PAS 16: Property, Plant and Equipment

Prof. Rogelio Paran, Jr.

Property, Plant and Equipment (PP&E)
1. Tangible assets (have physical
substance)

2. Used in business (used in the

production or supply of goods or
services, for rental, or for
administrative purposes)

3. Long-term in nature (expected to

be used for more than one
period)
Examples of PP&E:
Land Building

Furniture Bearer Plant Equipment

Examples that do not qualify as PP&E:
1. Land held for speculation
2. Land held for an undetermined
future use
3. Land and/or building classi ed as
investment property under PAS 40
Investment Property
4. Property held for sale in the
ordinary course of business
fi
5. Assets classi ed as held for sale
under PFRS 5
6. Biological assets related to
agricultural activity, other than
bearer plants
7. Intangible assets
8. Minor spare parts and short-live
stand-by equipment
fi
Initial Measurement
An item of PP&E is initially measured at cost. Cost comprises of:

Purchase price, including import duties, nonrefundable purchase taxes,

less trade discounts and rebates

Direct costs of bringing the asset to the location and condition necessary
for it to be used in the manner intended by management

Initial estimate of dismantlement, removal and site restoration costs for

which the entity incurs an obligation by acquiring or using the asset other
than to produce inventories
Attributable Cost vs Expensed Cost
Attributable: Expensed:

1. Cost of employee bene ts 1. Cost of opening a new facility

2. Cost of site preparation 2. Cost of introducing a new product or

service
3. Initial delivery and handling cost
3. Cost of conducting business in a new
4. Installation and assembly cost location or with a new class of
customers
5. Testing cost
4. Administration and other general
6. Professional fees overhead costs
fi
Initial Cost of PP&E:
Incidental Operations

Incidental operations before or during the construction of a PP&E are not

necessary in bringing the PPE to the location and condition necessary for it
to be capable of operating in the manner intended by management.
Self-Constructed Assets

The cost of a self-constructed asset is

determined using the same principles as
for an acquired asset.

The cost of a self-constructed asset

excludes internal pro ts and the cost of
abnormal amounts of wasted material,
labor, or other resources incurred in self-
constructing the asset.
fi
Bearer Plants
A bearer plant is a living plant that:

1. Is used in the production or supply

of agricultural produce

2. Is expected to bear produce for

more than one period

3. Has a remote likelihood of being

sold as agricultural produce,
except for incidental scrap sales
Measurement of Cost
Cost is measured at the cash price equivalent at the acquisition date.

The cost of a PP&E acquired through an exchange of non-monetary assets is

measured using the following order of priority:

1. Fair value of the asset given up

2. Fair value of the asset received

3. Carrying amount of the asset given up

Subsequent expenditures on
recognized PP&E:
1. Costs of day-to-day servicing of a PP&E

2. Costs incurred while an item capable of operating in the manner intended

by management has yet to be brought into use or is operated at less than
full capacity

3. Initial operating losses

4. Costs of relocating or reorganizing part or all of the entity’s operations.

Capitalization of subsequent
expenditures:

Replacement costs - Some PP&E have parts that need to be replaced. The
cost of replacing a part of an item of PPE is capitalized if the recognition
criteria are met

Major inspections - Some PP&E require regular major inspections as

condition for their continued operation.
Subsequent Measurement

1. Cost model - PP&E is carried at its cost less any accumulated

depreciation and any accumulated impairment losses

Cost is the amount of cash or cash equivalents paid or the fair value of
the other consideration given to acquire an asset at the time of its
acquisition or construction.
Subsequent Measurement
2. Depreciation - the systematic allocation of the depreciable amount of an asset
over its useful life.

1. Depreciable amount - the cost of an asset, or other amount substituted for

cost, less its residual value

2. Residual value - the estimated amount that an entity would currently obtain
from disposal of the asset, after deducting the estimated cost of disposal, if
the asset were already of the age and in the condition expected at the end of
its useful life

3. Useful life - the period over which an asset is expected to be available for use
by an entity, or the number of production or similar units expected to be
obtained from the asset by an entity
Depreciation
Depreciation stops when the asset is:

1. Derecognized

2. Classi ed as held for sale under PFRS 5; or

3. Fully depreciated.
fi
Land vs Building Values and
Depreciation
Depreciation Method

Straight-line method - spreads the cost of an asset evenly over the time it
will be used.
Depreciation Method

Diminishing Balance Method - depreciation is charged at a xed percentage

on the book value of an asset
Depreciation Method

Units of Production Method - assigns an equal amount of depreciation to

each unit of product manufactured or service rendered by an asset
Depreciation

On Jan 1, 2020, ABC Company acquired an equipment for P1,000,000. The

useful life of the equipment is 5 years or 2000 units, and a residual value of
P50,000.

1. Straight line: (1,000,000 - 50,000) / 5 = P190,000

2. Diminishing Balance: (Book Value x 40% / 100)

3. Units of Production: [ (1,000,000 - 50,000) / 2,000 ] x Unit of Production

Depreciation
Prod’n SL SL Bal Dim Dim Bal UoP UoP Bal
12/31/20 200 190,000 810,000 400,000 600,000 95000 905000
12/31/21 400 190,000 620,000 240,000 360,000 190000 715000
12/31/22 600 190,000 430,000 144,000 216,000 285000 430000

12/31/23 800 190,000 240,000 86,400 129,600 380000 50000

12/31/24 190,000 50,000 51,840 77,760

12/31/25 31,104 < 50,000