Chapter 10

Property, Plant and Equipment

Learning Objectives
1. State the initial and subsequent
measurements of items of PPE of
government entities.
2. Describe the following and state their
peculiar accounting requirements: Heritage
Assets, Infrastructure Assets, and
Reforestation Projects.
3. Account for Borrowing Costs by a
government entity.
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Property, Plant and Equipment
…are:
a. tangible assets;
b. held for use in the production or supply of
goods, services or program outputs, for
rental to others, or for administrative
purposes, and not intended for resale in
the ordinary course of operations; and
c. expected to be used for more than one
reporting period

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 Recognition
• An item of PPE is recognized if it meets the definition of a
PPE and the recognition criteria for assets, as well as the
capitalization threshold of ₱15,000.
• The threshold is applied on a per item basis, except as
follows:
– Individual items with values below the threshold but
work together as a group are recognized as PPE if the
total cost of the group is ₱15,000 or more
– Bulk acquisitions of small items of PPE are recognized
as PPE if their aggregate cost is ₱15,000 or more.
• Items below the capitalization threshold are recognized as
inventories (i.e., Semi-Expendable Property).

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 Initial Measurement
• PPE are initially measured at cost. Cost comprises
the following:
a. Purchase price, including non-refundable taxes
but excluding trade and cash discounts;
b. Direct costs; and
c. Present value of decommissioning and
restoration costs.

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Examples of directly attributable costs
• Costs of employee benefits arising directly from
the construction or acquisition of PPE;
• Costs of site preparation;
• Initial delivery and handling costs (e.g., freight
costs);
• Installation and assembly costs;
• Testing costs, net of disposal proceeds of samples
generated during testing; and
• Professional fees.

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Examples of costs that are expensed outright
• Costs of opening a new facility.
• Costs of introducing a new product or service
(including costs of advertising and promotional
activities).
• Costs of conducting business in a new location or
with a new class of customers (including costs of
staff training).
• Administration and other general overhead costs.

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 Modes of Acquisition
a. Acquisition by Purchase
– Cash discounts, whether taken or not, are excluded from the
initial measurement. Cash discounts not taken are recognized
as “Other Losses.”
– A PPE purchased under installment basis is initially measured
at the cash price equivalent.
– Promotional items are accounted for as follows:
• If the promotional item is the same as those purchased, the
total acquisition cost is allocated to all the items acquired
including the promotional item.
• If the promotional item is different from the other items
acquired, the initial cost of the promotional item is its fair
value. The purchase price, net of the fair value of the
promotional item, is allocated to the other assets acquired.

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 Modes of Acquisition
b. Acquisition by Construction
1. Acquisition through Construction Contracts awarded to
contractors – the cost is the contract price.
2. Construction by Administration (Self-construction) – the
cost includes direct materials, labor and other
construction overheads.

• Construction costs are initially recorded in the

“Construction in Progress” account pending the
completion of the asset. Upon completion, the
construction costs are reclassified to the appropriate PPE
account.

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 Modes of Acquisition
c. Acquisition through Exchange
– With Commercial Substance (order of priority):
1. Fair value of asset Given up (plus any cash
paid or minus any cash received);
2. Fair value of asset Received; or
3. Carrying amount of asset Given up (plus any
cash paid or minus any cash received)

– Lacks Commercial Substance: Carrying amount of

asset Given up (plus any cash paid or minus any
cash received)
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 Modes of Acquisition
d. Acquisition through Non-Exchange Transaction
– measured at fair value at the acquisition date.
i. If without condition, recognized
immediately as income.
ii. If with condition, initially recognized as
liability (i.e., ‘Other Deferred Credits’) and
subsequently recognized as income when
the condition is met.

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 Modes of Acquisition
e. Acquisition through Intra-agency or Inter-agency
Transfers
– measured at the carrying amount of the asset
received

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Subsequent Expenditures on recognized PPE

• Capitalization of costs ceases when the PPE

is in the location and condition necessary
for it to be capable of operating in the
manner intended by management.
Therefore, costs incurred in using or
redeploying a PPE are not capitalized.

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Subsequent Expenditures on recognized PPE

a. Repairs and Maintenance

1. Minor repairs – costs of day-to-day
servicing of an item of PPE, necessary to
maintain its operating capability. These are
charged as expenses.
2. Major repairs – are considered
‘betterments’ and are capitalized.

• If it is not clear whether a repair is minor or

major, it is treated as minor.

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Subsequent Expenditures on recognized PPE

b. Replacement costs
– The carrying amount of the old part is
derecognized and charged as loss.
– The cost of the new part is capitalized.
– If the carrying amount of the old part
cannot be determined, the cost of the new
part is used as the basis.

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Subsequent Expenditures on recognized PPE

c. Spare parts and servicing equipment

– Minor spare parts are recognized as
inventory and charged as expense when
consumed.
– Major spare parts and stand-by equipment
are recognized as PPE when they meet the
recognition criteria, e.g., they are expected
to be used over more than one period.
– Spare parts and servicing equipment that
can only be used in conjunction with an
item of PPE are accounted for as PPE.
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 Subsequent Expenditures on recognized PPE
d. Betterments
– are enhancements to the future economic benefits of a PPE, such as:
• increase in previously assessed physical output or service capacity;
• reduction in associated operating costs;
• extension of the estimated useful life; or
• improvement in the quality of output.
– Costs of betterments are capitalized (if they meet the recognition
criteria for PPE) and are subsequently depreciated as follows:
a. Over the remaining useful life, if the betterment increases the
service potential of the asset without extending its useful life; or
b. Over the extended useful life, if the betterment extends the
useful life of the asset. The extended period shall not exceed the
original estimate of useful life of the asset.

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 Subsequent Expenditures on recognized PPE
e. Additions and Rearrangements
– Additions are modifications which increase the physical size or
function of the PPE. An addition can be:
a. a new unit that is physically distinct from the old unit; or
b. an expansion, extension or enlargement of the old unit.
– The cost of a new unit is depreciated over its own useful life.
– An expansion cost is depreciated over the shorter of its useful life and
the remaining life of the PPE of which it is part.

– Rearrangement is the relocation or reinstallation of an asset which

proves to be less efficient in its original location.
– As the PPSAS provides that capitalization of costs ceases when an
asset is in the location and condition originally intended by
management, rearrangement costs shall be capitalized only when it is
clear that the PPE recognition criteria are met.
 Subsequent Measurement
• PPE are subsequently measured using the cost model.
• Depreciation begins when the asset is available for its
intended use. For simplicity, if a PPE becomes available for
its intended use:
– On or before the 15th of the month – depreciation is
computed at the beginning of that month.
– After the 15th of the month – depreciation is computed
at the beginning of the following month.
• Depreciation ceases when the asset is derecognized or
fully depreciated. Depreciation does not cease when the
asset becomes idle or retired from active use and held for
disposal.
• The straight line method of depreciation shall be used
unless another method is more appropriate.
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 Subsequent Measurement
• Residual value shall be at least 5% of cost, unless an
entity determines a more appropriate estimate,
subject to the approval of COA.

• The residual value and the useful life of an asset shall

be reviewed at least at each annual reporting date
and, if expectations differ from previous estimates,
the change(s) shall be accounted for as a change in
an accounting estimate
 
• Depreciation shall be recognized on a monthly basis.

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 Impairment
• A PPE is impaired if its carrying amount exceeds its
recoverable service amount or recoverable
amount.

• Indications of Impairment:
• 1. External Sources of Information
• 2. Internal Sources of Information

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 Computation of Value in Use
1. Depreciated Replacement Cost Approach
– Value in use is equal to the asset’s replacement cost adjusted
for depreciation to reflect the asset’s used condition.
– Replacement cost is the cost of replacing or reproducing the
asset, whichever is lower.  
2. Restoration Cost Approach
– Value in use = Depreciated replacement cost minus Estimated
restoration cost.
– Restoration cost is the cost of restoring the service potential of
an asset to its pre-impaired level.
3. Service Units Approach
– Value in use = Depreciated replacement cost minus a
proportionate reduction to reflect the reduced number of
service units expected from the asset in its impaired state.

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 Reversal of Impairment
• The principles used in recognizing reversals of
impairment loss on items of PPE are the same as
those used for investment property.

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 Heritage Assets
• Heritage assets are those which have historical,
cultural and environmental significance, and are
intended to be preserved for future generations.
• Heritage assets are measured at cost. They are not
depreciated, but subject to impairment.
• However, heritage assets that have future
economic benefits other than their heritage value
are depreciated similar to the other items of PPE,
e.g., a historic building being used as office.

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 Infrastructure Assets
• Infrastructure assets include road networks
(including facilities, such as traffic lights and road
signage), flood control, sewer, water and power
supply systems, communications networks,
railways, seaports, airports, and the like. 
• Infrastructure assets are accounted for similar to
the other items of PPE, i.e., they are initially
measured at cost and subsequently depreciated.
• However, generally, infrastructure assets have no
residual value. In cases where a part of an
infrastructure asset has a residual value, it shall be
at least 5% of the cost of that part.
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 Reforestation Projects
• Reforestation refers to the renewal of a forest
cover by planting seeds or young trees.
• Reforestation projects are recorded as land
improvements.  
• Subsequent costs are accounted for as follows:
– Maintenance and protection costs incurred
within the duration of the project are
capitalized.
– Those incurred after the turn-over of the
project are charged as expense.

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 Derecognition
• A PPE is derecognized when it is disposed or when
no future economic benefits is expected from it.
• On derecognition, the difference between the
carrying amount and the net disposal proceeds, if
any, is recognized as gain or loss in surplus or
deficit.

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Idle, Fully Depreciated, & Unserviceable PPE
• Idle PPE refers to assets that are temporarily
taken out of active use or temporarily
abandoned. Idle PPE are not derecognized but
continued to be depreciated.
• A PPE is fully depreciated when its carrying
amount is equal to zero or its residual value. Fully
depreciated PPE are not derecognized.
• Unserviceable property are those which do not
have future economic benefits. Unserviceable
property is derecognized.  

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 Lost PPE
• When a PPE is lost, e.g., through force majeure, the officer
having custody of the PPE shall immediately notify the COA
within 30 days and shall submit an application for relief, together
with supporting evidence. If warranted by the evidence, a credit
for loss shall be allowed. Failure to do the requirements will not
relieve the officer of liability. (P.D. No. 1445, Sec. 73)
• The carrying amount of the lost PPE is derecognized and charged
as loss.
• Pending the result of the investigation, the accountability of the
officer shall be established, equal to the depreciated
replacement cost of the lost PPE. If a credit for loss is
subsequently allowed to the officer, the accountability is simply
reversed. If not, the officer shall pay cash to settle his
accountability.
 Receipt and Disposition of PPE
• The procedures in the receipt and disposition of
PPE are similar to those of inventories.
• Property Card – used by the Supply/Property
Division to record all movements in items of PPE.
This is the equivalent of the Stock Card used for
inventories. 
• Property, Plant and Equipment Ledger Card –
used by the Accounting Division to record all
movements in items of PPE, both in quantity and
monetary amount. This is the equivalent of the
Stock Ledger Card used for inventories. 

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 Receipt and Disposition of PPE
• Property Acknowledgement Receipt – used by the
Supply/Property Division to record the issuance
of PPE to the end user. This is based on the
approved Requisition and Issue Slip (RIS)
submitted by the requesting individual. This is the
equivalent of the Report of Supplies and
Materials Issued used for inventories.
• Report on the Physical Count of Property, Plant
and Equipment – At the end of each year, the
entity shall perform a physical count of PPE and
prepare this report. This report shall be submitted
to the COA not later than January 31 of the
following year.
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 Receipt and Disposition of PPE
• Inventory and Inspection Report for Unserviceable
Property – used to account for all unserviceable
property subject to disposal.
• Report of Lost, Stolen, Damaged or Destroyed
Property – used by the accountable officer to
notify the concerned officials of the lost, stolen,
damaged or destroyed property. 
• Property Transfer Report – used to record
transfers of property from one accountable
officer to another.

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 Borrowing Costs
• Borrowing costs – are interest and other expenses
incurred by an entity in connection with the
borrowing of funds. (PPSAS 5.5)

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 Recognition of Borrowing costs
1. Benchmark Treatment – expensed in the period
incurred.
2. Allowed Alternative Treatment – capitalized if
the borrowing costs are directly attributable to
the acquisition of a qualifying asset.

• Qualifying asset – is an asset that necessarily

takes a substantial period of time to get ready for
its intended use or sale. (PPSAS 5.5)

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 Recognition of Borrowing costs
Applications:
The borrowing costs on loans borrowed by:
a. National Government (recorded by BTr) are
expensed (i.e., Benchmark Treatment).
b. Government agencies are capitalized, if they
relate to the acquisition of a qualifying asset (i.e.,
Allowed Alternative Treatment).

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Z.B.Millan
 END

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan