Property, Plant and Equipment, Investment Property, Intangible Assets:

Acquisition and Disposition

Lecture Notes

OVERVIEW
Non-current and Non-Financial Assets Categories:
Types of Assets classified as noncurrent revenue-producing assets are categorized:

● Property, Plant, and Equipment (IAS 16) - Assets in this category

include land, buildings, equipment, machinery, autos, and trucks. These
assets are held for use in the production or supply of goods or services, for
rental to others, or for administrative purposes. They are expected to be
used for more than one financial period.

● Investment Property (IAS 40) - This category of property comprises land

and buildings held to earn rental income and/or for capital appreciation over
time. It excludes property for use in the production or supply of goods or
services, administrative purposes, or sale in the ordinary course of business.
Property occupied by a business itself for use in the production or supply of
goods or services or administrative purposes (e.g., as office space) is
considered as part of property, plant, and equipment, while property held for
sale in the ordinary course of a business is essentially part of the inventory.

● Intangible Assets (IAS 38) - Unlike property, plant, equipment, and

investment property, these lack physical substance, and the extent and
timing of their future benefits are typically highly uncertain. They include
patents, copyrights, trademarks, franchises, and goodwill.

Methods of Acquisition
● Purchase
● Exchange
● Lease
● Donation
● Self-Construction
● Business Combination

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 LO1: Identify the various costs included in the initial cost of property,
plant, and equipment; investment property; and intangible assets.

Measurement/Valuation Principle: Assets are initially valued on acquisition based on

their initial costs:
● Purchase Price
● All expenditures are necessary to bring the asset to its desired condition and
location for intended use.
Cost that produce future benefits Capitalized - Recognize as
asset and expense in future
periods using depreciation
or amortization.

Cost that produce benefits for the current Expense outright

period

COST OF EQUIPMENT
Equipment - Equipment is a broad term that encompasses machinery used in
manufacturing, computers and other office equipment, vehicles, furniture, and
fixtures.

Key Points:
Purchase Price: Includes the base cost of the equipment minus any discounts,
plus any import duties and non-refundable taxes.
Direct Costs: Costs directly attributable to bringing the equipment to the location
and condition necessary for it to be operational. Examples include:
● Shipping and handling costs
● Installation and assembly costs
● Costs of testing whether the asset is functioning properly (Abnormal wastage
is expensed outright)
Other Costs: Professional fees (like legal and consultancy fees), if directly
attributable to the equipment acquisition.

COST OF LAND
Land- non-depreciable asset used for operations, investments and future
operations

Key Points:
Purchase Price: Total amount paid to acquire the land.
Direct Costs:

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 ● Closing Costs: include legal fees, title insurance, and other transaction fees.
● Site Preparation Costs: Costs to prepare the land for its intended use, like
clearing, filling, and leveling.
● Assumption of Liens or Mortgages: Any liens or mortgages assumed as
part of the purchase are added to the land cost.
● Additional Costs: This may include removing unwanted buildings minus
any proceeds from the sale of scrap.

COST OF LAND IMPROVEMENT

Land Improvements - represent enhancements made to the land and are
considered a depreciable asset.

Key Points:
Initial Cost: Includes costs related to the improvement, like fencing, driveways,
sidewalks, and parking lots.
Construction Costs: Any construction work done as part of the improvement.
Direct Costs:
● Professional Fees: Architectural, design, and legal fees.

COST OF BUILDING
Buildings - include offices, factories, and warehouses and are considered
depreciable assets.

Key Points:
Purchase or Construction Cost: The purchase price or the sum of all construction
costs.
Direct Costs:
● Renovation and Repair Costs: Costs incurred to make the building ready
for use. If repair costs are incurred, not making the building ready to use
shall be an expense outright.
● Professional Fees: Architectural, legal, and consultancy fees directly related
to the acquisition or construction of the building.

COST OF INVESTMENT PROPERTY

Investment Property - are property (land or building, or part of a building, or

both) held to earn rentals or for capital appreciation, or both. Distinct from property
intended for use in the production or supply of goods or services or for
administrative purposes.

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Key Points:
Purchase Price: Includes the purchase cost of the property, less any rebates or
discounts.
Direct Costs:
● Transaction Costs: Legal fees, property transfer taxes, and other directly
attributable transaction costs.
● Subsequent Expenditure: Costs incurred after the acquisition only if they
are expected to add future economic benefits.
● Borrowing Costs: If applicable, borrowing costs (capitalizable interest)
directly attributable to the acquisition, construction, or production of a
qualifying asset are included.

COST OF INTANGIBLE ASSETS

Intangible assets - are identifiable non-monetary assets without physical

substance. They are held for use in the production or supply of goods or services,
for rental to others, or for administrative purposes.

Key Points:
Purchase Cost: The acquisition cost of an intangible asset includes its purchase
price and any directly attributable costs of preparing the asset for its intended use.

Development Costs: For internally generated intangible assets, like patents or

copyrights, include design, coding, testing, and other direct costs.

Direct Costs:
● Legal and Consultation Fees: Costs incurred in securing legal rights or
patents.
● Other Directly Attributable Costs: Costs such as drawing up contracts for
acquisition, amortization of patents and licenses, and costs directly related to
software development.

OTHER IMPORTANT KEY POINTS: [Needs special attention]

Asset Retirement Obligations (AROs) are legal or constructive obligations

associated with the retirement of a tangible long-lived asset. According to
International Accounting Standard (IAS) 16, the initial cost of Property, Plant, and
Equipment (PPE) includes the estimated costs of dismantling and removing the
asset and restoring the site on which it is located.
● Estimating an ARO requires considering the present value of the expected
future outflow of resources to settle the obligation.

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 ● The initial estimate of the ARO is added to the cost of the related asset
and depreciated over the asset's useful life. Simultaneously, a liability
for the same amount as the ARO is recognized.

Franchise- is a type of license purchased by a franchisee from a franchisor to use

the franchisor’s name, trademarks, and business model.
● Purchase Cost: The initial measurement of a franchise includes its purchase
price and other directly attributable costs such as legal fees, consultancy
charges, and costs to comply with the terms of the franchise agreement.
● Fair Value Consideration: If the franchise is acquired in exchange for
non-monetary assets or a combination of monetary and non-monetary
assets, its cost is measured at fair value unless the exchange transaction
lacks commercial substance.

Goodwill- arises when a business is purchased for more than the fair value of its
identifiable net assets. It represents factors like reputation, customer loyalty, and
synergies.
● Business Combinations: Goodwill is recognized in a business combination
and is measured as the excess of the cost of the acquisition over the
acquirer's interest in the net fair value of the identifiable assets, liabilities,
and contingent liabilities.
● Non-Recognition as an Internally Generated Asset: Internally generated
goodwill is not recognized as an asset because it is not an identifiable
resource controlled by the entity that can be measured reliably at cost.

PRACTICAL EXAMPLES AND APPLICATIONS:

ABC Company, a dynamic player in the manufacturing sector, recently undertook a
series of strategic acquisitions to bolster its operational efficiency and diversify its
investment portfolio. The first acquisition was a state-of-the-art manufacturing
machine, essential for enhancing their production capabilities. This machine,
purchased for P100,000, incurred additional costs, including P5,000 for delivery,
P10,000 for installation and testing, and P2,000 in legal fees, totaling P117,000.
This investment was a key step in modernizing their production line and expanding
their manufacturing prowess.

Simultaneously, ABC Company ventured into the real estate market by acquiring a
commercial building in the city's business hub for P500,000. This move aimed to
generate steady rental income and broaden their investment base. The acquisition
process involved P25,000 in transaction costs and P15,000 for initial repairs.
Furthermore, they expanded into intellectual property by purchasing a patent for
P200,000, with additional legal and consultancy fees of P15,000. This acquisition of
the patent was a strategic move to secure a competitive edge in the market.

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Requirement: Using the guidelines provided by PAS 16, 40, and 38, identify the
initial cost of the machine, building, and the patent, respectively.

LO2: Determine the initial cost of these individual assets acquired as a

group for a lump-sum purchase price.

LUMP-SUM ACQUISITIONS:

Basic Principles:
● When assets are acquired together for a single price, allocate the total cost
based on the relative fair values of each asset at the acquisition date.
● Fair value is the price that would be received to sell an asset in an orderly
transaction between market participants.
Estimating Fair Values:
● For PPE and investment property: Use market prices, independent valuations,
or depreciated replacement cost.
● For intangible assets: Consider market participant assumptions, discounted
cash flows from future use, or the relief-from-royalty method.
Initial Measurement and Recognition
● Recognize each asset at its allocated cost, provided it meets the recognition
criteria of the respective standard (i.e., probable future economic benefits
and reliable measurement of cost).
● Include directly attributable costs such as installation, legal fees, and import
duties in the allocated cost.

PRACTICAL EXAMPLES AND APPLICATIONS:

A company acquires land with a building and manufacturing equipment for a lump
sum of P1 million. The fair values are estimated as P400,000 for land, P300,000 for
the building, and P300,000 for equipment.

Requirement:
1. Determine the purchase price of the journal entry to record the purchase.
2. The same transaction includes a patent valued at P100,000. Allocate the
purchase price including the patent and the journal entry, to record the
purchase.

LO3: Determine the initial cost of these assets acquired in exchange for a
deferred payment contract

NON-CASH ACQUISITIONS:

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Common in business transactions for acquiring PPE, investment property, and
intangible assets is a deferred payment contract - an agreement where the
payment for an asset is delayed or structured over a period of time.

Basic Principles:

PAS 16: Property, Plant, and Equipment

● Initial Measurement: Under IAS 16, the cost of PPE acquired in exchange for
a deferred payment agreement is measured at its fair value unless the
arrangement is at a non-market interest rate.

Fair Value is measured based on the following, whichever is clearly evident:

○ Fair Value of asset given
○ Fair value of the asset received
○ Book value of the asset given
● Interest and Discounts: If the payment is deferred beyond normal credit
terms and includes an interest element, this interest is not included in the
cost of the asset but is recognized as an expense over the payment period
(Discount).
PAS 40: Investment Property
● Fair Value Consideration: Similar to PPE, the initial cost of investment
property under a deferred payment arrangement is the fair value at the date
of exchange.
○ Fair Value of asset given
○ Fair value of the asset received
○ Book value of the asset given
IAS 38: Intangible Assets
● Asset Valuation: For intangible assets acquired under deferred payment
contracts, the initial cost is the fair value of the consideration given.
● Interest and Discounts: If the payment terms are deferred and include
significant financing components, the interest expense is recognized over the
period of the financing.

PRACTICAL EXAMPLES AND APPLICATIONS:

Dunhill Corporation, in a strategic bid to enhance its operational capacity and
diversify its assets, executed a series of notable acquisitions through various
financing arrangements.

For the acquisition of manufacturing equipment, Dunhill Corporation opted for a

promissory note arrangement. The equipment, essential for their production
enhancement, had a fair market value of P300,000. The company issued a
promissory note to cover this amount, with the note's fair value closely mirroring

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the equipment's market value, reflecting current market interest rates and the
creditworthiness of Dunhill Corporation.

In a move to expand its real estate portfolio, Dunhill Corporation acquired a prime
commercial building. This acquisition was also facilitated through a
zero-interest-bearing note. The terms of the note require the company to make an
annual payment of P250,000 over a five-year period. The market interest rate for
similar notes is 10%.

The acquisition of a valuable software patent, priced at a cash equivalent of

P500,000, was another strategic move by Dunhill Corporation. However, instead of
a direct cash transaction, the company chose to acquire this asset through the
issuance of debt.

Requirement: Record the acquisition of the assets in accordance with PAS 16, PAS
40 and PAS 38.

LO4: Determine the initial cost of these assets acquired for equity
securities or through donation

ACQUISITION THROUGH EQUITY SECURITIES

Basic Principle:

● When assets are acquired in exchange for equity securities, the initial cost of
the asset is determined by the fair value of the equity securities issued
unless not clearly evident, the fair value of the asset received shall be used.
● Pro-forma Journal Entry:
Debit: [Asset Account] (e.g., Property, Plant, and
Equipment/Investment Property/Intangible Assets)
Credit: [Equity Account] (e.g., Common Stock, Additional Paid-In
Capital)

ACQUISITION THROUGH DONATION

Basic Principle:

● Assets acquired through donations are measured at their fair value at the
date of acquisition.
● According to IAS 20 (Accounting for Government Grants and Disclosure of
Government Assistance), when assets are donated by a third party, the

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 asset's fair value is recognized, and a corresponding gain in the statement of
profit and loss.

Debit: [Asset Account] (e.g., Property, Plant and

Equipment/Investment Property/Intangible Assets)
Credit: [Income Account] (e.g., Donation Revenue, Gain on Asset
Acquisition)

Note: The standard does not explicitly indicate whether this donation shall be
considered income or part of donated capital.

The general rule is if unrelated - Income; If donated by a stockholder - part

of donated capital.

● The fair value of donated assets is usually determined based on market

values or appraisal values at the time of donation.

ACQUISITION THROUGH GOVERNMENT GRANTS

Basic Principle:
● Grants may be given to partially or fully finance the acquisition of assets.
Government grants are assistance by government in the form of transfers of
resources to an entity in return for past or future compliance with certain
conditions
● Grants are recognized when there is reasonable assurance that the entity will
comply with the conditions attached to them and the grants will be received.
● Recognized as Deferred Income: Treat the grant as deferred income and
recognize it in profit or loss on a systematic basis over the useful life of the
asset.
Debit: [Asset Account]
Credit: [Deferred Income Account]

PRACTICAL EXAMPLES AND APPLICATIONS:

Dunhill Corporation, aiming to expand its manufacturing capabilities, decided to
acquire a new production line. The cost of the equipment was determined to be
P800,000. To finance this acquisition, Dunhill Corporation opted to issue equity
securities. The company issued 80,000 shares with par value of P5/share, with each
share having a fair market value of P10.

To enhance its corporate social responsibility and diversify its asset base, Dunhill
Corporation was gifted a building by a local charity. The building, intended for use

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as an investment property, was valued at P1.2 million. The donation was made with
no strings attached, and Dunhill Corporation accepted the building.

Dunhill Corporation applied for and received a government grant to support the
development of a new proprietary software system. The total cost for the
development was projected to be P400,000. The government agreed to provide a
grant covering 50% of the project's cost, amounting to P200,000.

Requirement: Record the acquired assets.

LO5: Explain how to account for dispositions and exhanges of existing

assets for other nonmonetary assets

DISPOSITION

Basic Principle:
● Disposing of an asset involves removing it from the company’s books, often
due to sale, trade-in, or scrapping.
● Recognition of Gain or Loss: Calculate the difference between the net
disposal proceeds and the asset’s carrying amount.
● Journal Entries:
Debit: Cash/Bank (if there are proceeds)
Debit: Accumulated Depreciation (to remove the asset's accumulated
depreciation)
Debit/Credit: Gain or Loss on Disposal (to recognize any gain or loss)
Credit: Asset Account (to remove the asset from the books)
● PPE and intangible assets to be disposed of by sale are classified as “HELD
FOR SALE” and measured at the lower of book value or the fair value
less cost to sell.

EXCHANGES

Basic Principle
● An exchange involves swapping an asset for another non-monetary asset,
often seen in trade-ins or barter transactions.

With Commercial Substance:

● Recognition of Assets Acquired and Relinquished: Measure the asset
acquired at its fair value unless the exchange lacks commercial substance
(cash flow will not change significantly) or the fair value cannot be reliably
measured.

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 ● Recognition of Gain or Loss: Calculate based on the fair value of the asset
given up, adjusted for any cash paid or received.
● Journal Entries:
Debit: New Asset (at fair value)
Debit/Credit: Cash (if any paid or received)
Debit/Credit: Gain or Loss on Exchange
Debit: Accumulated Depreciation (of the old asset)
Credit: Old Asset (at carrying amount)

Without Commercial Substance:

● Recognition of Assets: When an exchange lacks commercial substance, the
asset acquired is usually recorded at the carrying amount of the asset given
up, adjusted for any cash paid or received.
● No Gain or Loss Recognized: Generally, gains or losses are not recognized
in exchanges lacking commercial substance.
● Fair Value Consideration: Even if the fair value can be reliably measured,
it is not used for measurement unless there is cash involved in the
transaction.
● Journal Entries

Debit: New Asset (at the carrying amount of the old asset plus or
minus cash paid or received)
Credit: Old Asset (at carrying amount)
Debit/Credit: Cash (if any paid or received)
Debit: Accumulated Depreciation (of the old asset, if applicable)

PRACTICAL EXAMPLES AND APPLICATIONS:

Dunhill Corporation has the following transactions involving its non-current assets:

January: Dunhill Corporation sells a piece of machinery that was originally

purchased for P100,000 and had accumulated depreciation of P40,000 up to the
date of sale. The machinery is sold for P70,000.

February: A building, originally classified as investment property and carried at a

cost of P500,000 with accumulated depreciation of P100,000, is reclassified as held
for trading.

March: The company exchanges an old truck, with a carrying amount of P20,000
(cost of P50,000 and accumulated depreciation of P30,000), for a new piece of
equipment. The fair value of the new equipment is P25,000, and the fair value of
the old truck is P20,000. The exchange has commercial substance.

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April: Dunhill Corporation exchanges a piece of land with a carrying amount of
P150,000 for another piece of land. The fair value of both pieces of land is
P200,000. The exchange lacks commercial substance, and no cash is involved.

Requirement: Record the transactions above.

LO6: Identify the items included in the cost of a self-constructed asset and
determine the amount of capitalized interest

Basic Principle:
● Self-constructed assets are assets that are constructed or produced internally
by an entity for its own use, rather than acquired

Components of Costs (IAS 16 and IAS 40):

● Direct Costs: Labor and materials directly attributable to the construction.
● Allocated Overheads: Costs that can be directly attributed to the
construction process, including a reasonable allocation of indirect costs.
● Site Preparation Costs: Necessary costs to prepare the site for
construction.
● Professional Fees: Architectural and design fees, legal fees related to
construction.
● Cost of Borrowing: Interest on borrowings attributable to the construction
period (capitalized interest).
● Initial Estimates of Costs of Dismantling and Removing the Item: If
the entity has an obligation that is incurred at the start of construction
(AROs).

Exclusions:
● General administrative costs and selling costs are not included unless they
can be directly attributed to the construction of the asset.

Capitalized Interest (IAS 23)

● Capitalized interest is the interest on borrowings specifically taken out to
finance the construction of an asset (Qualifying Assets), which is included in
the cost of the asset.
● Qualifying Assets - assets that will take a substantial period of time to be
ready for use or sale.
● IAS 23 (Borrowing Costs) provides guidance on when and how much interest
should be capitalized.
○ Capitalize the actual borrowing costs incurred during the period, less
any investment income on the temporary investment of those
borrowings (Specific Borrowings).

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 ○If borrowing is not sufficient to cover expenditures on qualifying
assets, apply the capitalization rate to the expenditures on the asset.
(General Borrowings)
○ The rate is derived from the interest rates applicable to borrowings of
the entity that are outstanding during the period .
○ Capitalized borrowing costs shall not exceed the actual interest
expense incurred for the period.
● Conditions for Capitalization:
○ Expenditures for the asset are being incurred.
○ Borrowing costs are being incurred.
○ Activities necessary to prepare the asset for its intended use or sale
are in progress.

PRACTICAL EXAMPLES AND APPLICATIONS:

On January 1, 2023, the Company began constructing a building for its office
headquarters. The building was completed on June 30, 2024. Expenditures on the
project, mainly payments to subcontractors, were as follows:

January 3, 2023 600,000

March 31, 2023 300,000

September 30, 2023 600,000

Accumulated Expenditures at December 31, 2023, 1,500,000

before interest capitalization

January 31, 2024 600,000

April 30, 2024 300,000

On January 2, 2023, the company obtained a P500,000 loan with an 8% interest

rate for the building construction. The loan was outstanding during the entire
construction period. The company's other interest-bearing debt included two
long-term notes of P2,000,000 and P4,000,000 with interest rates of 6% and 12%,
respectively. Both notes were outstanding during the entire construction period.

Requirements:
1. Compute the weighted average expenditures
2. Compute the capitalization rate
3. Compute the capitalized interest
4. Suppose that the 8% construction loan had been P1,000,000 rather than
P500,000. Compute the capitalized borrowing cost.

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 5. Assume the nonspecific borrowings were P200,000 and P400,000 (instead of
P2,000,000 and P4,000,000). Compute the capitalized borrowing cost.

LO7: Explain the difference in the accounting treatment of costs incurred to

purchase versus costs incurred to develop intangible assets internally

Purchased Intangible Assets

Recognition:
● Upon acquisition, purchased intangible assets are recognized at their fair
value, which is usually the purchase price plus any directly attributable costs
necessary to prepare the asset for its intended use (IAS 38).

Measurement:
● The initial measurement includes the purchase price, import duties,
non-refundable purchase taxes, and any directly attributable expense to
bringing the asset to working condition.

● Subsequent costs are recognized in the carrying amount of the asset only
when they increase the future economic benefits beyond the originally
assessed standards of performance.

Subsequent Expenditure:
● Expenditures after initial recognition, such as maintenance and servicing
costs, are typically recognized as an expense when incurred.

Internally Developed Intangible Assets

Research Phase:
● Costs incurred during the research phase of an internal project should be
recognized as an expense when incurred (IAS 38).
● Research costs are those incurred in the pursuit of new knowledge with the
hope that it might lead to the development of a new product or process.

Development Phase:
Costs incurred during the development phase can be capitalized if, and only if, all
the following can be demonstrated (IAS 38):
F - Feasibility of completion can be demonstrated.
U - Use or sell intention is clear.
T - Technical ability to complete the asset is available.
U - Use or sell ability is established, indicating the existence of a market.
R - Resources for completing and using or selling the asset are available.

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 E - Expenditures can be measured reliably during development.

C - Completion is intended for the asset to be available for use or sale.

A - Ability to generate probable future economic benefits is demonstrated.
S - Selling or usage plan is in place.
H - How the asset will generate economic benefits is known (e.g., revenue
generation plan).

Capitalization of Costs:
Directly attributable costs that are capitalized include employee costs incurred while
the asset is being developed, costs of materials and services, overheads that are
necessary to create the asset, and borrowing costs if they meet the criteria in IAS
23 (Borrowing Costs).

Amortization:
Once the internally developed intangible asset is available for use, it should be
amortized over its useful life, and the amortization method should reflect the
pattern in which the asset's economic benefits are consumed by the entity.

PRACTICAL EXAMPLES AND APPLICATIONS:

Bright Innovations Inc., a technology company, is in the process of developing a
new cloud-based platform designed to facilitate remote team collaborations. The
project began on January 1, 2023, and has gone through several phases. The
company's fiscal year ends on December 31. Bright Innovations Inc. has
determined the project met the capitalization criteria of IAS 38 starting July 1,
2023. Costs incurred are presented below:

(Jan - Jun 2023):

Employee salaries: P50,000
Overhead allocation: P20,000
Market research: P15,000

(Jul - Dec 2023):

Employee salaries: P80,000
Overhead allocation: P35,000
Software engineering costs: P40,000
Patent filing and legal fees: P10,000
Hardware procurement: P25,000

Requirement: Prepare the journal entries in 2023.

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LO 8: Calculate the fixed turnover ratio used to measure the effectiveness
of managers' use of Property, Plant, and Equipment.

Basic Principle:
● The Fixed Asset Turnover Ratio is a financial metric that helps stakeholders
assess how efficiently a company is using its fixed assets to generate sales.
● This ratio is particularly important for capital-intensive industries where a
significant investment in PPE is required to conduct business.

Formula:
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑁𝑒𝑡−𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠

Where:

● Net Sales are the total sales revenue of the company, less returns,
allowances, and discounts.
● Average Net Fixed Assets is calculated as (Beginning Net Fixed
Assets+Ending Net Fixed Assets) / 2

Interpretation:
● A higher Fixed Asset Turnover Ratio indicates that the company is effectively
using its PPE to generate sales.
● A lower ratio could suggest that the company is not utilizing its fixed assets
efficiently and may have too much invested in PPE for the level of sales it is
generating.
**Nothing Follows**

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