Chapter 6 Property Plant Equipment

Chapter 5 – Property, Plant &
Equipment
A) Introduction
St. Dominic College of Asia: Edmund E. Hilario,

1 CPA, MBA
Property, Plant & Equipment (PAS 16)
Definition of terms Characteristics
• PAS 16 defines • The PPE are tangible

property, plant & assets, meaning with
equipment “as physical substance
tangible assets that
are held for use in • They are used in
production or supply business, meaning
of goods or services, used in production or
for rental to others, supply of goods or
or for administrative services, for rental
purposes, and are purposes and
expected to be used administrative
during more than purposes
one period”.

2 CPA, MBA
Assets that are held for sale
including land or held for
investment are not included in PPE
They are expected to be used over a

period of more than one year.
Accordingly, PPE are classified as
non-current asset.

3 CPA, MBA
Recognition of PPE
An item of PPE shall be recognized as an asset
when:
It is probable that future economic
benefits associated with the asset will
flow to the entity
The cost of the asset can be measured
reliably

4 CPA, MBA
Measurement of PPE
Measurement at recognition
• PPE shall be measured at cost. Cost is the amount of cash or

cash equivalent paid or the fair value of assets given up to
acquire an asset at the time of acquisition or construction.
Cost includes the following:
• Purchase price, including import duties and non-refundable
purchase taxes after deducting trade discount and rebates
• Cost directly attributable, such as (a) cost of employee
benefits arising directly from the construction or acquisition of
the item of PPE, (b) Cost of site preparation, (c) Initial deliver
and handling cost, (d) Installation and assembly cost, (e)
Professional fees, (f) Cost of testing
• Initial estimate of the costs of dismantling and removing the
item and restoring the site on which it is located

5 CPA, MBA
Measurement after recognition
• After initial recognition, an entity shall choose

either the cost model or the revaluation model as
its accounting policy and shall apply that policy to
an entire class of PPE.
• The cost model – means that the PPE are carried
at cost less any accumulated depreciation and
any accumulated impairment loss.
• The revaluation model – means that PPE are
carried at revalued amount, being the FV at the
date of revaluation less any subsequent
accumulated depreciation & subsequent
accumulated impairment loss.

6 CPA, MBA
Acquisition of PPE
Cash basis – Cash price
equivalent which includes
cash paid plus directly
attributable costs.
On account subject to cash
discount –Invoice price minus
the discount, regardless of
whether the discount is taken
or not.
Installment basis – Cash price. The

excess of the installment price over
the cash price is treated as an
interest to be amortized over the
credit period.
7 CPA, MBA
Acquisition of PPE (continuation)
Issuance of share capitals – if assets are

acquired through the issuance of shares, the
cost of the assets shall be measured in the
following order of priority :
• The fair value of the property received
• The fair value of the share capital
• Par value or stated value of share capital
Issuance of bonds payable – if assets are

acquired through the issuance of bonds
payable, the cost of the asset shall be
measured in the following order of priority:
• FV of bonds payable
• FV of asset received
• Face value of bonds payable

8 CPA, MBA
Exchange – if assets are acquired in exchange for a nom-monetary asset or a

combination of monetary and non-monetary asset is measured at fair value,
unless the exchange transaction lacks commercial substance. A commercial
substance is defined as the event or transaction causing the cash flows of the
entity to change by reasons of the exchange. A commercial substance incur
when:
●
The cash flows of the asset received differ from the cash flows of the asset transferred
and the difference is significant relative to the fair value of the asset exchanged
●
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 change is significant relative to
the fair value of the asset exchange.

9 CPA, MBA
Trade in The cost of new asset shall be measured in the following order of
priority:
FV of asset given plus cash payment
Trade in value of asset plus cash payment
Donation - the assets shall be measured at fair value of the items received. Any
attributable costs incurred shall be capitalized. Any expenses incurred in connection
with the donation, like payment of registration fees and legal fees shall be charged to
the donated capital account.
Government grant - The capital gifts or grants shall be recorded at their fair value when
they are received.
Construction - The cost of self-constructed PPE shall include the following:
Direct cost of materials, Direct cost of labor, Indirect cost and incremental
overhead traceable to the construction

10 CPA, MBA
Measurement
A Exchange - no cash involved. The cost shall be measured
in the following order of priority
1. FV of property given
2. FV of property received
3. Cost or BV of property given
B Exchange – cash is involved. The cost shall be measured as
follows
1. Books of Payor - Fair value of asset given plus cash
payment
2. Books of Payee – Fair value of asset given minus the
cash received

11 CPA, MBA
Computation of cost of new asset
& gain /(loss) on exchange

Books of
Payor Recipient
FV of asset given xx xx
Add/Deduct:
Cash payment xx
Cash received xx
Cost of new asset xx xx

FV of asset given xx xx
Less: Book valuexx xx
Gain /(Loss on Exchange) xx xx


12 CPA, MBA
Computation of cost of new asset – Exchange no commercial substance
Books of Payor

Recipient
BV of asset given xx xx
Add/Deduct:
Cash payment xx
Cash received xx
Cost of new asset xx xx

13 CPA, MBA
Equipment
B) Government Grant

14 CPA, MBA
Government Grant
Definition:
●
PAS 20 defines government grants as’ assistance by government in the form of transfers of resources to an entity in return for part or
future compliance with retain conditions relating to the operating activities of the entity’. In other words, to qualify as a government
grant it is a prerequisite that the grant shall be provided by the government to an entity in return for past or future compliance with
conditions relating to the operating activities of the entity.
●
Government grants are sometimes called by other names such as subsidies, subventions or premiums. A forgivable loan from
government is treated as a government grant when is reasonable assurance that the entity will meet the terms for forgiveness of the
loan. PAS 20 as amended provides that the benefit of a government loan with a below-market rate of interest is treated as a
government grant. The benefit is measured as the difference between the proceeds received and the initial carrying value of the loan.

15 CPA, MBA
Recognition of
Government Grant
Government grants, including non-monetary grants at fair value,
shall be recognized when there is reasonable assurance that:
1. the entity will comply with the conditions attaching to them.
2. The grants will be received.
Receipt does not in itself provides conclusive evidence that the
conditions attaching to the grant have been or will be fulfilled.
Government grants shall not be recognized on a cash basis as this is
not consistent with generally accepted accounting practice.

16 CPA, MBA
Classification
of government grant
Grant related Is a government grant whose primary
to asset condition is that an entity qualifying for the
grant shall purchase, construct or otherwise
acquire long-term asset. Conditions may be
attached restricting the type or location of the
asset or the periods during which the asset is
to be acquired or held.
Grant related Is a government grant other than grant related to
To income asset

17 CPA, MBA
Accounting
for government grant
Government grant shall be recognized as income on a
systematic basis over the periods in which an entity
recognizes as expense the related costs for the grant is
intended to compensate, meaning the grant is taken to
income over one or more periods in which the related cost
is incurred.

18 CPA, MBA
Presentation
of government grant
1. Government grant related to asset, including nonmonetary grant
at fair values, shall be presented in the statement of financial
position in either of two ways:
a) By setting the grant as deferred income
b) By deducting the grant in arriving at the carrying amount of
the asset
2. Government grant related to income is presented as follows:
a) The grant is presented in the income statement, either
separately or under the general heading “other income.”
b) Or the grant is deducted from the related expense

19 CPA, MBA
Repayment
of government grant
Repayment for Shall be treated as change in accounting estimate
noncompliance
Shall be applied first against any unamortized deferred
Repayment income and any excess shall be recognized
related to income immediately as an expense
Repayment Shall be recorded by increasing the carrying amount
related to an of the asset
asset
The cumulative additional depreciation that would have been recognized
to date in the absence of the grant shall be recognized immediately as an
expense.

20 CPA, MBA
Government assistance
Government assistance is action by government designed
to provide an economic benefit specific to an entity or
range of entities qualifying under certain criteria.
Examples of government assistance are:
 Free technical or marketing advise
 Provision of guarantee
 Government procurement policy that is responsible for a
portion of the entity’s sales

21 CPA, MBA
Disclosures
about government grant
1. The accounting policy adopted for government grant,
including the method of presentation adopted in the
financial statement
2. The nature and extent of government grant recognized in
the financial statements and an indication of other forms
of government assistance from which the entity has
directly benefited
3. Unfulfilled conditions and other contingencies attaching
to government assistance that has been recognized.

22 CPA, MBA
Equipment
C) Borrowing Cost

23 CPA, MBA
Borrowing costs
Definit Borrowing costs are interest and other costs that an

●
entity incurs in connections with borrowing of funds.

This definition encompasses interest on all types of
borrowing, including finance leases and ancillary costs
ion incurred in connection with the arrangement of

borrowing.
PAS 23 as ●
Interest expenses calculated using the effective interest
method as described in PAS 39
amended provides ●
Finance charge with respect to a finance lease
Exchange differences arising from foreign currency
that borrowing
●
borrowing to the extent that it is regarded as an

costs include: adjustment to interest cost

24 CPA, MBA
Qualifying asset
●
Manufacturing plant
●
Power generation
facility
●
Intangible asset
●
Investment property

25 CPA, MBA
Accounting for borrowing cost
The amended
PAS 23 has ●
If the borrowing is directly
eliminated the attributable to the acquisition,
benchmark construction or production of a
treatment of qualifying asset, the borrowing
expensing all cost is required to be capitalized as
borrowing costs. cost of asset
The new rules on ●
All other borrowing costs shall be
borrowing cost expenses as incurred
are:

26 CPA, MBA
Asset financed by specific borrowing
If the funds are borrowed specifically for the

purpose of acquiring a qualifying asset, the
amount of capitalizable borrowing cost is the
actual borrowing cost incurred during the
period less any investment income from the
temporary investment of those borrowing.

27 CPA, MBA
Asset finance
by general borrowing
If the funds are borrowed by general borrowing and used for acquiring a
qualifying asset, the amount of capitalizable borrowing cost is equal to the
average carrying amount of the asset during the period multiplied by a
capitalization rate or average interest rate.
However, the capitalizable borrowing cost shall not exceed the actual interest
incurred. The capitalization rate or average interest rate is equal to the total
annual borrowing cost divided by the total general borrowings outstanding
during the period.

28 CPA, MBA
Specific borrowing for
asset used for general purposes
 If the asset is financed by specific borrowing but a
portion in used for working capital purposes, the
borrowing shall be treated as a general borrowing in
determining capitalizable borrowing cost.
 The capitalizable borrowing cost is equal to the average
expenditures on the asset multiplied by the average
interest rate.

29 CPA, MBA
Commencement
of capitalization
The capitalization of borrowing costs as part of the cost of
a qualifying asset shall commence when the following 3
conditions are present:
1. When the entity incurs expenditures for the asset
2. When the entity incurs borrowing costs.
3. When the entity undertakes activities that are necessary
to prepare the asset for the intended use or sale

30 CPA, MBA
Cessation of Capitalization
 Capitalization of borrowing cost shall cease when
substantially all the activities necessary to prepare the
qualifying asset for its intended use or sale are
complete.
 An asset is normally ready for its intended use or sale
when the physical construction of the asset is complete.

31 CPA, MBA
Disclosure
related to borrowing costs
 The amount of borrowing costs capitalized during
the period
 The capitalization rate used to determine the amount of
borrowing costs eligible for capitalization.
Segregation of assets that are “qualifying assets” from other
assets in the statement of financial position is not required to
be disclosed

32 CPA, MBA
Equipment
D) Land, Building
and Machinery

33 CPA, MBA
Land Account
●
If land is used as a plant asset – it
Classif ●
is treated as PPE
If land held for long-term capital
ication ●
appreciation – it treated as an
investment property
If land is held for current sale – it
of land treated as part of inventory
(current asset)

34 CPA, MBA
Cost chargeable to Land
1 Purchase price 3. Escrow fee
2. Broker’s commission 4. Cost of survey
5. Legal fees and other expenditures for establishing clean title
6. Fee for and for registration and transfer of title
7. Cost of relocation or reconstruction of property belonging to others in order
to acquire possession
8. Mortgages, encumbrances and interest on such mortgages assumed by buyer
9. Unpaid taxes up to date of acquisition assumed by buyer
10. Cost of clearing and demolishing unwanted old structure less proceeds from
salvage
11. Payments of tenants to induce them to vacate the land
12. Cost of permanent improvements such as cost of grading, leveling, and
landfill
13. Cost of option to buy the acquired land. If the land is not acquired, the cost
of option is expensed outright.
35 CPA, MBA
Land improvements
If land improvements are not subject to

depreciation – it is treated as land. Examples
of such expenses are cost of surveying, cost of
clearing, and cost of grading, leveling and
landfill, cost of sub-dividing and other cost of
permanent improvement.
If land improvements are subject to

depreciation – it is treated as land
improvements. Examples of such
improvements are fences, water systems,
drainage systems, sidewalks, pavements and
cost of trees, shrubs and other landscaping.

36 CPA, MBA
Special assessments
Special assessments are taxes paid by the landowner as a contribution to

the cost of public improvements hence, it will be included as part of the
cost of the land.

37 CPA, MBA
Real property taxes
As a general rule, real property taxes are treated

as outright expenses
Exception, if unpaid real property taxes are

assumed by the buyer, said property taxes will
be included in the acquisition costs only at the
date of acquisition. Subsequently, it will be
treated as outright expenses.

38 CPA, MBA
Building
Cost of ●
●
Purchase price
Legal fees & other expenses incurred in connection
building ●
●
with the purchase
Unpaid taxes up to date of acquisition
Interest. Liens and other encumbrances on the building
when ●
assumed by the buyer
Payments to tenants to induce them to vacate the
building
purchas
●
Any renovating or remodeling costs incurred to put a
building purchased in a condition suitable for its
intended use such as lighting installations, partitions
and repairs
ed
39 CPA, MBA
Cost of building when constructed
1. Building permit or license 3. Superintended fee
2. Architect fee 4. Cost of excavation
5. Materials used, labor employed and overhead incurred during the
construction
6. Cost of temporary buildings used as construction offices and tools or
materials shed
7. Expenditures incurred during the construction period such as interest on
construction loans and insurance
8. Expenditures for service equipment and fixtures made a permanent part of
the structure
9. Cost of temporary safety fence around construction site and cost of
subsequent removal thereof. However, the construction of a permanent
fence after the completion of the building is recognized as land
improvement
10. Safety inspection

40 CPA, MBA
Sidewalks, pavements,
parking lot & driveways
If the expenses incurred on If the expenses are
sidewalks, pavements, parking lot occasionally made or incurred
& driveway are part of the
blueprint for the construction of a
not in connection with the
new building – it is treated as part blueprint – it is treated as land
of the cost of building improvement

41 CPA, MBA
Claim for damages
If insurance is taken during the construction of a building – it is treated as part
of the cost of the building
If insurance is non taken during the construction of a building – it is treated as

outright expenses

42 CPA, MBA
Building fixtures
If expenses for building fixtures such as
shelves, cabinets and partitions are immovable,
meaning the removal thereof may destroy the
building – it is treated as part of the cost of the
building
If said expenses are movable – it is treated as

part of furniture & fixtures

43 CPA, MBA
Ventilating system,
lighting system & elevator
If expenses for ventilating system, lighting system & elevator are installed
during the construction – it is treated as part of the cost of the building
Otherwise it is treated as building improvements

44 CPA, MBA
Principles on land and building
 If land and building are acquired at a single cost, the cost is allocated to
the land and building on the basis of their relative fair value. Land and
building must have its separate account
 If land and an old building which is to razed are acquired as a single cost, the
cost is allocated only to the account of land
However, the net cost of razing the building (meaning cost of razing less
salvage value) is charged to the land account
If the premises are subject to a lease contract, payment made to tenants
to induce them to vacate the premises before the lease expiration are also
charged to the land account
 If the building owned by the entity is leased to tenants and the building is
demolished to make room for the construction of a new one, any payment
made to the tenants to induce them to vacate the building shall be charged to
the cost of the new building . However, the book value of the old building if
any, and the net cost of demolishing the building shall be charged to loss on
retirement of the old building.

45 CPA, MBA
Machinery
1. Purchase price
2. Freight, handling, storage and other cost related to the acquisition
3. Insurance while in transit
4. Installation cost, including site preparation and assembling
5. Cost of testing and trial run and other cost necessary in preparing
the machinery of its intended use
6. Initial estimate of cost or dismantling and removing the machinery
and restoring the site on which it is located, and for which the entity
has a present obligation
7. Fee paid to consultants for advice on the acquisition of the
machinery
8. Cost of safety rail and platform surrounding machine
9. Cost of water device to keep machine cool

46 CPA, MBA
Tools, pattern dies, returnable
containers, equipment
Tools Tools are classified as machine tools and hand tools, these tools
are used in connection with the operation of the machine
Pattern Are those used in designing or forging out a particular product.
dies These items are depreciated over their useful life, however if used
for specially ordered product such would be treated as outright
expenses
Returnable Includes bottles, boxes, tanks, drums, barrel and similar items which
container are returned to the seller by the buyer when the contents are
consumed or used.
Equipment Includes delivery equipment, store equipments, office equipment,
furniture and fixtures. The cost of such assets includes the purchase
price, freight and other handling charges, insurance while in transit,
installation cost and other costs necessary in preparing them for the
intended use.

47 CPA, MBA
Capital / revenue
expenditures
Asset If the expenditures that benefits the
current period and future periods.
Expense If the expenditures that benefits only the
current period

48 CPA, MBA
Recognition of subsequent cost
 The recognition of subsequent cost is subject to the same
recognition criteria for the initial cost of PPE and it shall be
recognized as asset when:
a. It is probable that future economics benefits associated with
the subsequent costs will flow to the entity
b. The subsequent cost can be measured reliably
 But if the subsequent cost merely maintains the existing level of
performance, the cost should be expense when incurred.

49 CPA, MBA
Future economic benefits
 A subsequent cost on an item of PPE that will benefit
future periods or increase the future service potential
of an asset when:
1. The expenditures extends the life of the property
2. The expenditures increase the capacity of the
property and quality of output
3. The expenditures improves the efficiency and
safety of the property

50 CPA, MBA
Improvements or betterment
Improvements or betterments are modification or alternations which increase
the service life or the capacity of the asset and such expenditures are
capitalized. Examples are:
A tile roof is substituted for wooden shingles
A shatter proof glass is substituted for ordinary glass
An old motor in a machine is replaced by a new and powerful one
Galvanized iron roofing is substituted for nipa roofing
Replacement of wooden floor by concrete flooring
The improvements that do not involve replacement of parts are simply added to
the cost of the existing asset

51 CPA, MBA
Replacement
Replacements also involve substitution but the new asset
is not better that the old asset when acquired.
Replacement is a substitution of an equal or lesser quality.
Classification of replacement:
Replacement of the old asset by a new one
Replacement of major parts or extraordinary repairs –
should be capitalized
Replacement of minor parts or ordinary repairs – expense
when incurred

52 CPA, MBA
Equipment
E) Depreciation

53 CPA, MBA
Depreciation
Concept of PPE are normally usable for a number of years after

depreciation which they have relatively little value either for
service or for sale. The difference between the
original cost of a property and any remaining value
when it is retired or worn out is an expense that
should be distributed to the periods during which the
asset is used. The portion that is allocated to expense
in a particular period is referred to by three different
terms: depreciation, depletion or amortization. The
objective of depreciation is to have each period
benefiting from the use of the asset bear an equitable
share of the asset cost
Depreciation is defined as “the systematic allocation of the depreciable

amount of an asset over its useful life.

54 CPA, MBA
Factors of depreciation
Depreciable amount – refers to the cost of an asset less its residual value
●
Expected usage of the asset – usage is assessed by references to the asset’s expected capacity or physical output
●
Expected physical wear and tear – this depends on the operational factors such as the number of shifts the assets is used, the repair and maintenance program, and the care and maintenance of the asset while idle.
●
Technical or commercial obsolescence – this arises from changes or improvements in production or change in the market demand for the product output of the asset
●
Legal limits for the use of the asset such as the expiry date of the related lease.
Residual amount – refers to the expected worth of the asset at the end of its
useful life
Useful life – refers to the period over which an asset is expected to be available
for use by the entity or number of production or similar units expected to be
obtained from the asset. Factors in determining the useful life of an asset:

55 CPA, MBA
Kinds of depreciation
Physical depreciation – is
related to the depreciable
●
Wear and tear due to frequent use
asset’s wear and tear and ●
Passage of time due to non-use
deterioration over a ●
Action of the elements
period. Physical ●
Accidents
depreciation may be ●
Disease
caused by:
Functional or economic
depreciation – depreciation ●
When there is no future demand for the product which the
arises from obsolescence depreciable asset produces
●
When a new depreciable asset becomes available and the new
or inadequacy of the asset asset can perform the same function for substantially less cost.
to perform efficiently. Inadequacy arises when the asset is no longer useful to the firm
Obsolescence may arise because of an increase in the volume of operations.
from the following:

56 CPA, MBA
Methods of depreciation
Equal or uniform charge methods

●
Straight line method – straight line depreciation is a constant charge over the useful life of the assets
●
Composite method – assets that are dissimilar in nature or assets that have physical characteristics and vary widely in useful life, are grouped and treated as a single unit.
●
Group method – assets that are similar in nature and in estimated useful life are grouped and treated as a single unit.
Variable charge or use-factor methods

●
Working hours or service hours method
●
Output or production method
Decreasing charge or accelerated or diminishing balance method

●
Sum of year’s digits method
●
Declining balance method
●
Double declining method
Other methods
●
Inventory or appraisal method
●
Retirement method
●
Replacement method

57 CPA, MBA
Composite and group method
Composite Are those assets that are dissimilar in nature yet grouped and
method treated as a single unit
Group Are those assets that are similar in nature and the estimated useful
method life are grouped and treated as a single unit
Composite Is determined by dividing the total depreciable amount by total
method annual depreciation.
Composite Is determined by dividing the total annual depreciation by the total
rate cost

58 CPA, MBA
Equipment
F) Depletion

59 CPA, MBA
Depletion
Exploration and evaluation expenditures Cost
●
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 resources
●
General and administrative costs directly attributable to exploration and evaluation activities
The exploration and evaluation expenses may qualify as exploration and

evaluation asset; however, there is not standard guideline for the recognition of
exploration and evaluation asset. Accordingly, an entity must develop its own
accounting policy for the recognition of such asset.

60 CPA, MBA
Measurement and classification
Exploration and evaluation asset shall be

measured initially at cost. Subsequently, it
shall be measured at either the cost model or
the revaluation model. Exploration and
evaluation asset is classified as tangible asset
or intangible asset. For example, vehicles and
drilling rigs would be classified as tangible
assets and drilling rights would be classified as
intangible assets.

61 CPA, MBA
Impairment
PFRS 6 provides that
exploration and ●
The period for which the entity has the right to explore
evaluation asset shall in a specific are has expired and is not expected to be
be assessed for renewed
impairment when facts ●
Substantive expenditures for exploration and evaluation
and circumstances is neither budgeted nor planned
●
The exploration and evaluation activities have not let to
suggest that the discovery of commercially viable quantity of mineral
carrying amount may resources and the entity has decided to discontinue such
exceed recoverable activities
amount. The
●
Sufficient data indicate that the carrying amount of the
exploration and evaluation asset is unlikely to be
following facts and recovered in full from successful development or by sale
circumstances may
indicate impairment:

62 CPA, MBA
Wasting asset
Nature and characteristics
●
Wasting assets are material objects of economic value and utility to man produced by nature.
Wasting assets or natural resources, includes coal, oil, ore, precious metals like gold, silver and
timber. Wasting assets are so called because they are physically consumed and once
consumed, they cannot be replaced anymore. Characteristics of wasting assets are:
●
They are physically consumed
●
They are irreplaceable

63 CPA, MBA
Cost of wasting asset
Cost of wasting asset or mineral
resources can be divided into 4
categories, namely:
●
Acquisition cost – refer to the price paid to obtain the property containing the natural resource. If there is a
land value after the extraction of the natural resource, there is a residual value of a wasting asset.
●
Exploration cost – refers to the cost incurred in an attempt to locate the natural resources that can be
economically be extracted or exploited. The exploration may result in either success or failure.
●
Development costs – refers to the cost incurred to exploit or extract the natural resource that has been
located through successful exploration. Development cost may in the form of:
●
Tangible equipment – this includes transportation equipment, heavy machinery, tunnels, bunker and mine
shaft.
●
Intangible development cost – this includes drilling, sinking mine shaft and construction of wells.
●
Restoration cost – refers to the cost incurred to bring the property to its original state. PAS 16, the
estimated cost of restoring the property to its original condition is capitalized only when the entity incurs
the obligation when the asset is acquired.

64 CPA, MBA
Depletion
It refer to the systematic
allocation of the depletable
cost of wasting asset over
the period the natural
resources is extracted or
produced. The depletion is
computed using the output or
production method. The
depletion cost of the wasting
asset is divided by the units
estimated to be extracted to
obtain a depletion rate per
unit. The depletion rate per
unit is then multiplied by the
units extracted during the
year to arrive at the depletion
for the period.

65 CPA, MBA
Revision of depletion rate
The revision of the
depletion rate
should be made on
a prospective basis
that is by dividing
the remaining
depletable cost of
the wasting asset
by the revised
estimate of the
production output.

66 CPA, MBA
Depreciation of mining property
this refers to tangible
equipment such as ●
If the life of the equipment is shorter, the
transportation equipment,
heavy machinery, mine
straight line method of depreciation is
shaft and other equipment normally used
used in mining operations
●
If the life of the wasting assets is shorter,
that are subject to normal the output method of depreciation is used.
depreciation policy. The ●
However, if the mining equipment is
depreciation of said movable and can be used in future
equipment is based on the
extractive project, the equipment is
life of the equipment or
the life of the wasting
depreciated over its useful life using the
assets, whichever is straight line method.
shorter.

67 CPA, MBA
Shutdown
In the event of shutdown, the
output method of depreciating
mining property can not be used. Dep’r exp in the year of shutdown
●
In this case, the depreciation in

the year of shutdown is based on = Book value of equip/
the remaining life of the
equipment using the straight line Remaining life of the equipment
method, hence the formula is:
When operations are resumed, the

depreciation is again computed
following the output method,
however, a new depreciation rate
per unit is computed by dividing
the remaining book value of the
equipment by the remaining or
revised estimate of deposit.

68 CPA, MBA
Wasting asset doctrine
Under this doctrine, a wasting asset corporation can legally return capital to shareholders during the
lifetime of the corporation. Accordingly, a wasting asset corporation can pay dividend not only to the
extent of retained earnings but also to the extent of accumulated depletion. The amount paid in excess
of retained earnings is accounted for as a liquidating dividend or return of capital. This doctrine is an
exception to the trust fund doctrine, which state that the share capital of a corporation is conceived as a
trust fund for the protection of creditors, hence, such capital can not be returned to shareholders during
the lifetime of the corporation. The formula in determining the maximum dividend that can be declared
and paid by a wasting asset corporation is as follows:
●
Retained earningsxx
●
Add: Accumulated depreciation xx
●
Total xx
●
Less: Capital liquidated in prior year’s xx
●
Unrealized depletion in EI xx xx
●
Maximum dividend xx
69 CPA, MBA
Equipment
G) Revaluation

70 CPA, MBA
Revaluation
Basis ●
Fair value – the fair value of land and
buildings is usually equal to the market
of
value. This value is determined by
appraisal normally undertaken by
professional qualified valuers.
Depreciated replacement cost – the fair
revalu
●
value of items in PPE is also equal to their

market value. However, if market value is
not available, depreciated replacement cost
ation shall be used.

71 CPA, MBA
Definition of terms
Revaluation – consists of the preparation of a
detailed listing of the items of PPE at appraisal date,
detailed inspection of each unit or property, pricing
the property items ordinarily at fair value or
replacement cost, determination of accumulated
depreciation and calculation of the depreciated
replacement cost of the property by professionally
qualified valuers.
Revalued amount – this

refer to the fair value or
depreciated replacement
cost of the item of PPE
Fair value – refer to the amount

for which an asset could be
exchanged between
knowledgeable, willing parties
in an arm’s length transaction.

72 CPA, MBA
Definition of terms (continuation)
Depreciated replacement costs –
refers to the replacement costs of the
PPE minus the corresponding
accumulated depreciation. This
amount is the “sound value” of the
asset.
Revaluation surplus – refers to the

fair value or depreciated replacement
cost (sound value) minus the book
value of the PPE. This amount is
also known as revaluation increment.
Appreciation or revaluation increase –

refer to the excess of the revalued
amount over the historical cost.
Appreciation minus the corresponding
accumulated depreciation equals the
net appreciation or revaluation surplus.

73 CPA, MBA
Accounting for Revaluation
No change in life ●
Proportionate approach – under this approach, the accumulated
– there are 2 depreciation at the date of revaluation is restated proportionately with the
change in the gross carrying amount of the asset so that the carrying
approaches in ●
amount of the asset after revaluation equals to the revalued amount.
Elimination approach – under this approach, the accumulated
recording the depreciation is eliminated against the gross carrying amount of the asset
and the net amount restated to the revalued amount of the asset.
revaluation
There is a
change in
life
74 CPA, MBA
Treatment of the Revaluation Surplus
PAS 16 provides that “when an asset’s carrying amount is increased as
a result of the revaluation, the increase shall be credited to revaluation
surplus. PAS 1 as amended, paragraph 7 provides that such revaluation
surplus is a component of other comprehensive income, of which the
treatment of the revaluation surplus is as follows:
●
If the asset is retired or disposes of, the whole surplus may be
realized; hence the revaluation surplus will be transferred
directly to retained earnings.
●
If the asset is still in used and still being depreciated, a part of
the surplus is realized. The amount of surplus realized is the
difference between the depreciation based on the revalued
carrying amount and depreciation on the original cost.
75 CPA, MBA
Reversal of a Revaluation Increase
When an asset’s carrying amount is decrease as a result of revaluation, the

decrease shall be recognized as an expense. However, a revaluation decrease
shall be charged directly against any revaluation surplus to the extent that the
decrease is a reversal of a previous revaluation and the balance is charged to
expense.

76 CPA, MBA
Reversal of a
Revaluation Decrease
When an asset’s carrying amount is increased

as a result of revaluation, the increase shall be
credited to revaluation surplus. However, a
revaluation increase shall be recognized as
income to the extent that it reverses a
revaluation decrease of the same asset
previously recognized as an expense.

77 CPA, MBA
Sale of Revalued Asset
When a revalued asset is sold, all account relating thereto shall be

closed in order to determine properly the gain or loss on the sale. The
difference between the sales price and the carrying amount of the
revalued assets is recognized as gain or loss on the sale.

78 CPA, MBA
Disclosures Related to Revaluation
When an item of PPE are stated at revalued amount the following shall be
disclosed:
●
The effective date of revaluation
●
Whether an independent appraiser was involved
●
Method and significant assumptions applied in estimating fair value
●
The extend to which the fair value was determined directly by reference to observable prices in an active market or recent market
transaction on an arm’s length terms or was estimated using other valuation technique
●
Historical cost and carrying amount of each class of revalued PPE
●
Revaluation surplus, indicating the movement for the period and any restrictions on the distribution of the balance to shareholders.

79 CPA, MBA
Impairment
Impairment is a fall in the market
value of an asset so that its
“recoverable amount” is now less
than its carrying amount in the
statement of financial position. The
carrying amount is the amount at
which an asset is recognized in the
statement of financial position after
deducting accumulated depreciation
and accumulated impairment loss.
This is based on “established
principle” that assets shall not be
carried at above their recoverable
amount. The basis principle
underlying PAS 36 is that “if an
asset’s carrying amount is higher
than its realistic value, measured as
its recoverable amount, the asset is
judged to have suffered an
impairment loss. The asset shall
therefore be reduced by the amount
of the impairment loss.

80 CPA, MBA
3 main accounting issues to
consider, in impairment loss namely:
Indication of
possible
impairment
Measurement of
the recoverable
amount
Recognition of
impairment loss

81 CPA, MBA
Sources of impairment are classified as
follows:
External sources
●
Significant decrease or decline in the market value of the asset as a result of passage of time or normal use or a new competitor entering the market
●
Significant change in the technological, market, legal or economic environment of the business in which the asset is employed. This could be as
simple as a change in customer taste.
●
An increase in the interest rate or market rate of return on investment which will likely affect the discount rate in used in calculating the value in use
Internal sources
●
Evidence of obsolescence or physical damage of an asset
●
Significant change in the manner or extent in which the asset is used with an adverse effect on the entity. For example, the asset is part of a restructuring or held for sale or
the asset is idle
●
Evidence that the economic performance of an asset will be worse than the expected. For example, the undiscounted net cash flows from the asset are significantly worse
than those budgeted.

82 CPA, MBA
Recoverable Amount
Under PAS 36, the recoverable amount of an asset is, its fair value less cost to sell or
value in use, whichever is higher.
●
If there is a binding sale agreement , the fair value less cost to sell is the sales price, adjusted for incremental costs that would be directly attributable to the sale of the asset
●
If there is no binding sale agreement but the asset is traded in an active market, the fair value less cost to sell is equal to the market price less the costs to sell, or the sales price of recent transactions in similar assets. The
appropriate market price is usually the current bid price.
●
If there is no binding sale agreement and the asset is not traded in an active market, the fair value less cost to sell is equal to the best estimate of “knowledgeable and willing parties” in an arm’s length transactions.
Fair value less cost to sell or (net selling price) is “the amount obtainable from the sale of
an asset in arm’s length transaction between knowledgeable and willing parties, less cost
to sell”. The following rules shall be observed in determining the fair value less cost to sell:
●
Cash flow projections shall be based on reasonable and supportable assumptions
●
Cash flow projections shall be based on the most recent budgets on financial forecasts, usually up to a maximum period of 5 years, unless a longer period can be justified
●
Cash flow projections beyond the 5-year period shall be estimated by extrapolating the 5-year projection using a steady or declining growth rate each subsequent year unless an increasing rate can be
justified.
Value in use – is measured as the present value or discounted value of future net cash flows
expected to be derived from an asset. The cash flows are pretax cash flows and pretax
discounts rate is applied in determining the present value. Therefore, PAS 36 requires the
following:
83 CPA, MBA
Recognition of impairment loss
Impairment of asset - If the recoverable
amount of an asset is less than its
carrying amount, an impairment loss
has incurred. The impairment loss shall
be recognized immediately by reducing
the asset’s carrying amount to its
recoverable amount. The impairment
loss is recognized in profit or loss and
presented separately in the income
statement.
Impairment of revalued asset –

PAS 36 provides that an
impairment loss on revalued
asset is recognized directly
against any revaluation surplus
related to the asset and any
excess is recognized in profit
or loss (impairment loss).

84 CPA, MBA
Formula: In computing impairment loss
Computation of impairment loss of an asset
Carrying amount of asset xx
Less: Recoverable amount (whichever is higher)
FV less cost to sell xx
Value in use xx xx
Impairment loss xx

Computation of impairment loss of revalued asset
Decrease in replacement cost xx
Less: Decrease in acc dep’r xx
Add: Revaluation surplus, net of RE xx xx
Impairment loss xx
85 CPA, MBA
Cash generating unit
PAS 36 requires that “a cash
generating unit is the smallest
identifiable group of assets that
generate cash inflows from
continuing use that are largely
independent of the cash inflows
from other assets or group of
assets”. A cash generating unit
maybe a department, a product line,
or a factory for which the output of
product and input of raw materials,
labor and overhead can be
identified. As a basic rule, the
recoverable amount of an asset shall
be determined for the asset
individually. However, if it is not
possible to estimate the recoverable
amount of the individual asset, an
entity shall determined the
recoverable amount of the cash
generating unit to which the asset
belongs

86 CPA, MBA
PAS 36, paragraph 104
Provides that
when an ●
First to the goodwill, if any
impairment loss ●
Then to all other non-cash assets of the
is recognized for CGU on a prorate basis on their carrying
amount.
a cash generating ●
If one of the assets of the CGU has fair
unit, this loss value less cost to sell higher than the
shall be allocated amount computed on the CGU prorate
to the assets of basis, then the difference is further allotted
to other CGU, again on a pro rate basis.
the unit in the
following order:

87 CPA, MBA
Corporate asset
Corporate assets are assets other than goodwill that contribute to the
future cash flows of both the cash generating unit under review and
other cash generating units. Corporate assets are group or
divisional assets such as head office building, EDP, equipment or a
research center. Essentially corporate assets are assets that do not
generate cash inflows independently from other assets. Thus, the
recoverable amount of an individual corporate asset cannot be
determined unless management has decided to dispose of the asset.
As a consequence, if there is an indication that a corporate asset
may be impaired, the recoverable amount of the cash generating
unit to which the corporate asset belongs is determined and
compared with the carrying amount of the cash generating unit.

88 CPA, MBA
Reversal of an impairment loss
PAS 36 provides that “an impairment loss recognized for an asset in prior years shall be reversed
if there has been a change in the estimate used to determine the asset’s recoverable amount since
the last impairment loss was recognized”. In other words, if the recoverable amount of an asset
that has previously been impaired turns out to be higher than the asset’s current carrying amount,
the carry amount of the asset shall be increased to its new recoverable amount.
However, PAS 36 further provides that “the increase carrying amount of an asset due to
a reversal of an impairment loss shall not exceed the carrying amount that would have
been determined, had no impairment loss been recognized for the asset in prior years.”
The reversal of the impairment loss shall be recognized immediately as income in the
income statement.
But PAS 36 further requires that any reversal of an impairment loss on a revalued
asset shall be (treated as a revaluation increase, meaning,) credited to income to the
extent to that amount of impairment loss previously recognized (that is, it reverses a
previous revaluation decrease) and any excess is credited directly to revaluation
surplus.

89 CPA, MBA

Chapter 6 Property Plant Equipment

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Chapter 5 – Property, Plant &

St. Dominic College of Asia: Edmund E. Hilario,

• PAS 16 defines • The PPE are tangible

St. Dominic College of Asia: Edmund E. Hilario,

They are expected to be used over a

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

• PPE shall be measured at cost. Cost is the amount of cash or

St. Dominic College of Asia: Edmund E. Hilario,

• After initial recognition, an entity shall choose

St. Dominic College of Asia: Edmund E. Hilario,

Installment basis – Cash price. The

Issuance of share capitals – if assets are

Issuance of bonds payable – if assets are

St. Dominic College of Asia: Edmund E. Hilario,

Exchange – if assets are acquired in exchange for a nom-monetary asset or a

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

Books of Payor

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

Definit Borrowing costs are interest and other costs that an

entity incurs in connections with borrowing of funds.

ion incurred in connection with the arrangement of

borrowing to the extent that it is regarded as an

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

If the funds are borrowed specifically for the

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

If land improvements are not subject to

If land improvements are subject to

St. Dominic College of Asia: Edmund E. Hilario,

Special assessments are taxes paid by the landowner as a contribution to

St. Dominic College of Asia: Edmund E. Hilario,

As a general rule, real property taxes are treated

Exception, if unpaid real property taxes are

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

St. Dominic College of Asia: Edmund E. Hilario,

If insurance is non taken during the construction of a building – it is treated as

St. Dominic College of Asia: Edmund E. Hilario,

If said expenses are movable – it is treated as

St. Dominic College of Asia: Edmund E. Hilario,

Otherwise it is treated as building improvements