Property, Plant and Equipment

1
PROPERTY, PLANT
AND EQUIPMENT
Introduction
 Property, Plant and Equipment (PPE) is an important component of

nonmonetary assets in businesses.
 It enables an entity to conduct its business efficiently, add value,

help to improve future cash flows and reduce business risks.
 PPEs are tangible assets and:
– Are held for use in production of

goods/supply/rental/administrative purpose, and
– Expected to be used more than one period. (Para 6)
FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2016 1– 2
Property, Plant and Equipment
MFRS 116 does not cover asset whose scope are covered in other
specific standards, such as:
 PPE held for sale – dealt in MFRS 5 Non-Current Assets Held
for Sale and Discontinued Operations.
 Biological Assets – dealt in MFRS 141 Agriculture.
 Exploration and evaluation assets – dealt in MFRS 6 Exploration
for and Evaluation of Mineral Resources.
 Mineral rights and mineral reserves such as oil and natural gas.

Introduction
Importance of PPE:
 PPE is generally used in the business operations. Enable

business to carry out its normal trading activities.
 PPE enables an entity to conduct its business more
efficiently
 A good, well maintained PPE would and further value to the
company and may help to improve its future cash flows
 PPE assists companies in reducing business risks.

Initial Recognition
Before an item can be classified as a PPE, in addition to meeting

the definition of a PPE in para 7 of MFRS 116, the general
recognition criteria that need to be satisfied are:
 Entity expects to obtain economic benefits from using the
assets
 The costs can be reliably measured

Initial Recognition
Two recognition costs:
i) Initial cost (Para 16 & 17)

The acquisition of such property, plant and equipment, although
not directly increasing the future economic benefits of any
particular existing item of property, plant and equipment, may
be necessary for an entity to obtain the future economic
benefits from its other assets.

Initial Recognition
ii) Subsequent cost (Para 17 – 20)
An entity does not recognize in the carrying amount of an item

of property, plant and equipment the costs of the day-to-day
servicing of the item. However, the subsequent cost match the
definition on paragraph 7 on MFRS 116, it can be included in
the carrying value. (Eg: Major replacement, major renovation)

Initial Measurement
Self constructed asset

 Assets built by entity for own use.
 Initial recognition is based on cost/ related expenditure; Eg.:

material used, labour and contractor costs.
 Profits arising from the savings/efficiencies can be excluded
from the cost of the constructed assets.
 Likewise, the inefficiencies that results in extra costs should
also be deducted from the cost of the constructed assets.
See Example 1: Self-Constructed Asset.

Example 1
 A storage company constructed a small building to store

its unused vehicles and other moveable assets. The costs
incurred in constructing the building include the following:
RM
Contractors’ costs 300,000
Direct materials and labour 50,000
Technical overheads 12,000
General administrative overheads 8,000
Interest cost in financing the
3,000
construction
373,000

Example 1
The company purchased RM50,000 of materials for the

construction; however, due to technical inaccuracies in estimating
the necessary amount of material for the construction, only
RM48,000 of materials were used. In addition, during the
construction, several of the foreign labours involved were
affected with an infectious disease. The disease had disrupted
the construction and cost the company a further RM15,000.
 Required:
Determine the cost of the building for capitalization.

Solution
RM RM
Contractors’ cost 300,000
Direct materials and 50,000
labour
Less: Internal profit (2,000)
(RM50,000 – RM48,000)
Labour inefficiency (15,000)
33,000
Technical overheads 12,000
Interest cost in financing 3,000
the construction
Cost of the building 348,000

Initial Measurement (cont.)
Capitalization of interest (MFRS 123)

 Borrowing costs directly attributable to the acquisition, construction
or production of a qualifying assets shall be capitalized as part of
cost of that asset.
 In determining the interest rate to be capitalized, the entity must
ensure that it does not exceed the actual interest.
 This is to ensure that all assets are not overstated while liabilities
are not understated.

 The cost of an item of property, plant and equipment is the

cash price equivalent at the recognition date. If payment is
deferred beyond normal credit terms, the difference
between the cash price equivalent and the total payment is
recognised as interest over the period of credit unless such
interest is capitalised in accordance with MFRS 123.

Exchange of asset
 Cost of an asset obtained through an exchange is measured

by the fair value of the asset given up unless the fair value of
the asset received is clearly evident. See Example 2:
Exchange of Non-monetary asset

Example 2
PUBG, a gaming company traded its super computer for

the newer super computer that will increase the
effectiveness and efficiency in graphic development. The
new super computer manufactured by the Alienware. The
book value of the current super computer is RM 200,000
(Cost at RM500,000 less accumulated depreciation of
RM300,000) and a fair value of RM250,000. In addition to
the assets exchanged, the eye surgery company paid
RM30,000 in cash. The newer super computer can be used
for at least 20 years.

Example 2
Required:
a) Determined whether the super computer reflects as a
property, plant and equipment to PUBG.
b) Determine the cost of the acquired newer super
computer.
c) Provide journal entry to record the above situation.

Example 2
a) Yes, the super computer is a PPE. This is because it

fulfilled the recognition criteria of PPE whereby it can
obtain future economic benefit from using the asset and
the cost can measured reliably.
b) RM 280,000
c) New asset 280,000
Accumulated depreciation 300,000
Old asset 500,000
Bank 30,000
Gain on disposal 50,000

Unit of measure for recognition
 Unit of measure is the unit to measure the collection of item or

part of an item.
 In accordance with entity’s specific requirements, judgement

needed.

Subsequent Measurement
Cost Model
 PPE is subsequently measured at its book value; i.e. Costs
less Accumulated Depreciation and Impairment losses
 Impairment is a situation whereby the fair value less than its
expected selling costs is more than its carrying value (the
asset is less than what it is actually worth).

Subsequent Measurement
Cost Model (Para 30)

 When impairment happens, the impairment loss is immediately
recognized in profit and loss. Also, the entity needs to reduce the
value of PPE recorded in Statement of Financial Position. See
Example 1.8: Subsequent Measurement – Cost Model
RM RM
Dr Impairment Loss XXX
Cr Accumulated Impairment Loss XXX

Example 3
ADATA Sdn Bhd manufatures electrical component for the

industrial companies. Due to intense competition in the market
caused by the success of a business rival’s electrical product
that was recently launched, there has been indication that one of
the plants of the company may not be recoverable and that the
amount of impairment loss for the plant is RM50,000. The
original cost of this plant is RM200,000 while the accumulated
depreciation to date is RM70,000. The company opted the cost
model to value the plants.
Example 3
Required:
a) Provide a journal entry to record the impairment of this
plant.
b) Ascertain the carrying value of the plant after
considering the impairment and the journal entry in (a).

Solution
a) The journal entries to record the implementation loss is as follows:
Impairment loss RM50,000

Accumulated impairment loss RM50,000
b) Taking into consideration the impairment loss, the carrying value

of the plant would then be valued at RM80,000 (i.e. book value at
RM130,000 less impairment loss at RM50,000)
RM
Cost 200,000
Less: Accumulated depreciation (70,000)
Less: Accumulated impairment loss (50,000)
Carrying value 80,000

Subsequent Measurement (cont.)
Revaluation Model (Para 31 - 40)

 PPE is subsequently measured at its revalued amount.
 The PPE shall be carried at its revalued price less any accumulated
depreciation and impairment loss.
 Entity must ensure that the revaluation is carried out frequently (three or
five years) so that the fair value of the PPE does not differ materially
from its carrying amount.
 The whole class of a PPE shall be revalued if an item in the class is
revalued.

Subsequent Measurement (cont.)
Revaluation Model
 If a PPE is revalued upwards, the gain shall be recorded as a gain in
other comprehensive income and as a revaluation surplus in
accumulated equity.
 If a PPE is revalued downwards, the loss shall be recorded as a loss in
other comprehensive income and it reduces accumulated equity in
revaluation surplus.
 See Example 4: Subsequent Measurement – Revaluation Model.

Example 4
Oral B company acquired an equipment at the cost of RM300,000 on

1 January 2020. The equipment has a useful life of six years and no
residual value. The company opted for the revaluation model to value
its equipment. An independent valuer was of the opinion that the fair
value of the equipment at the end of year 2020 is RM252,000.
Required:
a) Prepare the necessary journal entries to record the above.
b) Ascertain the carrying value of the equipment after considering
the journal entry in (a).

Example 4
a) Before the revaluation is taken into consideration, note

that the company would need to record the yearly
depreciation of RM50,000 (being the original cost at
RM300,000 less residual value or RM0 and divided by
useful life of six years).
Depreciation (RM300,000)/ 6 years RM50,000

Accumulated depreciation RM50,000

Example 4
b) According to the MFRS 116, the difference of RM2,000 is

treated as a gain which will be credited to the other
comprehensive income. The journal entry and the
corresponding amount of the equipment and related
accounts is discussed below based on the two methods
allowed in MFRS 116.

Derecognition
 Asset is derecognized if it is i) disposed, or ii) economic

benefits cease to flow from the asset.
 E.g. If asset is sold under sale and leaseback
agreement, if an entity enters into a finance lease
agreement where the entity is the lessor and through
donation.

Derecognition (cont.)
 When a PPE is derecognized, the revaluation surplus for

the PPE is transferred to the retained earnings.
 If an asset continues to be used after it has been fully
depreciated, the asset needs to be disclosed in the
Statement of Financial Position at its carrying amount.

Example 5
The facts in example 4 are retained, except that on 30 April

2021, Oral B company disposed the equipment for RM210,000.
Required:
Assuming the company uses the restated nett amount method,
provide the journal entry to record the disposal of the
equipment on 30 April 2021.

Example 5
Following the revaluation in example 4, the equipment has now

been stated at its revalued amount of RM252,000 at the
beginning of year 2021. The remaining useful life of the
equipment has now been reduced to five years. Since the
equipment is disposed during the year, the period of which the
equipment is still in use needs to be taken into consideration,
which is four months over the full financial years.

Example 5
The partial period of ownership needs to be reflected in the

depreciation account. This is recorded as follows:
Depreciation expense RM16,800

[RM252,000/ 5 years x 4 over 12 months]
Accumulated depreciation RM16,800

Example 5
The gains/losses arising from the disposal is determined by

comparing the book value of the equipment with the cash
proceeds received from the disposal.
RM
Cash proceed from disposal 210,000
Less: Revalued amount (252,000)
Less: Accumulated depreciation (16,800)
Loss from disposal 25,200

Example 5
The journal entries to record this situation:
Cash 210,000
Accumulated depreciation 66,800
Loss in disposal 25,200
Equipment 300,000
Revaluation surplus 2,000

Disclosure Requirement
 In general (Para 73 – 79), an entity needs to disclose the following:
– Gross carrying amount of the PPE.
– Accumulated depreciation, including impairment loss at the
beginning and ending of a period.
– Impairment losses and its reversal.
– Details of the expenditure relating to asset construction (for self-
constructed assets), amount of expenditure and contractual

commitments.

Disclosure Requirement (cont.)
 For revaluation, an entity needs to disclose the following:

– Date of revaluation.
– Whether an independent valuer is engaged for the revaluation
exercise.
– How fair value is determined and the presumptions in arriving at
the values.
– The revalued amount for each class of PPE.
– Information on the revaluation surplus.

Issues in Accounting for Property,
Plant and Equipment
 The recent development in the business community and the
financial market has caused the focus of financial statements to
shift from an ‘income focus’ (reported in income statement) to an
‘entity’s worth’ (as reported in the statements of financial
position).
 Thus, determining the ‘fair value’, the basis used in arriving at
the amount and the practical aspects in adhering to the standard
is an issue.
Plant and Equipment
 In addition, for initial measurement, it is also an issue to
determine the basis for indirect costs in the case of self-
constructed assets.
 In Malaysia, whose markets are still developing and thus, the
markets for some assets are not clearly observable,
determining the fair value for the assets is a challenge.

Plant and Equipment
 Nevertheless, it is important to note that the qualitative criteria
of accounting information as provided in the conceptual
framework needs to be revisited at all times in exercising
professional judgements, so as to provide useful information
to the users of accounting information.

Thank You


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1

 Property, Plant and Equipment (PPE) is an important component of

 It enables an entity to conduct its business efficiently, add value,

 PPEs are tangible assets and:

– Are held for use in production of

– Expected to be used more than one period. (Para 6)

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

 PPE is generally used in the business operations. Enable

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

Before an item can be classified as a PPE, in addition to meeting

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

Two recognition costs:

i) Initial cost (Para 16 & 17)

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

ii) Subsequent cost (Para 17 – 20)

An entity does not recognize in the carrying amount of an item

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

Self constructed asset

 Initial recognition is based on cost/ related expenditure; Eg.:

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

 A storage company constructed a small building to store

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

The company purchased RM50,000 of materials for the

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

Capitalization of interest (MFRS 123)

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

 The cost of an item of property, plant and equipment is the

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

 Cost of an asset obtained through an exchange is measured

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

PUBG, a gaming company traded its super computer for

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

a) Yes, the super computer is a PPE. This is because it

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

Unit of measure for recognition

 Unit of measure is the unit to measure the collection of item or

 In accordance with entity’s specific requirements, judgement

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

Cost Model (Para 30)

Dr Impairment Loss XXX

Cr Accumulated Impairment Loss XXX

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

ADATA Sdn Bhd manufatures electrical component for the

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

a) The journal entries to record the implementation loss is as follows:

Impairment loss RM50,000

b) Taking into consideration the impairment loss, the carrying value

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

Revaluation Model (Para 31 - 40)

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

 If a PPE is revalued upwards, the gain shall be recorded as a gain in

other comprehensive income and as a revaluation surplus in

 If a PPE is revalued downwards, the loss shall be recorded as a loss in

other comprehensive income and it reduces accumulated equity in

 See Example 4: Subsequent Measurement – Revaluation Model.

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

Oral B company acquired an equipment at the cost of RM300,000 on

FINANCIAL ACCOUNTING AND REPORTING 2 All Rights Reserved

a) Before the revaluation is taken into consideration, note