflows na kayang ibigay ng isang asset.
- Ang sabi ng IAS 36, whenever we compute value in use, we should use the risk-free
interest rate and we also need to consider if may weighted probability.

Solution:
 - Jan 02 item
- It is an organization costs. It is expensed outright.
- Jan. 15 item
- Not an intangible asset but a marketing cost.
- July 1 item
- Not an intangible asset.

—--------------------------------------------------------
Solution:

- Since ang ina-audit ay 2021, we should debit retained earnings (instead of amortization expense) for the
2020 amortization of the franchise.
- Dec. 31, 2020 item
- Mali ang ginawang entry. They must be outright expensed. So debit retained earnings.
- Note: since intangible asset ang nacredit, it means na nacapitalized sila originally instead
na i-expense (?)
Solution (continuation)

- Cost of developing a formula

- It is an R&D cost, so outright expensed.
 - Goodwill purchased
- We should debit goodwill and credit intangible asset para marecognize siya as a separate
intangible asset.
- Litigation - as mentioned above, it does not enhance the value of the asset, so expense.

—--------------------------------------------------------------------
Solution:

- Trademark
- If may binigay na definite life pero sinabing “trademark wll be renewed in the future indefinitely”,
walang magiging amortization. It is treated as an intangible asset with indefinite life.
- Since walang amortization, initial cost = CV at year-end.
- Value in use = 10,000/6% = 166,666,67
 - Goodwill
- Carryinge value
- Since sinabi na goodwill is associtiated with Andorra’s Almond Manufacturing reporting
unit. So we should use Almond Manufacturing’s Net Asset value.
- 2,700,000 + 1,500,000 - 1.800.000 = 2,400,000
- Walang impairment since CV < Recoverable value
- Goodwill’s net book value is still 1,500,000. The computation above is only to assess if there is
an impairment.
- Customer List
- Generally not treated as an intangible asset unless acquired. If silent, it is treated as an intangible
asset. So, subject to amortization.

Solution:
 - Franchise
- Since may indefinite term, walang amortization.

Additional:

IAS 38 INTANGIBLE ASSETS

To qualify as an intangible asset, an item must meet ALL the following criteria:
1. Identifiability – “pag binenta ang asset, buhay pa rin ang entity”
a. Separable
b. Arises from contractual or legal rights
2. Control
a. Power to obtain future economic benefits
b. Right to restrict the access of others
3. Existence of future economic benefits
a. From sale of products or services
b. Cost savings

Examples of Intangible Assets

1. Patent – granted to an inventor
a. Life: minimum period of 20 years
2. Copyright
a. Granted to an author of artistic works
b. Life: generally a period of 50 years after death; after which the work enters the public domain.
3. Trademarks
a. Service marks, collective marks, certification marks
b. Life: as long as the owner continues to use it.
4. Franchise
 a. Right granted by the franchisor to a franchisee.
b. If franchisor is a government, it permits the franchisee to use PUBLIC PROPERTY
c. If franchisor is a private entity, it permits the franchisee to use FRANCHISOR’S TRADEMARK OR PROCESS
d. Life: period indicated in the contract (generally renewable)

Initial Recognition
• Intangible assets are initially measured at cost.

• Separate acquisition
o Purchase price
▪ Import duties
▪ Non-refundable purchase taxes
▪ Deduct trade discounts and rebates.
▪ If acquired beyond normal credit terms:
• Purchase price is the cash equivalent
• Cash price equivalent – total cash outflow = finance cost/interest expense over the credit
period,
▪ If separately acquired by issuance of own securities:
• Cost = fair value of the asset acquired (unless FV of the securities issued is clearly and
reliably determinable.
o DACs

• Acquisition as part of a business combination

o Recognized at fair value
o When an intangible asset acquired in a buscom is separable or arises from contractual/legal right, it is
presumed that its fair value can be determined reliably
o The acquirer also recognizes an acquiree’s in-process research and development project if:
▪ It meets the definition of an asset
▪ It is identifiable

• Acquisition by way of government grant

o An entity may choose to either:
▪ Recognize both intangible asset and the grant initially at fair value
• The grant is recognized as income over the period in which the intangible asset is
amortized.
▪ Recognize the asset at a nominal amount (presumably zero) + any expenditure that directly
attributable to preparing the asset for its intended use.

• Acquisition by exchanges of assets

o Measured at fair value, unless the exchange transaction lacks commercial substance of the fair value of
neither the asset nor the asset given up is reliably measurable.
o It the transaction lacks commercial substance, cost = carrying value of asset given up + cash paid or minus
cash received.
▪ No gain or loss is recognized

• Internally Generated Intangible Asset

o Research phase
▪ Research – original and planned investigation undertaken with the prospect of gaining NEW
scientific or technical knowledge and understanding
▪ All expenditures are recognized as expense when incurred.
o Development phase
▪ Development – application of research findings or other knowledge to a plan or design for the
production of NEW or SUBSTANTIALLY IMPROVED materials, etc.
▪ Expenditures incurred during the development phase are capitalizable if the entity can
demonstrate the following:
• Technical feasibility of completing the intangible asset so that it will be available for use or
sale
• Intention to complete the intangible asset and use or sell it.
• Ability to use or sell the intangible asset
• How the intangible asset will generate probable future economic benefits
• Availability of adequate technical, financial, and other resources for the completion, use,
or sale of the IA
• Ability to measure reliably the expenditure attributable to the IA during its development.
▪ Capitalizable costs
• Costs of materials and services (related to generation of asset)
 • Cost of employee benefits (generation)
• Fees to register a legal right
• Amortization of patents and licenses.
o Expenditures to be expensed:
▪ Research
▪ Start-up activities (organization and pre-operating costs)
▪ Training costs
▪ Advertising and promotional
▪ Costs of relocation and reorganization
o If the entity cannot distinguish, the entity treats the expenditure as if it were incurred during research phase.
Thus, expensed.

Expenditures after initial recognition

• Recorded as expenses, unless they provide economic benefits in excess of the originally assessed standard of
performance.
o Extension of useful life
o Increase in net cash inflow from the use of the asset
▪ Increasing revenue
▪ Decreasing operating costs.
▪ Improvement of the quality of the output
• Illustration problem (pg. 228 of dean’s book)
o Patents not yet registered is initially debited as “Patents in Process”. After rigstration, it was transferred to
“Patents” with the cost of obtaining rights.
o Amortization starts after registration
Measurement after initial recognition
• Cost model
• Revaluation model

Amortization of Intangible asset with finite useful lives

• Amortized over the period of expected economic benefits
o SHORTER between the period of its legal/contractual rights and the period over which the entity expects to
use the asset
o Amortization begins when the asset is in the location and condition necessary for it to be capable of
operating in the manner intended by management.
o Amortization ceases at the EARLIER between:
▪ The asset in classified as held for sale
▪ Derecognition of the asset

Amortization methods:
1. Straight-line method
2. Diminishing balance method
3. Unit of production

• The residual value of an IA with a finite useful life shall be assumed zero unless
o There is a commitment by a 3rd party to purchase the asset at the end of its useful life; or
o There is an active market for the asset

The account charges upon amortization is reported either as a:

1. Product cost – used in the production process
2. Period cost- franchise to operate a sales outlet

Intangible Assets with Indefinite Useful Lives and Assets not yet Available for Use
• Example: trademark that is continuously used by an enterprise
• An IA with an indefinite useful life or IA that is not yet in use shall not be amortized but is required to be tested for
impairment at least annually and whenever there in an indication that the asset may be impaired.
• If later on na-assess na hindi na indefinite useful life, the asset’s carrying amount shall be amortized over the
determine remaining useful life.

• The cost of internal development of software for in-house use – expense

• Software purchased for entity’s own use and is integral to the hardware – part of the cost of the hardware (PPE)
o Inventory – if for sale on a routine basis

Notes (Problems - Dean):

• Problem 4-5
 o Recovery of impairment loss – based on the recovery from lower amortization per year, not on the
remaining life ??
• Problem 4-9
o Computer software amortization
▪ May given na expected total revenue. Kinompare kung sino ang higher between the amortization
(based on revenue) and amortization based on useful life.
▪ Compare their accumulated depreciation din sa susunod na years.

CAPITALIZED (Patent) EXPENSED (R&D)

Fees paid to Phil. Patent Office
Drawings required by the patent office to be filed
with patent application
Legal costs of filing for patent
Registration of patent (?)
Impairment loss (special equipment)
Research salaries and fringe benefits for engineers
and scientists
Cost of testing prototype

CAPITALIZED (Intangible Asset) EXPENSED (R&D)

Notes (Prac Acc Valix)

• Problem 56-1
o An in-process R&D project acquired separately is recognized as an asset at cost, even if a component is
research.
• Problem 56-8
o Cost of trademark
▪ Design cost of trademark
▪ Legal fee of registering trademark
▪ Registration fee with IPO
• Problem 56-9
o Cost of trademark
▪ Purchase price
▪ Nonrefundable VAT
▪ Legal cost incurred to register the new trademark.
• Problem 56-10
o Noncompetition agreement – part of intangible assets.
• Problem 56-11
o Cost capitalized as intangible asset
▪ Cost of trademark
▪ Employee benefit relating to testing of new process
• Testing cost – what is the treatment? Expensed or capitalized?
• Problem 57-1
o Assembled workforce – not accounted for separately as an asset. Hindi naconsider sa pagcompute ng
goodwill from business combination.
• Problem 57-2
o The government contract is not recognized separately because it is not based on any legal or contractual
relationship nor it is separately tradable.
o Not recognized separately = kasama na sa goodwill and fair value niya??
• Problem 57-6
o In-process R&D
▪ Recognized as an asset pero hindi ina-amoritze??
• Problem 59-2
o R&D performed under contract for others should not be treated as expense if the direct costs are
specifically reimbursable under the contract
▪ If hindi reimbursable, is it expensed?
• Problem 59-3
o The legal costs incurred to file a patent should be charged to the patent account
▪ Production of the finished project would not have been undertaken without the patent – what if
wala ang statement na ito? Is it still capitalizable as part of the cost of the patent?
 o Prototype-related expenditures
▪ Are they expensed?
• Problem 59-4
o What is the treatment of “cost of adapting the new monitor for the specific needs of a customer”?
• Problem 59-18
o Start up costs re expensed immediately:
▪ Establishment costs
▪ Preopening costs – opening a new facility
▪ Preoperating costs – launching a new product

Ocampo
• Problem 3
o Question: kailangan bang may technical feasibility AND commercial viability before macapitalize? Or kahit
isa lang sa kanila, okay na?

IFRS 5 NONCURRENT ASSETS HELD FOR SALE

An entity shall classify noncurrent asset (disposal group) as held for sale if its carrying amount will be recovered principally
through sale rather than through continuing use.

Measurement
o If initially classified as held for sale, measured at the lower of its carrying amount and FVCTS.
o FVCTS < CA = impairment loss (initial recognition)
o Gain is recognized when there is an increase in FVCTS
o Not in excess of the cumulative unrecovered impairment loss that has been recognized.

To confirm: walang recovery of impairment through the passage of time??

• Recovery is through the lower depreciation

Reclassfication as held for use:

o Lower of carrying amount before it was classified as held for sale (adjusted for any depreciation)
o Recoverable amount (higher between FVCTS and value in use)

To confirm:
• If revaluation model, fair value ang basis sa pagremeasure. If cost model, fair value less cost to sell??
MEASUREMENT PPE INVESTMENT BIOLOGICAL WASTING NCAHFS
PROPERTY ASSETS ASSETS
Initial Cost Cost Cost

Includes
transaction costs.

Purchased IP
• Purchase
price
• DACs –
professional
fees,
property
transfer
taxes, other
transaction
costs.

Excludes:
• Start up
costs
• Operating
lossess
before
planned
level of
occupancy
• Abnormal
amounts of
wasted
material
Subsequent Fair value model of Cost
cost model model or
revaluation
model
The price in the
principal market to
measure fair value
shall not be
adjusted for
transaction cost.

Apply to ALL of the

IP
 UNIVERSITY OF SANTO TOMAS
UST - Alfredo M. Velayo College of Accountancy
España, Manila

ACC5117 – 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

1
 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

3
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

****************************

5
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

7
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.

9
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

11
 UNIVERSITY OF SANTO TOMAS
UST - Alfredo M. Velayo College of Accountancy
España, Manila

ACC5117 – AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

QUIZZER 1
TOPIC: PROPERTY, PLANT AND EQUIPMENT

PROBLEM 1

Presented below is a list of items that may or may not be reported as property, plant, and equipment in a statement of
financial position of GOKU Company

Annual crops related to agricultural activity 440,000

Bearer animals related to agricultural activity 310,000
Land held for capital appreciation 1,500,000
Head office building 1,900,000
Machinery used in production 850,000
Store building 650,000
Delivery vehicle 450,000
Land and building held for resale in the ordinary course of business 3,000,000
Factory building 2,000,000
Research and development building 1,000,000
Office furniture and fixtures 380,000
Equipment held for sale in the ordinary course of business 1,400,000
Equipment held for sale in accordance with IFRS 5 115,000
Dogs used in rendering security services 75,000
Equipment for rental to others under operating leases 270,000
Equipment for rental to others under finance leases 355,000
Land and building for rentals to others under operating leases 2,500,000
Land and building for rentals to others under finance leases 4,000,000
Plants displayed in administrative office 35,000
Bearer plants related to agricultural activity (excluding
produce growing on bearer plants valued at P 120,000) 370,000

Question: How much should be reported as property, plant and equipment?

PROBLEM 2

VEGETA Co. was incorporated on 1/2/22 but was unable to begin manufacturing activities until 8/1/22 because new factory
facilities were not completed until that date. The Land and Building account at 12/31/22 per books were as follows:

Date Item Amount

1/31/22 Land and old building P300,000
2/28/22 Cost of removing building (demolition or razing cost) 4,000
4/1/22 Legal fees 6,000
5/1/22 Fire insurance premium payment 5,400
5/1/22 Special tax assessment for streets 4,500

1
 5/1/22 Partial payment of new building construction 150,000
5/15/22 Hospitalization of injured construction worker
(not covered by insurance) 10,000
6/1/22 Insurance premiums for accident insurance during
construction 12,000
8/1/22 Final payment on building construction (The building is 150,000
already completed; Useful life 20 years. No Salvage
value)
8/1/22 General expenses 30,000
9/1/22 Construction of fences 24,000
12/31/22 Asset write-up 75,000

Additional information:

 To acquire the land and building on 1/31/22, the company paid P300,000 cash. The market value of the land and
building is P150,000 and P50,000, respectively.

 When the old building was removed, VEGETA paid Tagagiba Co. P4,000, but also received P1,000 from the sale of
salvaged material (credited to other income). At that time, the old building is still usable.

 Legal fees covered the following:

Cost of organization P2,500
Examination of title covering purchase of land 2,000
Legal work in connection with the building construction 1,500
P6,000

 The fire insurance premium covered premiums for a three-year term beginning May 1, 2022.

 General expenses covered the following for the period 1/2/22 to 8/1/22.
President's salary P15,000
Cost of broken window destroyed by barbarians 5,000
Plant superintendent covering supervision of new building 10,000
P30,000

 The fences are not part of the original blue print of the building. The useful life is estimated to be 10 years.

 Because of the rising land costs, the president was sure that the land was worth at least P75,000 more than
what it cost the company.

Compute for the following:

Question 1: Land

Question 2: New Building

Question 3: Land Improvements

Question 4: Amount to be charged to Income Statement in 2022

 PROBLEM 3

PICCOLLO made the following individual cash purchases:

Land and Building P 3,000,000
Machinery and office equipment 900,000
Delivery equipment 250,000

An appraisal was made which disclosed the following values:

Land P 500,000
Building 1,500,000
Machinery 400,000
Office Equipment 200,000
Delivery Equipment 175,000

Question: How much is the cost of the machinery purchased by PICCOLLO?

PROBLEM 4

FRIEZA Entity acquired the assets of NAMEK Company. The following values of the property are available:
BOOK VALUES FAIR VALUES
Land P 300,000 P 500,000
Building 1,800,000 2,500,000
Machinery 750,000 1,000,000

FRIEZA Company gave 30,000 ordinary shares of its P 100 par value in exchange. The shares had a quoted price of
P 200 per share on that date of purchase of the property.

Question: How much is the cost of the building?

PROBLEM 5

TRUNKS Company acquired a welding machine with an invoice price of P3,360,000 subject to a cash discount of 5% which
was not taken. TRUNKS incurred freight and insurance during shipment of P50,000 and testing and installation cost of
P200,000. TRUNKS also incurred cost of P20,000 in removing the old welding machine prior to the installation of the new
one. Welding supplies were acquired at a cost of P100,000. The VAT on the acquisition is P360,000.

Question: What is the cost of the welding machine?

PROBLEM 6

CELL Company acquired two items of machinery as follows:

 On December 30, 2021, CELL Company purchased a machine in exchange for a non-interest bearing note requiring three
payments of P1,000,000. The first payment was made on December 30, 2022, and the others are due annually on December
30. The prevailing rate of interest for this type of note at date of issuance was 12%. The present value of an ordinary annuity
of 1 at 12% is 1.69 for two periods and 2.40 for three periods. The new machine was damaged during its installation and the
repair cost amounted to P50,000.

 On January 1, 2021, CELL Company acquired used machinery by issuing the seller a three-year, noninterest-bearing note for
P4,000,000. In recent borrowing, CELL has paid a 12% interest for this type of note. The present value of 1 at 12% for 3
years is .71.

Question: What is the total cost of the machinery?

3
PROBLEM 7

BULMA Company commenced operations on July 1, 2021. During the following year, the company acquired a tract of land,
demolished the building on the land and built a new factory. Equipment was acquired for the factory and, in March 20, the
plant was ready to commence operation.

During this period, the following inflows and outflows occurred:

While searching for a suitable block of land, BULMA Company placed an option to buy
with three real estate agents at a cost of P1,000 each. One of these blocks of land was

later acquired.
Payment of option fees P 3,000
Receipt of loan from bank 4,000,000
Payment to settlement agent for title search, stamp duties and settlement fees 100,000
Payment of arrears in rates on building and land 50,000
Payment for land 1,000,000
Payment for demolition of current building on land 120,000
Proceeds from sale of material from old building 55,000
Payment to architect 230,000
Payment to council for approval of building construction 120,000
Payment for safety fence around construction site 34,000
Payment to construction contractor for factory building 2,400,000
Payment for external driveways, parking bays and safety lighting 540,000
Payment for safety inspection on building 30,000
Payment for equipment 640,000
Payment of freight and insurance costs on delivery of equipment 56,000
Payment of installation costs on equipment 120,000
Payment for safety equipment surrounding equipment 110,000
Payment for removal of safety fence 20,000
Payment for new fence surrounding the factory 80,000
Payment for advertisements in the local paper about the forthcoming factory and its
benefits to the local community 5,000
Payment for opening ceremony 60,000
Payments to adjust equipment to more efficient operating levels subsequent to initial
operation 33,000

Compute for the following:

Question 1: Land

Question 2: Land Improvements

Question 3: Building

Question 4: Equipment
PROBLEM 8

KRILLIN Company purchased land as a factory site for P2,400,000. The entity paid P240,000 to tear down a building on the
land. Salvage was sold for P20,000. Legal fee of 15,000 was paid for title investigation and making the purchase. Architect
fee was P125,000. Title insurance was P10,000, and liability insurance during construction was P25,000. Excavation
amounted to P40,000. The contractor was paid P8,800,000. A special assessment made by the city for. pavement was
P30,000. Interest incurred during construction was P300,000. The entity installed lighting and signage at a cost of P50,000.

Compute for the following:

Question 1: Land

Question 2: Building

PROBLEM 9

During 2021, YAMCHA Company made the following property, plant and equipment expenditures:
Land and building acquired from PAN Inc. P 9,000,000
Repairs made to the building 300,000
Special tax assessment 50,000
Remodeling of office space including
new partitions and walls 400,000

In exchange for the land and building acquired from PAN, YAMCHA issued 60,000 shares of its P100 par value ordinary
shares. On the date of purchase, the stock had a market value of P150 per share and the land and building had fair value of
P2,000,000 and P6,000,000 respectively. During the year, YAMCHA also received land from a shareholder to facilitate the
construction of a plant in the city. YAMCHA paid P100,000 for the land transfer and charged this amount to legal expenses.
The land is fairly valued at P1,500,000.

Question: What is the cost of the land and building acquired?

PROBLEM 10

POPO Company and TENSHIN Company are fuel oil distributors. To facilitate the delivery of oil to their customers, POPO and
TENSHIN exchanged ownership of 1,200 barrels of oil without physically moving the oil. POPO paid TENSHIN P300,000 to
compensate for a difference in the grade of oil. It is reliably determined that the exchange lacks commercial substance. On
the date of the exchange, cost and market value of the oil were as follows:
POPO TENSHIN
Cost P 1,000,00 P 1,400,000
Market Values P 1,200,000 P 1,500,000

Question 1: What amount should POPO Company record as cost of the oil inventory received in exchange?
Question 2: What amount should TENSHIN Company record as cost of the oil inventory received in exchange?

5
 UNIVERSITY OF SANTO TOMAS
UST - Alfredo M. Velayo College of Accountancy
España, Manila

ACC5117 – AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

QUIZZER 2
TOPIC: PROPERTY, PLANT AND EQUIPMENT

PROBLEM 1

On January 1, 2021, SAKURA Company purchased an equipment with a cost of P500,000. It is expected that this equipment
will be used for 5 years and have a residual value at that time of P50,000. It is also expected that this equipment can
produce 75,000 units of SAKURA’s products. In 2021 and 2022, this equipment produced 10,000 and 12,500 units
respectively.
1. What is the accumulated depreciation on this equipment under the straight-line method of depreciation as of
December 31, 2022?
2. What is the accumulated depreciation on this equipment under the SYD method of depreciation as of December 31,
2022?
3. What is the accumulated depreciation on this equipment under the double-declining method of depreciation as of
December 31, 2022?
4. What is the accumulated depreciation on this equipment under the production method of depreciation as of
December 31, 2022?

PROBLEM 2

You obtain the following information pertaining to NARUTO Co.’s property, plant, and equipment for 2022 in
connection with your audit of the company’s financial statements.

Audited balances at December 31, 2021:

Debit Credit
Land P 1,875,000
Buildings 15,000,000
Accumulated depreciation – buildings P 3,288,750
Machinery and equipment 11,250,000
Accumulated depreciation – Machinery and Equipment 3,125,000
Delivery Equipment 1,437,500
Accumulated Depreciation – Delivery Equipment 1,057,500

Depreciation Data:
Depreciation Method Useful Life
Buildings 150% declining – balance 25 years
Machinery and Equipment Straight-line 10 years
Delivery Equipment Sum-of-the-years’-digits 4 years
Leasehold Improvements Straight-line -

Transaction during 2022 and other information are as follows:

a. On January 2, 2022, NARUTO purchased a new truck for P250,000 cash and traded-in a 2-year-old truck with a
cost of P225,000 and a book value of P67,500. The new truck has a cash price of P300,000; the market value of
the old truck is not known.

1
 b. On April 1, 2022, a machine purchased for P287,500 on April 1, 2017 was destroyed by fire. NARUTO recovered
P193,750 from its insurance company.

c. On May 1, 2022, cost of P2,100,000 were incurred to improve leased office premises. The leasehold
improvements have a useful life of 8 years. The related lease terminates on December 31, 2028.

d. On July 1, 2022, machinery and equipment were purchased at a total invoice cost of P3,500,000; additional cost
of P62,500 for freight and P312,500 for installation were incurred.

e. NARUTO determined that the delivery equipment comprising the P1,437,500 balance at January 1, 2022, would
have been depreciated at a total amount of P225,000 for the year ended December 31, 2022.

The salvage values of the depreciable assets are immaterial. The policy of the NARUTO Co. is to compute
depreciation to the nearest month.

Based on the above and the result of your audit, answer the following:

1. How much is the Accumulated depreciation – Buildings as of December 31, 2022?

2. How much is the Accumulated depreciation – Machinery and Equipment as of December 31, 2022?

3. How much is the Accumulated depreciation – Delivery Equipment as of December 31, 2022?

4. How much is the Accumulated depreciation – Leasehold Improvements as of December 31, 2022?

5. How much is the net gain (loss) from disposal of assets for the year ended December 31, 2022?

PROBLEM 3

SAI Company provided the following information with respect to a building

The building was acquired January 1,2020 at a cost of P3,900,000 with an estimated useful life of 40 years and residual
value of P100,000. Yearly depreciation was computed on the straight-line method.

 The building was renovated on January 1, 2022 at a cost of P380,000. This was considered as improvement.
Residual value did not change.

 On January 1,2025, the management decided to change the total life of the building to 30 years.

Question: What is the depreciation of the building for 2025?

PROBLEM 4

On December 31, SUNA Company reported the following information:

Equipment P 3,125,000
Accumulated Depreciation 1,093,750

The equipment was measured using the cost model and depreciated on a straight-line basis over a 10-year period.
On the same date, the management decided to change the basis of measuring the equipment from the cost model to the
revaluation model.

The equipment had a fair value of P 2,843,750 with remaining useful life of 5 years on December 31, 2021.
1. What amount should be reported as revaluation surplus on December 31, 2021?

2. What is the depreciation of the equipment for 2022?

3. What amount should be reported as revaluation surplus on December 31, 2022?

PROBLEM 5

The following account balances relating to property, plant and equipment of RIN Company appear on the
books on December 31, 2021:
LAND P 3,000,000
BUILDING 30,000,000
ACCUMULATED DEPRECIATION 12,000,000

PPE have been carried at cost since their acquisition. The land was acquired 15 years ago while the building’s construction
was completed on January 1, 2012. The straight-line method for depreciation is used and the building is depreciated over its
25-year useful life with no residual value. On January 1, 2022, the company revalued property, plant, and equipment. On
the same date, contracted professional appraisers submitted the following information regarding the replacement cost of
the land and the building:
LAND 4,500,000
BUILDING 40,000,000

1. What is the revaluation surplus on January 1, 2022?

2. What is the revaluation surplus on December 31, 2022?

3. What is the depreciation on the building for the year ended December 31, 2022?

PROBLEM 6

Cotton Company acquired a building on January 1, 2017 at a cost of P10,000,000. The building has an estimated life of 10
years and residual value of P2,000,000. The building was revalued on January 1, 2021 and the
revaluation revealed replacement cost of P15,000,000, residual value of P2,500,000 and revised life of 12
years. The entity’s tax rate is 30%

1. What is the revaluation surplus on January 1, 2021?

2. What is the revaluation surplus on December 31, 2021?

3. What is the depreciation on the building for the year ended December 31, 2021?
3
PROBLEM 7

On January 1, 2020, LEE INC purchased a machinery for P 1,250,000. The machinery was estimated to have a useful life of 8
years from the date of acquisition and a residual value of P 125,000. Company’s depreciation policy is straight-line method.

On December 31, 2022, an impairment assessment was conducted and they were able to determine the following
information:
Undiscounted net cash inflows P 150,000 per year
Tax rate 30%
Fair value of machinery P 700,000
Estimated cost to sell 50,000
Discount rate 8%

No change in the initial estimates of useful life and residual value

Use present value factors up to 4 decimal places.

Calculate the following:

1. Carrying value of the machinery on December 31, 2022 (prior to impairment assessment)

2. Recoverable amount of the machinery on December 31, 2022

3. Impairment loss to be reported for year 2022

4. Depreciation expense to be reported for year 2023

PROBLEM 8
On January 1, 2020, SASUKE acquired a building for a total cost of P 2,500,000 with residual value of P 250,000 and useful
life of 20 years. The company uses revaluation model to account for the building and will be depreciated on a straight-line
basis. On December 31, 2021, fair value of the building was determined to be P 2,400,000

On December 31, 2022, SASUKE tested the building for possible impairment. Fair value less cost to sell was was
P 2,200,000 while its pre-tax discounted cash flows amounted to P 2,000,000.

On December 31, 2025, SASUKE tested again the building for possible impairment. It was determined that the recoverable
value of the building amounted to P 1,750,000. Value in use of the property was P1,500,000.

Calculate the following:

1. Impairment loss to be reported in year 2022
2. Impairment loss to be reported in year 2025
PROBLEM 9
On December 31, 2021, KURENAI Company’s only cash generating unit was tested for impairment. Information to
the assets of the cash generating unit is presented below:
BUILDING P 1,250,000
EQUIPMENT 750,000
MACHINERY 500,000
GOODWILL 250,000

It was determined that the cash generating unit has a recoverable amount of P 1,750,000 and the building’s fair value is P
1,000,000.

Calculate the following:

1. What is the impairment loss to be recognized on the building?

2. What is the impairment loss to be recognized on the equipment?

3. What is the impairment loss to be recognized on the machinery?

PROBLEM 10

On December 31, 2021, CHOJI subjected to impairment test a piece of equipment. Data pertinent to the equipment as of
December 31, 2021 follow:

Original cost P 2,400,000

Adjusted Accumulated Depreciation 600,000
Selling price 1,400,000
Estimated cost to make the sale 200,000
Value in use 1,100,000
Remaining useful life 6 years
Method of depreciation Straight-line

On December 31, 2023, the asset is found to have a recoverable amount of P1,300,000.

1. How much loss on impairment is recognized in 2021?

2. How much depreciation expense is recognized in 2022?

3. How much gain on recovery is recognized in 2023?

4. How much is the depreciation expense recognized in 2024 under the cost model?

5. How much is the depreciation expense recognized in 2024 under the revaluation model?

5
 UNIVERSITY OF SANTO TOMAS
UST - Alfredo M. Velayo College of Accountancy
España, Manila

ACC5117 – AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

QUIZZER
TOPIC: BORROWING COSTS

PROBLEM 1
ELOY Company had the following borrowings during 2022. The borrowings were made for general purposes but the
proceeds were used in part to finance the construction of a new building:

Principal Interest

12% bank loan 10,000,000 1,200,000

15% long-term loan 20,000,000 3,000,000

The construction began on January 1, 2022 and was completed on December 31, 2022. Expenditures on the building were
made as follows:
January 1 5,000,000

June 30 8,000,000

December 31 2,000,000

Question: What is the capitalizable borrowing cost?

PROBLEM 2
TOX Company had the following loans outstanding during the years 2022 and 2023:

Specific construction loan 2,000,000 10%

General loan 15,000,000 12%

The company began the self-construction of a building on January 1, 2022 and was completed on December 31, 2023. The
following expenditures were made during 2022 and 2023:
January 1, 2022 P 2,000,000

July 1, 2022 4,000,000

November 1, 2022 3,000,000

July 1, 2023 1,000,000

Total P 10,000,000

Question: What is the cost of the building on December 31, 2023?

1
PROBLEM 3
ALI Company constructs its own buildings and applies the allowed treatment for borrowing costs (IAS 23), i.e., the interest
on funds borrowed for construction is capitalized as part of the cost of the building. In 2022, a total of P1,228,500 interest
was capitalized.

The following is as summary of construction expenditures in 2023:

Accumulated construction cost in 2022, including the

capitalized interests P 18,228,500

March 1, 2023 expenditures 7,000,000

September 1, 2023 expenditures 4,000,000

December 1, 2023 expenditures 5,000,000

ALI Company has the following outstanding loans at December 31, 2023:

5-year, 12% note related directly to new building borrowed

in 2022 10,000,000

General borrowings:
10-year, 10% note issued prior to construction
of new building 5,000,000
5-year, 8% note issued prior to construction of new
building 10,000,000

Questions:
1. How much is the total capitalized borrowing cost under IAS 23 for 2023?

2. How much interest expense should be reported in the 2023 income statement?

3. What is the total cost of the new building as of December 31, 2023?

PROBLEM 4
LOLO SIR Company is constructing a building. Construction began on January 1 and was completed on December 31.
Expenditures were P2,400,000 on March 1, P1,980,000 on June 1, and P3,000,000 on December 31. LOLO SIR Company
borrowed P1,200,000 on January 1 on a 5-year, 12% note to help finance construction of the building. In addition, the
company had outstanding all year a 10%, 3-year, P2,400,000 note payable and an 11%, 4-year, P4,500,000 note payable.

Questions:
1. What are the weighted average accumulated expenditures?

2. What is the weighted-average interest rate used for interest capitalization purposes?

3. What is the avoidable interest for LOLO SIR Company?

4. What is the actual interest for LOLO SIR Company?

5. What amount of interest should be charged to expense?

PROBLEM 5
KAP INCORPORATED had the following outstanding loans during 2022 and 2023:
Specific construction loan – 10% 3,000,000
General loan – 12% 25,000,000

KAP INCORPORATED began the self-construction of new building on January 1, 2022 and building was completed on
September 30, 2023. The following expenditures were made in 2022 & 2023:

January 1, 2022 4,000,000

April 1, 2022 5,000,000
December 1, 2022 3,000,000
July 1, 2023 6,000,000

Question: What is the cost of the new building on September 30, 2023?

3
 UNIVERSITY OF SANTO TOMAS
UST - Alfredo M. Velayo College of Accountancy
España, Manila

ACC5117 – AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

LECTURE NOTES
TOPIC: BORROWING COSTS (IAS 23) AND GOVERNMENT GRANTS (IAS 20)

IAS 23 BORROWING COSTS

Interest and other costs that an entity incurs in connection with borrowing of funds

 Interest expense calculated using the effective interest method

 Finance charges with respect to finance lease

 Exchange difference arising from foreign currency borrowing to the extent that it is regarded as an adjustment to interest cost

Qualifying asset – asset that necessarily takes a substantial period of time to get ready for the intended use or sale

EXCLUSION FROM CAPITALISATION

1. Assets measured at fair value, such as biological assets

2. Inventory manufactured or produced in large quantity on a repetitive basis (even if takes a substantial period of time to get it
ready for sale)

3. Assets that are ready for their intended use or sale when acquired

TREATMENT OF BORROWING COSTS

- CAPITALISABLE - if the borrowing is directly attributable to the acquisition, construction, or production of a qualifying
asset.
- EXPENSE – if not related

MEASUREMENT:

1. Assets financed by specific borrowing

Capitalizable Borrowing Costs =

ACTUAL BORROWING COSTS less INVESTMENT INCOME, if there’s any

2. Assets financed by general borrowing

Capitalizable Borrowing Costs =

LOWER between ACTUAL INTEREST INCURRED and CALCULATED AVERAGE BORROWING COSTS

Calculated average borrowing costs:

Average carrying amount of the asset during the period X capitalisation/average interest rate

wherein:
capitalisation rate = total annual borrowing cost divided by total general borrowings outstanding during the period

1
 NOTE: any investment income should not be deducted from capitalizable borrowing cost

COMMENCEMENT OF CAPITALISATION

When these three conditions are present:

 When the entity incurs expenditures for the asset

 When the entity incurs borrowing costs
 When the entity undertakes activities that are necessary to prepare the asset for the intended use or sale

CESSATION OF CAPITALISATION

When substantially all of the activities necessary to prepare the qualifying asset for the intended use or sale are COMPLETE

DISCLOSURES

1. amount of borrowing cost capitalised during the period

2. capitalisation rate used

************

IAS 20 GOVERNMENT GRANT

GOVERNMENT GRANT
Assistance by 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.

RECOGNITION AND MEASUREMENT

Government, including non-monetary grant at fair value, shall be recognised when there is reasonable assurance that:

 The entity will comply with the conditions attaching to the grant

 The grant will be received

CLASSIFICATION AND PRESENTATION

1. Government grant related to ASSET

- primary condition is that an entity qualifying for the grant shall purchase, construct or acquire a long-term asset

Presentation: EITHER by setting the grant as deferred income OR by deducting the grant from the cost of the asset

2. Government grant related to INCOME

- other than grant related to asset

Presentation: in INCOME STATEMENT either as “other Income” OR deduction from the related expense

Government grant shall be recognised as INCOME on a systematic basis over the periods in which an entity recognises as expenses the
related costs for which the grant is intended to compensate:

 Grant in recognition of specific expenses shall be recognised income over the period of the related expense

 Grant related to depreciable asset shall be recognised as income over the periods and in proportion to the depreciation of the
related asset

 Grant related to non-depreciable asset requiring fulfilment of certain conditions shall be recognised as income over the periods
which bear the cost of meeting the conditions
  A government grant that becomes receivable as compensation for expenses or losses already incurred or for the purpose of
giving immediate financial support to the entity with no further related costs shall be recognised as income of the period in
which it becomes receivable

REPAYMENT OF GOVERNMENT GRANT

If a grant becomes repayable (due to non-compliance), should be treated as a CHANGE IN ACCOUNTING ESTIMATE.

1. Grant related to INCOME - the repayment should be applied first against any related unamortised deferred credit, and any
excess should be dealt with as an expense

2. GRANT related to an ASSET - the repayment should be treated as increasing the carrying amount of the asset or reducing the
deferred income balance.

The cumulative depreciation which would have been charged had the grant not been received should be charged as an expense

GRANT OF INTEREST-FREE LOAN

 A forgivable loan from government is treated as government grant when there is reasonable assurance that the entity will meet
the terms for forgiveness of the loan

 Government loan with a NIL or below -market rate of interest is also a government grant. The benefit is measured as the
difference between the face amount and the present value of the loan

DISCLOSURE

The following must be disclosed:

1. accounting policy adopted for grants, including method of balance sheet presentation

2. nature and extent of grants recognised in the financial statements

3. unfulfilled conditions and contingencies attaching to recognised grants

It is not required to disclose the name of the government agency that gave the grant along with the date of sanction of the grant by such
government agency and the date when the cash was received in case of monetary grant.

GOVERNMENT ASSISTANCE

Government grants do not include government assistance whose value cannot be reasonably measured, such as technical or marketing
advice. Disclosure of the benefits received is required.

*************************

PRACTICE QUIZZER

1. This is defined as "assistance by government in the form of transfer of resources to an entity

in return for past or future compliance with certain conditions relating to the operating
activities of the entity"

a. Government aid
b. Government assistance
c. Government donation
d. Government grant

3
2. Government grant shall be recognized when there is reasonable assurance that

Statement 1: The entity will comply with the conditions attaching to the grant.

Statement 2: The grant will be received

a. I only
b. II only
c. Both I and II
d. Either I or II

3. Which of the following statements is true relating to a government grant?

Statement 1: Receipt of a grant does not of itself provide conclusive evidence that the conditions
attaching to the grant have been or will be fulfilled.

Statement 2: Government grant shall not be recognized on a cash basis as this is not consistent with GAAP.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

4. A forgivable loan from a government or the benefit of a government loan at NIL or below
market interest rate is accounted for as

a. Government grant
b. Government assistance
c. Both a and b
d. Neither I nor II

5. It is a government grant whose primary condition is that an entity qualifying for it should
purchase, construct or otherwise acquire long-term asset

a. Government appropriation
b. Government gift
c. Subsidy related to asset
d. Subsidy related to income

6. In the case of grant related to an asset, which of following accounting treatment is prescribed?
a. Take it to the income statement and disclose it as an extraordinary gain.
b. Record the grant at a nominal value in the first year and write it off in the subsequent year.
c. Record the grant at fair value in the first year and take it to income in the subsequent year
d. Either set up the grant as deferred income or deduct it in arriving at the carrying amount
of the asset.

7. Government grant in recognition of specific costs is recognized as income

a. Immediately
b. Over the same period as the relevant expense.
c. Over a maximum of 5 years using straight line
d. Over a maximum of 5 years using sum of digits
8. Which of the following statements is true regarding the accounting for government grant related to an asset?

a. Depreciation expense will be higher if the grant is recorded as an adjustment to the asset.
b. Depreciation expense will be higher and net income lower if the grant is recorded as
deferred income.
c. Depreciation expense will be higher and net income lower if the grant is accounted for
as an adjustment to the asset.
d. Depreciation expense will be higher if the grant is recorded as deferred income but net
income will be the same under the deferred income approach and deduction from asset
approach.

9. Government grant related to depreciable asset is usually recognized as income

a. Immediately.
b. Over the useful life of the asset using straight line.
c. Over the useful life of the asset using sum of years' digits.
d. Over the useful life of the asset and in proportion to the depreciation of the asset.

10. A government grant that becomes repayable shall be accounted for as

a. Change in accounting policy
b. Change in accounting estimate
c. Both change in accounting estimate and change in accounting policy
d. Neither change in accounting estimate nor change in accounting policy

11. Repayment of grant related to an asset shall be recorded by

a. Increasing the carrying amount of the asset if the deduction approach is used.
b. Reducing the deferred income balance to zero if the deferred income approach is used.
c. Recognizing as expense the cumulative additional depreciation that would have been recorded to date in the absence of
the grant if the deduction approach is used.
d. All of these

12. Repayment of grant related to income shall be

a. Expensed immediately
b. Charged to retained earnings
c. Recognized as component of other comprehensive income
d. Applied first against the deferred income balance and any excess shall be recognized
immediately as an expense

13. Which of following statements in relation to a repayment of grant related to an asset is true?
Statement 1. The repayment of grant related to an asset shall be recorded by increasing the carrying amount of the asset.

Statement 2: The cumulative additional depreciation that would have been recognized to date in the absence of the grant
shall be recognized immediately as an expense.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

14. Government assistance includes all of the following, except

a. Free technical advice
b. Provision of guarantee
c. Improved irrigation water system for the benefit of an entire local community
d. Government procurement policy that is responsible for a portion of the entity's sales\

15. Which disclosure is not required in relation to government grant?

a. Unfulfilled conditions and other contingencies attaching to government assistance.
b. The accounting policy adopted for government grant including method of presentation adopted in the financial
statements.
5
 c. The name of the government agency that gave the grant along with the date of sanction of the grant by the government
agency and the date when cash was received in case of monetary grant.
d. The nature and extent of government grant recognized in the financial statements and an indication of other form of
government assistance from which the entity has directly benefited.

16. Under PAS 23, Borrowing Costs specifically include all of the following, except
a. Interest and other costs that an entity incurs not in connection with borrowing of funds
b. Interest Expense calculated using the effective interest method
c. Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to
the interest costs
d. Finance charges in respect of finance leases

17. Which of the following is a qualifying asset?

a. patent
b. trees
c. wine and beverages that are produced
on a repetitive basis
d. office supplies

18. Which of the following can’t tag as a qualifying asset?

a. manufacturing plant
b. investment in debentures
c. power generation facilities
d. investment properties

19. Which of the following may not be considered as

“qualifying asset”?
a. A power generation plant that normally takes two years to construct
b. An expensive private jet that can be purchased from a local vendor
c. A tool bridge that usually takes more than a year to build
d. A ship that normally takes one to two years to complete

20. All of the following statements are correct, except

a. Capitalization of borrowing costs is required if the borrowing is directly attributable to the acquisition, construction or
production of a qualifying asset. Otherwise, it is expensed.
b. Assets measured at fair value such as biological assets and investments in securities can be classified as qualifying assets
c. Assets that are ready for their intended use or sale when acquired is not a qualifying asset
d. None. All of the items are correct.

21. If assets are financed by specific borrowing, the amount of capitalizable borrowing cost is equal to
a. actual borrowing cost
b. whichever is lower between actual borrowing cost and average carrying amount of asset multiplied by capitalization
rate/average interest rate
c. actual borrowing cost less investment income
d. whichever is lower between actual borrowing cost and average carrying amount of asset multiplied by capitalization
rate/average interest rate , less any investment income

22. If assets are financed by general borrowing, the amount of capitalizable borrowing cost is equal to
a. actual borrowing cost
b. whichever is lower between actual borrowing cost and average carrying amount of asset multiplied by capitalization
rate/average interest rate
c. actual borrowing cost less investment income
d. whichever is lower between actual borrowing cost and average carrying amount of asset multiplied by capitalization
rate/average interest rate, less any investment income
23. A company constructed machinery for its own use. A bank loan specifically financed this property both during and after the
construction. How much of the interests incurred should be reported as interest expense?
a. Interests incurred before completion
b. all interests incurred
c. Interests incurred after completion
d. Zero

24. Which of the following is a disclosure requirement in relation to borrowing costs?

a. Borrowing cost capitalized during the period.
b. Segregation of qualifying asset from other assets.
c. Capitalization rate used to determine borrowing cost to be capitalized.
d. Borrowing cost capitalized during the period and capitalization rate used to determine
borrowing cost to be capitalized.

25. Which of the following statements about the capitalization of borrowing cost as part of the
cost of a qualifying asset is true?
a. Capitalization always continues until the asset is brought into use.
b. Capitalization always commences as soon as expenditure of the asset is incurred.
c. Capitalization always commences as soon as interest on relevant borrowings is being
incurred.
d. If funds come from general borrowings, the amount to be capitalized is based on the
weighted average amount of expenditures.

7
 UNIVERSITY OF SANTO TOMAS
UST - Alfredo M. Velayo College of Accountancy
España, Manila

ACC5117 – AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

LECTURE NOTES
TOPIC: WASTING ASSETS

IFRS 6 EXPLORATION FOR AND EVALUATION OF MINERAL RESOURCES

- Search for mineral resources, including minerals, oil, natural gas and similar non-regenerative resources after the entity has obtained
legal rights to explore in a specific area, as well as the determination of the technical feasibility and commercial viability of extracting
the mineral resource

Exploration and evaluation expenditures:

- Expenditures incurred in connection with the exploration and evaluation of mineral resources before the technical feasibility and
commercial viability of extracting a mineral resource is demonstrable

It does not include the following:

 Expenditures incurred before an entity has obtained the legal right to explore a specific area
 Expenditures incurred after the technical feasibility and commercial viability of extracting a mineral resource are demonstrable

Examples of Exploration and evaluation expenditures:

 Acquisition of rights to explore

 Topographical, geological, geochemical and geophysical studies
 Exploratory drilling
 Trenching
 Sampling
 Activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral resource
 General and administrative costs directly attributable to exploration and evaluation activities

Accounting policies for exploration and evaluation

IFRS 6 permits an entity to develop an accounting policy for recognition of exploration and evaluation expenditures as assets.

However, the standard does not provide clearcut guidance for the recognition of exploration and evaluation asset

Hence, an entity must develop its own accounting policy for the recognition of such asset.

Thus, an entity adopting IFRS 6 may continue to use the accounting policies applied immediately before adopting the IFRS. This includes
continuing to use recognition and measurement practices that are part of those accounting policies.

Measurement and classification

Initially – at COST

Subsequently – cost model or revaluation model

1
WASTING ASSETS –
- Natural resources like coal, oil, precious metals and timber
- Physically consumed and irreplaceable

a. Acquisition cost – price paid to obtain the property containing the natural resources

b. Exploration Cost – expenditures incurred before the technical feasibility and commercial viability of extracting a mineral
resource are demonstrated

SUCCESSFUL EFFORT METHOD – capitalise only if successful, any ‘dry hole’ or unsuccessful discovery is expensed.

FULL COST METHOD – all exploration costs are capitalisable

c. Development Cost – costs incurred to exploit or extract the natural resource that has been located through successful
exploration

TANGIBLE DEVELOPMENT COSTS – classified and depreciated in accordance with IAS 16.
Example: transportation equipment, heavy equipment etc

INTANGIBLE DEVELOPMENT COSTS – capitalised as cost of natural resource. Example: drilling, construction of wells etc

d. Estimated Restoration Cost – cost incurred to bring the property to its original condition. Must be an existing present
obligation and should be discounted.

Depletion

- Systematic allocation of the depletable amount of a wasting asset over the period the natural resource us extracted or produced
- Recognised as the cost of the material used in production and becomes the finished product
- Normally calculated using the output method/production method

Other Items

 Depreciation of mining properties should be whichever is shorter between useful life of the mining property and useful life of
the wasting assets
If useful life of mining property is shorter – use straight line method
If useful life of wasting asset is shorter – use output method
Exception: If mining property is movable and can be used in future extractive project, use service life of the mining property and
to be depreciated using straight-line method
 Maximum Dividend (R-A-C-U)
Retained Earnings XXX
Add: Accumulated Depletion XXX
Less: Capital Liquidated in prior years (XXX)
Less: Unrealised Depletion in Ending Inv (XXX)
Maximum Dividend XXX

*********************
PRACTICE QUIZZER

1. Depletion expense
a. Is usually part of cost of goods sold.
b. Excludes restoration cost from the depletable amount.
c. Includes tangible equipment cost in the depletable amount.
d. Excludes intangible development cost from the depletable amount.

2. The most common method of computing depletion is

a. Declining Balance method
b. Percentage of completion method
c. Output method
d. Straight-line method

3. Which of the following is not part of depletable amount?

a. Exploration cost
b. Acquisition cost of the mineral resource deposit
c. Intangible development cost such as drilling, tunnel and shaft
d. Tangible development cost associated with equipment used to extract the mineral resource

4. Under PFRS 6, Exploration and evaluation of mineral resources are incurred

a. When searching for an area that may warrant detailed exploration, even though the entity has not yet obtained the
legal rights to explore a specific area.
b. When the legal rights to explore a specific area have been obtained, but the technical feasibility and commercial
viability of extracting mineral resources are not yet demonstrable
c. When a specific area is being developed and preparations for commercial extraction are being made.
d. In extracting mineral resource and processing the resource to make it marketable or transportable

5. What is the treatment for exploration costs under the full cost method?
a. capitalized only when there is a discovery of commercially viable natural resource
b. whether successful or not, all exploration cost shall be capitalized
c. all shall be part of the expenses in the profit or loss
d. if unsuccessful, it will be part of the expenses incurred

6. Which of the following most accurately describes the generally accepted accounting principle
regarding the accounting for the costs of drilling dry holes in the oil and gas industry?
a. Only the successful effort method may be used.
b. Only the full cost method may be used.
c. Both the successful effort and full cost methods may be used.
d. Neither the successful effort method nor the full cost method may be used

7. When is an entity required to recognize exploration and evaluation expenditure as an asset?

a. Such expenditure is always expensed as incurred.
b. When such expenditure is recoverable in future periods
c. When required by the entity's accounting policy for recognizing exploration and
evaluation asset.
d. When the technical feasibility and commercial, viability of extracting the associated mineral resource have been
demonstrated

8. Which type of expenditure is included in the term "exploration and evaluation" of mineral resources?
a. The extraction and processing of mineral resource for transport to market.
b. The commercial review of possible areas for mineral extraction before bidding for the legal right to explore a specific
area
c. The expenditure incurred after the technical feasibility and commercial viability of extracting a mineral resource are
demonstrable
d. None of these should be included in exploration and evaluation expenditures

3
9. Which of the following expenditures would never qualify as an exploration and evaluation asset?
a. Expenditure for exploratory drilling
b. Expenditure for acquisition of rights to explore
c. Expenditures related to the development of mineral resource
d. Expenditures for activities in relation to evaluating the technical feasibility and
commercial viability of extracting a mineral resource

10. All of the following statements are correct, except

a. Depreciation of equipment used in mining operations is based on the useful life of the equipment or the useful life of
the wasting asset, whichever is shorter
b. If the useful life of the equipment is shorter, the straight line method will be used
c. If the useful life of the wasting asset s shorter, the output method of depreciation will be used
d. If the mining equipment is movable and can be used in future extractive project, the depreciation is based on the
output method.
 UNIVERSITY OF SANTO TOMAS
UST - Alfredo M. Velayo College of Accountancy
España, Manila

ACC5117 – AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

QUIZZER
TOPIC: WASTING ASSETS

PROBLEM 1
DADDY ICE Company acquired property in 2023, which contains mineral deposit. The acquisition cost of the property was
P20,000,000. Geological estimates indicate that 5,000,000 tons of minerals may be extracted. It is further estimated that
the property can be sold for P5,000,000 following mineral extraction. At a discounted value of P2,000,000, DADDY ICE is
legally required to restore the land to a condition appropriate for resale. After acquisition, the following costs were
incurred:

Exploration cost 13,000,000

Development cost related to drilling of wells 10,000,000
Development cost related to production equipment 15,000,000

The company extracted 600,000 tons of the mineral in 2023 and sold 450,000 tons

Question:

1. What is the total depletion for 2023?

2. What is the depletion expense for 2023?

PROBLEM 2
On January 1, 2022, AMANDA Company purchased land with valuable natural ore deposits for P10,000,000. The residual
value of the land was P2,000,000. At the time of purchase, a geological survey estimated a recoverable output of 4,000,000
tons. Early in 2022, roads were constructed on the land to aid in the extraction and transportation of the mined ore at a
cost of P1,600,000. In 2022, 500,000 tons were mined. A new survey at the end of 2023 estimated 4,200,000 tons of ore
available for mining., In 2023, 800,000 tons were mined and sold.

1. What amount should be recognized as depletion for 2022?

2. What amount should be recognized as depletion for 2023?

PROBLEM 3
On July 1, 2023, GEORGE Company, a calendar year corporation, purchased the rights to a mine. The total purchase price
was P16,400,000, of which P2,000,000 was allocable to the land. Estimated reserves were 1,800,000 tons. The entity
expects to extract and sell 25,000 tons per month. The entity purchased new equipment on July 1, 2023. The equipment
cost P7,500,000 and had a useful life of 8 years. However, after all the resource is removed, the equipment will be of no use
and will be sold for P300,000.

1. What amount should be recorded as depletion for 2023?

2. What amount should be recorded as depreciation of the mining equipment for 2023?

1
PROBLEM 4
In connection with your audit of the HUGO Mining Corporation for the year ended December 31, 2023, you noted that the
company purchased for P5,200,000 mining property estimated to contain 4,000,000 tons of ore. The residual value of the
property is P400,000.

Building used in mine operations costs P400,000 and have estimated life of fifteen years with no residual value. Mine
machinery costs P800,000 with an estimated residual value P160,000 after its physical life of 4 years.

Following is the summary of the company’s operations for first year of operations.

Tons mined 800,000 tons

Tons sold 640,000 tons
Unit selling price per ton P4.40
Direct labor 640,000
Miscellaneous mining overhead 128,000
Operating expenses (excluding depreciation) 576,000

Inventories are valued on a first-in, first-out basis. Depreciation on the building is to be allocated as follows: 20% to
operating expenses, 80% to production. Depreciation on machinery is chargeable to production.

QUESTIONS: Based on the above and the result of your audit, answer the following: (Disregard tax implications)

1. How much is the depletion for 2023?

2. Total inventoriable depreciation for 2023?
3. How much is the Inventory as of December 31, 2023?
4. How much is the cost of sales for the year ended December 31, 2023?
5. How much is the maximum amount that may be declared as dividends at the end of the company’s first year of
operations?

PROBLEM 5
In 2016, RED Corporation acquired a mine. Because the mine is located deep in the mountains, RED was able to acquire the
mine for the low price of P50,000. In 2017, Washington constructed a road to the silver mine costing P5,000,000.
Improvements to the mine made in 2017 cost P750,000. Because of the improvements to the mine and the surrounding
land, it is estimated that the mine can be sold for P600,000 when the mining activities are complete.
During 2018, five buildings were constructed near the mine site to house the mine workers and their families. The total cost
of the five buildings was P1,500,000. Estimated residual value is P250,000. In 2016, geologists estimated 4 million tons of
ore could be removed from the mine for refining. During 2019, the first year of operations, only 5,000 tons of ore were
removed from the mine. However, in 2020, workers mined 1 million tons of ore. During that same year, geologists
discovered that the mine contained 3 million tons of ore in addition to the original 4 million tons. Improvements of
P275,000 were made to the mine early in 2020 to facilitate the removal of the additional ore. Early in 2020, an additional
building was constructed at a cost of P225,000 to house the additional workers needed to excavate the added ore. This
building is not expected to have any residual value.
In 2021, 2.5 million tons of ore were mined and costs of P1,100,000 were incurred at the beginning of the year for
improvements to the mine.
Questions (Round off depletion and depredation rates to two decimal places)
1. Depletion expense for 2020
2. Depreciation expense for 2020
3. Depletion expense for 2021
4. Depreciation expense for 2021
PROBLEM 6
On January 1, 2021, LOLA HEART Company paid P5,400,000 for property containing natural resource of 2,000,000 tons of
ore. The present value of the estimated cost of restoring the land after the resource is extracted is P450,000 and the land
will have a value of P650,000 after it is restored for suitable use.

Tunnels, bunk houses and other fixed installations are constructed at a cost of P8,000,000 and such expenditures are
charged to mine improvements.

Operations began on January 1,2022 and resources removed totaled 600,000 tons. During 2023, a discovery was made
indicating that available resource after 2023 will total 1,875,000 tons.

At the beginning of 2023, additional bunk houses were constructed in the amount of P770,000. In 2023, only 400,000 tons
were mined because of a strike.

Questions
1. Depletion expense for 2022
2. Depreciation expense for 2022
3. Depletion expense for 2023
4. Depreciation expense for 2023

PROBLEM 7
HELENA Co. has acquired a track of mineral land for P50,000,000. HELENA estimates that the acquired property will yield
150,000 tons of ore with sufficient mineral content to make mining and processing profitable. It further estimates that
7,500 tons of ore will be mined the first and last year and 15,000 tons every year in between. (Assume 11 years of mining
operations.) The land will have a residual value of P1,550,000. HELENA builds necessary structures and sheds on the site at a
total cost of P12,000,000. The company estimates that these structures can be used for 15 years but, because they must be
dismantled if they are to be moved, they have no residual value. HELENA does not intend to use the building elsewhere.
HELENA machinery installed at the mine was purchased secondhand at a total cost of P3,600,000. The machinery cost the
former owner P9,000,000 and was 50% depreciated when purchased. HELENA estimates that about half of this machinery
will still be useful when the present mineral resources have been exhausted but that dismantling and removal costs will just
about offset its value at that time. The company does not intend to use the machinery elsewhere. The remaining machinery
will last until about one-half the present estimated mineral ore has been removed and will then be worthless. Cost is to be
allocated equally between these two classes of machinery.

Questions:
1. What are the estimated depletion and depreciation charges for the 1 st year?
2. What are the estimated depletion and depreciation charges for the 5 th year
3. What are the estimated depletion and depreciation charges for the 6 th year?
4. What are the estimated depletion and depreciation charges for the 7 th year?
5. What are the estimated depletion and depreciation charges for the 11th year?

3
 UNIVERSITY OF SANTO TOMAS
UST - Alfredo M. Velayo College of Accountancy
España, Manila

ACC5117 – AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

LECTURE NOTES
TOPIC: INVESTMENT PROPERTY

Investment Property - is property (land or a building – or part of a building or both) held (by the owner or by the lessee
under a finance lease) to earn rentals or for capital appreciation or both, rather than for:

a. use in the production or supply of goods or services or for administrative purposes; or

b. sale in the ordinary course of business

Owner-occupied property is property held (by the owner or by the lessee under a finance lease) for use in the production or
supply of goods or services or for administrative purposes

Examples of investment property under PAS 40

a. Land held for long-term capital appreciation rather than for short-term sale in the ordinary course of business.
b. Land held for a currently undetermined future use. (If an entity has not determined that it will use the land as
owner-occupied property or for short-term sale in the ordinary course of business, the land is regarded as held for
capital appreciation.
c. A building owned by the entity (or held by the entity under a finance lease) and leased out under one or more
operating leases.
d. A building that is vacant but is held to be leased out under one or more operating leases.
e. Property that is being constructed or redeveloped for continued future use as investment property.

Examples of items that are not investment property under PAS 40

a. Property intended for sale in the ordinary course of business or in the process of construction or development for
such sale (see IAS 2 Inventories), for example, property acquired exclusively with a view to subsequent disposal in
the near future or for development and resale.
b. Property being constructed or developed on behalf of third parties
c. Owner-occupied property (see IAS 16), including (among other things) property held for future use as owner-
occupied property, property held for future development and subsequent use as owneroccupied property, property
occupied by employees (whether or not the employees pay rent at market rates) and owner-occupied property
awaiting disposal.
d. Property that is leased to another entity under a finance lease.

RECOGNITION
Investment property shall be recognized as an asset when, and only when:

a. it is probable that the future economic benefits that are associated with the investment property will flow to the
entity; and
b. the cost of the investment property can be measured reliably.

1
MEASUREMENT AT RECOGNITION

An investment property shall be measured initially at its cost, including transaction costs

Direct attributable costs include, for example, professional fees for legal services, property transfer taxes and other
transaction costs.

PARTLY INVESTMENT PROPERTY AND PARTLY OWNER-OCCUPIED

1. If separable and could be sold or leased out separately – NO ISSUE, treat the properties separately as investment
property and owner-occupied property
2. If inseparable – the property is investment property if only an insignificant portion is held for manufacturing or
administrative purposes –

Provision of ancillary services:

a. Insignificant – INVESTMENT PROPERTY
b. Significant – OWNER-OCCUPIED PROPERTY

COST OF SELF-CONSTRUCTED INVESTMENT PROPERTY

The cost of a self-constructed investment property is total cost incurred at each reporting date or at the date when the
construction or development is complete, whichever is earlier

INVESTMENT PROPERTY HELD UNDER FINANCE LEASE

The initial cost of a property interest held under a lease and classified as an investment property shall be as prescribed for a
finance lease under IFRS16 wherein a lessee is required to recognise a right-of-use asset and a lease liability.

ROU is initially recognised at cost which includes the following:

 The present value of the lease payment

 Lease payment made to the lessor at or before commencement date less any lease incentive
 Initial direct cost incurred by the lessee
 Estimate of cost of dismantling and restoring the underlying asset for which the lessee has a present obligation.

ACQUISITION THROUGH NON-MONETARY EXCHANGE

When an investment property is acquired through non-monetary exchange, the cost of such an investment is measured
using the following order of priority:

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)

MEASUREMENT AFTER RECOGNITION

An entity shall choose as its accounting policy either the fair value model or the cost model and shall apply that policy to all
of its investment property.

1. Fair Value model

2. Cost model – Cost less accumulated depreciation less accumulated impairment loss
PROPERTY LEASED TO AN AFFILIATE (INTRACOMPANY RENTALS)
 Separate/Individual entity – INVESMENT PROPERTY
 Group Entity – OWNER-OCCUPIED PROPERTY

DERECOGNITION
1. On disposal
2. When permanently withdrawn from use
3. When no future economic benefit is expected from the investment property

Net Selling Price xxx

Less: CV of the asset xxx
Gain (Loss) - P/L xxx

Note: Carrying value of the asset is equal to the depreciated amount of the investment property if under cost model while
equals to the fair value of the last reporting period if under the fair value model.

TRANSFERS FROM OR TO INVESTMENT PROPERTY

- should only be made when there is a change in use

1. Transfers between investment property at cost model, owner-occupied property and inventory shall be made at
carrying amount
2. Transfers between investment property at fair value model to owner-occupied property and inventory shall be
made at fair value model which becomes the deemed cost for subsequent accounting
3. If owner-occupied property is transferred to investment property at fair value model, the difference will be
accounted as revaluation surplus
4. If inventory is transferred to investment property at fair value model, the difference shall be accounted in profit or
loss
5. When an investment property under construction is completed and to be carried at fair value, the difference
between fair value and carrying amount shall be included in profit or loss

***********

PRACTICE QUIZZER

1. Which of the following best describes property (land or building or part of building or both) held to earn rentals or
for capital appreciation?
a. owner-occupied property
b. investment property
c. property, plant and equipment
d. leasehold property

2. Which of the following would not be reported as an investment property?

a. property that is being constructed or developed for future use as investment property
b. land held for a currently undetermined future use
c. building owned by the entity and leased out under an operating lease
d. property owned by the entity and leased out under finance lease

3
3. Which of the following best describes an owner-occupied property?
a. property held to earn rentals
b. property held for capital appreciation
c. property held for sale in the ordinary course of business
d. property held for use in the production of goods and for administrative purposes

4. Initially, investment property shall be measured at

a. cost
b. fair value
c. cost less accumulated depreciation less accumulated impairment losses
d. fair value less accumulated depreciation less accumulated impairment losses

5. Subsequently, investment property shall be measured using

a. fair value model
b. cost model
c. cost model or revaluation model
d. cost model or fair value model

6. Under the cost model, an investment property is carried on each balance sheet date at
a. fair value
b. cost less accumulated impairment losses
c. cost less accumulated depreciation
d. cost less accumulated depreciation and impairment losses

7. Which of the following additional disclosures must be made when an entity chooses the cost model as its
accounting policy for investment property?
a. fair value of the property
b. present value of the property
c. value in use of the property
d. net realizable value of the property

8. Under the fair value model, any unrealized gain or loss on investment property is
a. not recognized
b. recognized in equity as a revaluation surplus
c. recognized in income statement
d. recognized in equity as other comprehensive income

9. Transfers to and use from investment property shall be made only when there is
a. change in business model
b. change in use
c. change in management intention
d. all of the above

10. Transfer from investment property carried at fair value to owner-occupied property shall be accounted for at
a. historical cost
b. present value of expected future cash flows
c. carrying amount
 d. fair value, which becomes the deemed cost

11. Difference because of the transfer from owner-occupied property to investment property carried at fair value is
treated to be
a. part of profit or loss
b. other comprehensive income
c. revaluation surplus
d. retained earnings

12. If an entity owns and manages a hotel, services provided to guests are a significant component of the arrangement
as a whole. In such a case, the hotel is classified as
a. Investment property
b. Owner-occupied property
c. Neither investment property not owner-occupied property
d. Partly investment property and partly owner-occupied property

13. Which of the following statements is true if the property is partly investment and partly owner-occupied?
Statement I. If the investment and owner-occupied portions could be sold or leased out separately, the portions
shall be accounted for separately as investment property and owner-occupied property.

Statement II. If the investment and owner-occupied portions could not be sold or leased out separately, the
property is investment property if only an insignificant portion is held for manufacturing or administrative purposes.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

14. Which of the following statements is true concerning property leased to an affiliate?
Statement I. From the perspective of the individual entity that owns it, the property leased to an affiliate is
considered an owner-occupied property.

Statement II. From the perspective of the affiliates as a group and for purposes of consolidated financial
statements, the property is treated as investment property.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

15. Directly attributable expenditures related to investment property include

a. Start-up costs
b. Professional fees for legal services, property transfer taxes and other transaction cost.
c. Initial operating losses incurred before the investment property achieves the planned level of occupancy
d. Abnormal amounts of wasted material, labor and other resources incurred in constructing or developing
the property.
5
16. If an inventory is transferred to investment property that is to be carried at fair value, the remeasurement to fair
value is
a. Included in profit or loss
b. Included in retained earnings
c. Accounted for as a revaluation surplus
d. Included in other comprehensive income

17. When an investment property under construction is completed and to be carried at fair value, the difference
between the carrying amount and fair value shall be
a. Included in profit or loss
b. Included in retained earnings
c. Included in other comprehensive income
d. Accounted for as a revaluation of PPE

18. Transfer from investment property to property, plant and equipment is appropriate
a. When there is change of use.
b. Based on the entity's discretion
c. Only when the entity adopts the fair value model.
d. The entity can never transfer property into another classification once it is classified as investment.
 UNIVERSITY OF SANTO TOMAS
UST - Alfredo M. Velayo College of Accountancy
España, Manila

ACC5117 – AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

QUIZZER
TOPIC: INVESTMENT PROPERTY

PROBLEM 1
SEYCHELLES INC, your audit client, provides the following information as of December 31, 2023:

Property held for future development and subsequent use as owner-occupied property 2,200,000
Property occupied by employees 1,800,000
Owner-occupied property held for sale in accordance with PFRS 5 375,000
Property that is being constructed or developed for use as an investment property 6,000,000
Existing investment property that is being redeveloped for continuing use as investment property 12,000,000
Vacant lot held to be leased out under an operating lease 4,000,000
Property held for use in the production or supply of goods or services 3,000,000
Building held for administrative purpose 4,500,000
Land held for sale in the ordinary course of business 1,000,000
Property held in the process of construction or development for sale 1,500,000
Property held for future use as owner-occupied property 2,000,000
Building held for administrative purposes and leased out under operating lease (60%
is for administrative purposes) 7,500,000
Building leased out under an operating lease (the entity supplies security and maintenance
services to the lessees) 15,000,000
Equipment leased to an external party under an operating lease 1,000,000
Land held for long-term capital appreciation 7,500,000
Land held for undetermined future use 15,000,000
Building leased out under an operating lease 37,500,000
Building leased out under a finance lease 22,500,000

Question 1: What total amount should be considered as investment property?

Question 2: What total amount should be considered as owner-occupied property?

PROBLEM 2
KENYA Inc. has the following items related to its investment property as of December 31, 2023:
Land held for undetermined use P1,000,000
Land held for capital appreciation 900,000
Land held for sale as inventory 800,000
Land being used as PPE (Owner-occupied) 700,000
Building leased out under finance lease 600,000
Building leased out under operating lease (Note A) 500,000
Equipment leased out under operating lease 100,000
Building in the process of construction for sale 300,000
Building constructed on behalf of third persons 400,000

1
Building under construction to be used as future investment property 500,000
Building occupied by employees 450,000
Building (8-storey) being used as office (Note B) 400,000
Building being used as store 1,200,000
Building being used as factory 2,000,000

Note A – The Company is providing security and maintenance to the lessees.

Note B - 2 floors (25%) were being leased out under operating lease to tenants.

Question: What is the total amount of Investment Property?

PROBLEM 3
CONGO and its subsidiaries provided the following properties owned by the group:
Land held by CONGO for undetermined future use 1,000,000
Vacant building owned by CONGO to be leased out under an operating lease 1,500,000
Property held by a division of CONGO, engaged in real estate firm, on
the ordinary course of business 2,500,000
Property held by CONGO for use in production 2,000,000
Building used as head office but majority of the building being leased
out tenants under operating leases 1,250,000
Office of the building owned by a subsidiary of CONGO and for
which the subsidiary provides security and maintenance services to
the lessees 500,000
Equipment leased by CONGO to a subsidiary 750,000
Property being constructed on behalf of another party 250,000
Real estate held for capital appreciation 1,750,000
Property being constructed as an investment property 500,000

Question: In the consolidated statement of financial position of CONGO Company and its subsidiaries, what total amount
should be shown as investment property?

PROBLEM 4
Your audit client, ANGOLA INCORPORATED and its subsidiaries reported the following items as investment properties in its
consolidated statement of financial position:

a. Land held by ANGOLA for undetermined future use, P 2,500,000.

b. A vacant building owned by ANGOLA and to be leased out under an operating lease, P 10,000,000
c. Property held by a subsidiary of ANGOLA, a real estate firm, in the ordinary course of business, P 15,000,000
d. Property held by ANGOLA for use in production, P 500,000
e. A hotel owned by ANGELA COMPANY, a subsidiary of ANGOLA; and for which ANGELA provides security services for
its customers’ belongings, P 25,000,000
f. A building owned by ANGOLA being leased out to ANGELO ENTERPRISES, a subsidiary of ANGOLA, P 10,000,000

Based on the given information and the result of your audit, determine the amount to be reported as investment properties
in ANGOLA INCORPORATED and its subsidiaries consolidated financial statements
PROBLEM 5
On January 1, 2021, DJIBOUTI INC completed the construction of a building to be leased out to tenants under operating
lease. The building has total construction cost of P 50,000,000 and a 10 years economic life with nil salvage value. The
following information are also available.

12/31/2021 12/31/2022 12/31/2023

Fair value P 54,000,000 P 60,000,000 P 40,000,000

Cost to sell 4,000,000 10,000,000 15,000,000

Value in use 40,000,000 52,000,000 30,000,000

On July 1, 2024, the building was sold for P 35,000,000 incurring disposal costs of P 500,000.

Questions:

1. What is the total expense/(gain) to be reported in year 2021 if DJIBOUTI uses cost model to account for investment
properties?

2. What is the total expense/(gain) to be reported in year 2022 if DJIBOUTI uses fair model to account for investment
properties?

3. What is the total expense/(gain) to be reported in year 2023 if DJIBOUTI uses cost model to account for investment
properties?

4. What is the total expense/(gain) to be reported in year 2024 if DJIBOUTI uses fair value model to account for
investment properties?

5. Provide the journal entry to recognize the disposal of investment property in July 1, 2024 under cost model

6. Provide the journal entry to recognize the disposal of investment property in July 1, 2024 under fair value model

PROBLEM 6
LIBYA Company is engaged in both real estate development and leasing of real property. On June 30, 2023,
LIBYA transferred inventory and land and building held as owner occupied property to investment property to be
carried at fair value. The following is information is available on January 1, 2023:
January 1, 2023
Cost of inventory 1,000,000
NRV of inventory 900,000
Carrying amount of land 1,500,000
Carrying amount of building 2,000,000

The building has a remaining life of 10 years and the land was acquired 15 years ago. The fair value of the inventory, land
and building are as follows:
June 30, 2023 December 31, 2023

Inventory 1,150,000 1,350,000

Land 1,750,000 2,000,000
Building 2,500,000 2,600,000

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Questions:

1. What is the total amount to be recognized in profit or loss for the reclassification of inventory to investment
property?

2. What is the total amount to be recognized in profit or loss for the reclassification of land and building to investment
property?

PROBLEM 7
On January 1, 2016, JAMAICA Corporation acquired a building for P15,000,000 with an estimated useful life of 40 years.
Additional P250,000 was incurred by the company in connection with the acquisition and preparation as their main office. It
is the company’s policy to depreciate this building using sum-of-years’ digit. The salvage value of the building upon the
expiration of its useful life was estimated at P375,200. On January 2021, a test of impairment was made on the building and
it was determined that the building has a recoverable value of P9,825,200 with no change in the estimated salvage value.
On January 1, 2023, JAMAICA Company acquired a new building as the new headquarter but immediately converted the old
building as investment property. As of January 2023, the old building was revalued, and its fair market value was
determined at P11,500,000.

Question:

1. What amount of gain on transfer should the company report in its equity as a result of the conversion?

2. What amount of gain on transfer should the company report in its income statement as a result of the conversion?
 UNIVERSITY OF SANTO TOMAS
UST - Alfredo M. Velayo College of Accountancy
España, Manila

ACC5117 – AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

LECTURE NOTES
TOPIC: AGRICULTURE

Objective of IAS 41: to establish standards of accounting for agricultural activity – the management of the biological transformation
of biological assets (living plants and animals) into agricultural produce (harvested product of the entity's biological assets).

It shall be applied to the following when they relate to agricultural activity:

a. Biological Assets – living plants and animals (with the exception of bearer plants following certain requirements)
b. Agricultural Produce – harvested product of an entity’s biological asset
c. Government grant related to agricultural activity

Initial Recognition Subsequent Recognition

FV less cost of disposal
Biological assets FV less cost of disposal
Alternative – cost less acc depreciation and
acc impairment loss

FV less cost of disposal at the point of

Agricultural produce harvested N/A. Becomes inventory (LCNRV)
harvest (ALWAYS)
Agricultural produce growing on bearer plant FV less cost of disposal FV less cost of disposal

Note: The fair value measurement of agricultural produce stops at the point of harvest.

Cost of Disposal – directly attributable to the disposal of an asset. Excludes transport costs, finance costs and income taxes.

Types of Biological Assets:

1. Bearer
2. Consumable

Government grant related to agricultural activity

-should be measured at fair value less cost of disposal when the grant becomes receivable

 Non-Conditional: to be recognized as income

 Conditional: liability, then income when the conditions attaching to the grant are met

Amendments to PAS16 and PAS 41

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

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Other Items:

1. 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.
2. Bearer plants need to be assessed for impairment under PAS 36 Impairment of Assets
3. 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
4. Plants with dual purpose is reported as biological assets and not as a bearer plant

GAIN AND LOSS – should be charged to profit or loss

Fair value at the end of reporting period xxx

Less: Fair value at the end of reporting period
using initial recognition’s age xxx
Add: Change in fair value under physical change xxx
+ FV of newborn animal or plant xxx
Total change in FV under physical change xxx
(SAME DATE, DIFFERENT AGE)

Fair value at the end of reporting period

using initial recognition’s age xxx
Fair value at the beginning of the period xxx
Total change in FV under price change xxx
(SAME AGE, DIFFERENT DATE)

*********

PRACTICE QUIZZER
1. Which of the following is not under the scope of PAS 41?
a. Biological assets
b. Government grant related to agricultural activity
c. Agricultural produce
d. Investment property

2. Which of the following items would be classified as agricultural produce?

a. tree
b. bush
c. butter
d. apple

3. Which of the following criteria must be satisfied before a biological asset can be recognized in an entity’s FS?
i. the entity controls the asset as a result of past events
ii. it is probable that economic benefits relating to the asset will flow to the entity
iii. an active market for the asset exists
iv. the asset comes from a homogeneous biological group

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

4. ABC Company owns a number of herds of Cattle. Where should Changes in the fair value of a herd of Cattle be recognized in
the financial statements?
a. in profit or loss only
 b. both a and b
c. in other comprehensive income
d. in the statement of cash flows

5. Biological Assets are measured at

a. Cost
b. net realizable value
c. Lower of cost and net realizable value
d. Fair vale less cost of disposal

6. What is the measurement basis for biological asset and agricultural produce?
a. Historical cost
b. Present Value
c. Current Cost
d. Fair Value

7. When the Fair value of the biological asset cannot be determined reliably, the biological asset shall be measured at
a. Cost
b. Cost less accumulated depreciation
c. Cost less accumulated depreciation and accumulated impairment
d. net realizable value

8. Which of the following is unlikely to be used in fair value measurement?

a. Quoted price of an identical asset in active market
b. Quoted price of a similar asset in an active market
c. Quoted price of an identical asset in an active market
d. External independent valuation

9. Agricultural produce is measured at

a. fair value
b. fair value less cost of disposal at the point of harvest
c. net realizable value
d. net realizable value less normal profit margin

10. It is the harvested product of the entity’s biological asset

a. Agriculture
b. Harvest
c. Agriculture produce
d. Product

11. Which of the following is not an agricultural activity?

a. rice farming
b. ocean fishing
c. hog raising
d. vegetable planting

12. Land that is related to agricultural activity is valued

a. at fair value
b. in accordance with PAS 16 (PPE) or PAS 40 (Investment Property)
c. at fair value in combination with the biological asset that is being grown in the land
d. at the resale value separate from the biological asset that has been grown on the land

3
13. Entity A had a plantation forest that is likely to be harvested and sold in 30 years. The income should be accounted for in the
following way:
a. No income should be reported until first harvest and sale in 30 years
b. Income should be measured annually and reported using a FV approach that recognizes and measures
biological growth
c. The eventual sale proceeds should be estimated and matched to the profit and loss account over the 30-year period
d. The plantation forest should be valued every 5 years and the increase in value should be shown in the statement of
recognized gains and losses

14. According to PAS 41, Agriculture, the usual measurement of

a. Agricultural produce is at FV at point of harvest
b. Agricultural produce is at FV minus cost to sell at the point of harvest and at each subsequent balance sheet date
c. Biological asset is at FV less cost to sell at initial recognition and at each subsequent balance sheet date
d. Biological asset is at cost minus accumulated depreciation and impairment losses

15. Which statement is incorrect concerning biological assets?

a. Biological assets are living animals and living plants
b. Agricultural activity is the management by an entity of the biological transformation of biological asset into agricultural
produce or additional biological asset
a. Biological assets are measured at FV less cost to sell
b. Agricultural produce is measured at FV less cost to sell at the point of harvest less normal profit margin

16. Where the FV of the biological asset cannot be determined reliably, the asset should be measured at
a. Cost
b. Cost less Accumulated Depreciation
c. Cost less Accumulated Depreciation and accumulated impairment losses
d. Net realizable value

17. Statement 1: PAS 41 takes the view that the fair value of agricultural produce at the point of harvest can always be measured
reliably

Statement 2: Agricultural activity is the process of enhancing or stabilizing the conditions necessary for the biological
transformation to take place

Statement 3: The management by an entity of the biological transformation of biological assets for sale into agricultural
produce, or into additional biological assets, is called “management” activity

a. False, True, False

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

18. According to PAS 41, biological assets and agricultural produce held for regular sale should be valued at
a. cost
b. lower of cost or NRV
c. NRV
d. FV less cost to sell
19. When agricultural produce is harvested, the harvest should be accounted for by using PAS 2, or another applicable Philippine
Accounting Standards. For the purpose of this Standard, cost at the date of harvest is deemed to be

a. its FV less cost to sell at point of harvest

b. the historical cost of the harvest
c. the historical cost less accumulated impairment losses
d. market value

20. The following are examples of bearer biological assets, except

a. fruit trees
b. grape vines
c. livestock from which milk is produced
d. fish in farms

21. Consumable biological assets are those that are to be harvested as agricultural produce or sold as biological assets.
Examples are the following, except

a. livestock intended for the production of meat

b. livestock from which milk is produced
c. livestock held for sale
d. trees being grown from lumber

22. Changes in FV of a biological asset or an agricultural produce at the point of harvest are
a. ignored
b. included in the determination of income of the current period
c. included in equity
d. included in retained earnings

23. All of the following are products after harvest, except

a. leaf
b. lumber
c. tea
d. cured tobacco

24. Which of the following is not within the scope of PAS 41?
a. accounting for a herd of cattle
b. initial measurement of wool from sheep
c. ripening of mangoes for commercial sale
d. government grant received in respect of trees in plantation forest

25. Aggregate change in fair value less cost to sell of biological assets to be reported under profit or loss is composed of
a. price change only
b. physical change only
c. both A and B
d. neither A nor B

26. All of the following should not be presented as part of PAS 16 PPE, except
a. Annual Crops (i.e. market vegetables)
b. Fishes
c. Grape Vines
d. Hogs

5
27. All of the following are characteristics of Bearer Plants to be classified as PAS 16, except
a. Is used in the production or supply of agricultural produce
b. Is expected to bear produce for more than one period
c. Has a probable likelihood of being sold as agricultural produce, except for incidental scrap sale
d. None of the above

28. Which of the following statements is incorrect regarding bearer plants?

a. 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.
b. Bearer plants need to be assessed for impairment under PAS 36 Impairment of Assets
c. 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
d. Bearer plants with dual purpose will now be presented as part of PAS 16 PPE
 UNIVERSITY OF SANTO TOMAS
UST - Alfredo M. Velayo College of Accountancy
España, Manila

ACC5117 – AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 2

QUIZZER
TOPIC: AGRICULTURE

PROBLEM 1
UTAH Company reported the following information as of the end of the fiscal year 2023.
Bearer Plants P 1,250,000
Consumable plants 500,000
Bearer animals 750,000
Consumable animals 625,000
Animals related to recreational activities 450,000
Agricultural produce growing on bearer plants 375,000
Harvested agricultural produce 300,000
Agricultural land 1,500,000
Dogs being used for security purposes 50,000
Plants displayed in the administrative building 200,000

Determine the following:

1. What amount should be reported as biological assets?

2. What amount should be reported as property, plant and equipment?

PROBLEM 2
DALLAS Company has the following assets as of the end of the reporting period.
Maize plant P 10,000
Logs 3,000
Felled trees 2,500
Milk 1,500
Wool 500
Cheese 5,000
Sausages 1,750
Bearer plants 20,000
Bearer animals 12,500
Animals related to recreational activities 60,000
Freestanding trees 30,000
Land under trees 125,000
Harvested latex 22,500
Picked apples 17,500
Apples growing on apple trees 35,000
Grapes growing on grape vines 8,500
Mango pies 45,000

Determine the following:

1. What amount should be reported as biological assets?

2. What amount should be reported as property, plant and equipment?
3. What amount should be reported as inventory?
4. What amount should be reported as agricultural produce?

1
PROBLEM 3
MIAMI Company had the following items in 2023 related to its biological assets:

Acquisition cost of biological assets - January 1, 2023 P1,000,000

Fair value surplus on initial recognition
at fair value on January 1, 2023 200,000
Cost to sell of biological assets on acquisition date 50,000
Change in fair value on December 31, 2023 due to growth and price fluctuation 120,000
New born biological assets at year-end at fair value 20,000
Decrease in fair value due to harvest 40,000
Wool and milk harvested during the year but still
on hand at year-end 200,000

Cost to sell includes the following:

Commission to brokers P 2,000
Transportation costs to the market 1,000
Levies by commodity exchange 500
Transfer tax and duties 1,500
Advertising costs 1,000

Determine the following:

1. What amount should be reported for biological asset on December 31, 2023 Statement of financial position?
2. What amount should be reported as net gain (loss) on biological asset on 2023 Income statement?

PROBLEM 4
You noted the following in connection with your audit of BOSTON Company’s biological assets.

A herd of 17 2-year-old animals was held at January 1 of the current period. On July 1, two animals aged 2.5 years was purchased for
10,800 and one animal was born. No animals were sold or disposed of during the period. Fair value per unit less cost to sell were as
follows:

2-year-old animal on January 1 P 5,000

Newborn animal at July 1 3,500
2.5-year-old animal on July 1 5,400
Newborn animal on December 31 3,600
0.5-year-old animal on December 31 4,000
2-year-old animal on December 31 5,250
2.5-year-old animal on December 31 5,550
3-year-old animal on December 31 6,000

Determine the following:

1. Carrying amount of biological assets as of December 31
2. Change in fair value due to price change
3. Change in fair value due to physical change
PROBLEM 5
On January 1, 2022, GEORGIA Company purchased 50 2-year-old cows for P20,000 each for its dairy milk farm. On August 1, 2023, the
cows gave birth to 5 calves. There were no animals sold, died or additional purchases during 2022 and 2023.

The fair values of the biological assets in the active market are as follows:

01/01/22 12/31/22 08/01/23 12/31/23

New born P– P– P5,000 P4,500

5 months old – – 5,500 6,000

2 years old 20,000 21,000 22,000 24,000

3 years old 33,000 30,000 28,000 32,000

4 years old 35,000 38,000 40,000 39,000

Cost to sell for each biological asset is 5% of fair value.

Determine the following:

1. What amount should GEORGIA report the biological assets in the December 31, 2022 Statement of financial position?
2. What amount of net gain (loss) should be reported in the 2023 income statement?
3. What amount of gain (loss) in 2023 is attributable to price & physical change, respectively?
4. What amount should GEORGIA report the biological assets in the December 31, 2023 Statement of financial position?

PROBLEM 6
ALASKA, Inc. produces milk on its farms. It produces 30% of the country’s milk that is consumed. ALASKA owns 450 farms and
has a stock of 21,000 cows and 10,500 heifers. The farms produce 8 million kilograms of milk a year, and the average inventory
held is 150,000 kilograms of milk. However, the company is currently holding stocks of 500,000 kilograms of milk in powder
form.

At October 31, 2023, the herds are:

 21,000 cows (3 years old), all purchased on or before November 1, 2022.

 7,500 heifers, average age 1.5 years, purchased on April 1, 2023.
 3,000 heifers, average age of 2 years, purchased on November 1, 2022.

No animals were born or sold in the year.

The unit fair values less estimated point-of-sale costs were:

 1-year old animal at October 31, 2023 P 3,200

 2-year-old animal at October 31, 2023 4,500
 1.5-year-old animal at October 31, 2023 3,600
 3-year-old animal at October 31, 2023 5,000
 1-year old animal at November 1, 2022 and April 1, 2023 3,000
 2-year-old animal at November 1, 2022 4,000

The company has had problems during the year. Contaminated milk was sold to customers. As a result, milk consumption has
gone down. The government has decided to compensate farmers for potential loss in revenue from the sale of milk. This fact
was published in the national press on September 1, 2023. ALASKA received an official letter on October 10, 2023, stating that
P5 million would be paid to it on January 2, 2024.

The company’s business is spread over different parts of the country. The only region affected by the contamination was
Central Visayas, where the government curtailed milk production in the region. The cattle were unaffected by the
contamination and were healthy. The company estimates that the future discounted cash flow income from the cattle in the
3
 Central Visayas region amounted to P4 million, after taking into account the government restriction order. The company feels
that it cannot measure the fair value of the cows in the region because of the problems created by the contamination. There
are 6,000 cows and 2,000 heifers in the region. All these animals had been purchased on November 1, 2022. A rival company
had offered ALASKA P3 million for these animals after point-of-sale costs and further offered P6 million for the farms
themselves in that region. ALASKA has no intention of selling the farms at present. The company has been applying PAS 41
since November 1, 2022.

Determine the following:

1. What is the fair value of the cattle (excluding Central Visayas region) at November 1, 2022?
2. What is the fair value of the cattle (excluding Central Visayas region) at October 31, 2023?
3. What is the increase in fair value of the cattle (excluding Central Visayas region) due to price change?
4. What is the increase in fair value of the cattle (excluding Central Visayas region) due to physical change?
5. On October 31, 2023, the cattle in the Central Visayas region would be valued at

PROBLEM 7
As a result of your fiscal year 2023 audit, you have uncovered the following items composing the ledger balance of biological assets
amounting to P 8,900,000.

Eggs (for sale as agricultural produce) P 50,000

Poultry housing, net of accumulated depreciation 270,000
Poultry breeding stocks 430,000
Poultry hatching eggs 250,000
Poultry growing stocks – to be sold to meat dealers
within 3 months from balance sheet date 900,000
Agricultural land on which the palay stalks were planted 1,250,000
Palay stalks (not yet harvested) 750,000
Freestanding trees 2,500,000
Forest land (on which trees were planted) 1,500,000
Constructed roads and tunnels in orchard 1,000,000

Determine the following:

1. Biological assets – current as of December 31, 2023

2. Biological assets – non-current as of December 31, 2023
3. Property plant and equipment as of December 31, 2023
4. Inventory of Agricultural Produce as of December 31, 2023