MODULAR REVIEW

Property plant and

Equipment
LEARNING OBJECTIVES
Once you have completed this module you should be able to :
• Learn the proper recognition, measurement and disclosure of PPE
• Ascertain if the PPE is properly accounted
• Learn the accounting for government grant
• To ascertain that borrowing cost is recognize accordingly
• Ascertain the proper measurement and presentation of land, building and
machinery
• Distinguish the Accounting for depreciation and depletion
• Know the importance of revaluation of assets and learn the accounting
for impairment of assets
OVERVIEW

 Major topics covered in this module include:

 Overview Property, plant and equipment
 Initial and subsequent measurement tangible noncurrent assets
INTRODUCTION
Property, Plant and Equipment (PPE)
Property, plant and equipment are tangible assets which
are held by an entity for production or supply of goods and
services, for rental to others, or for administrative
purposes, and are expected to be used during one or more
than one period.
Characteristic of PPE
1. The PPE are tangible assets, meaning to say it has physical substance.
2. The PPE are used in business, meaning used in production or supply of
goods and services, for rental purposes and for administrative purposes.
3. The PPE are expected to be used over a period of more than one year.
Recognition of PPE
The item of PPE shall be recognized as an asset whet:
a. It is probable that future economic benefits associated with the asset will
flow the entity
b. The cost of the asset can be measured reliably
Spare parts and servicing equipment
Usually spare parts and servicing equipment are carried as inventory and
mostly recognize as expense when consumed.

However, major spare parts and servicing equipment can be used only on
connection with an item of PPE, they are accounted for as PPE and are
depreciated over a time period not exceeding the useful life of the related
asset.
Measurement
PPE shall be measured initially at cost.

Subsequently!!!
After initial recognition, an entity shall choose either the cost model or the
revaluation model as the accounting policy and shall apply that policy to an
entire class PPE.
Element of cost
a. Purchase price
b. Directly attributable cost
c. Initial estimate of Cost of dismantling and removing
Modes of acquiring PPE
a. Cash purchase
b. Acquired on credit or on account
c. By installment
d. By issuing share capital
e. By issuing bonds payable
f. Acquired in an exchange
g. Donation
h. Self-constructed PPE
i. Government grant
Acquisition on cash basis
The cost of PPE is the cash price equivalent at the recognition date. The
cost of asset acquired on a cash basis simply includes the cash paid plus
directly attributable cost such as freight, installation cost and other cost
necessary in bringing the asset to present location and condition for the
intended use.
Moreover when several assets are acquired at a basket price or lumpsum
price, it is necessary to apportion the single price to the asset acquired on
the basis of relative sales value. In absence of fair value of other asset the
one with available fair value will be assign first with value equal to its FV
then the remaining is charge to asset with no FV.
Illustration- on cash basis
Land and building are acquired at a single cost of the P11,000,000. at that
time of acquisition, the land has a fair value of P1,000,000 and P4,000,000
Allocation and entry:

Fair value Fraction Allocated cost

Land P1,000,000 1/5 P2,200,000
Building P4,000,000 4/5 P8,800,000
multiply
P5,000,000 P11,000,000
Land P2,200,000
Building P8,800,000
cash P11,000,000
Acquisition on account
PPE acquired on account subject to cash discount, the cost of the asset is
equal to the invoice price minus the discount, regardless the discount is
taken or not.

What if not taken? If the discount is not taken, the same is charged to
purchase discount lost account which is treated as other expense.

What is the rationale of not considering the discount as capitalizable cost?

reasonable wise the management would take advantage of all discount,
hence it implied of inefficiency of management if the discount is not taken.
Illustration- on account
An equipment is purchased for P200,000, 2/10,n/30. the purchase may be recorded using
either the gross method or net method.

Gross Method
Equipment P200,000 acquisition
accounts payable P200,000
Accounts payable P200,000
cash P196,000
Payment w/in discount period
equipment P4,000
Accounts payable P200,000
Purchase discount lost P4,000 Payment beyond the
cash 200,000
discount period
equipment 4,000
Illustration- on account
An equipment is purchased for P200,000, 2/10,n/30. the purchase may be
recorded using either the gross method or net method.

Net Method
Equipment P196,000 acquisition
accounts payable P196,000
Accounts payable P196,000 Payment w/in discount period
cash P196,000
Accounts payable P196,000 Payment beyond the
Purchase discount lost P4,000 discount period
cash 200,000
Acquisition on installment basis
Asset acquired on installment basis is generally recorded base on cash price
equivalent at the recognition date. Any excess of the installment price over
cash price is treated as an interest to be amortized over the credit period.
Illustration- installment basis
A machinery use in manufacturing anti Bitok tablet is purchased at an installment
price of P350,000. the terms are P50,000 down and the balance payable in three
equal annual installment. The cash price of the machinery is P290,000. a
promissory note is issued for the installment balance of P300,000.
Machinery P290,000
Discount on note payable P60,000
note payable P300,000
cash P50,000
Note payable P100,000
cash P100,000
Interest expense P30,000
discount- note payable P30,000
Table of allocation- interest expense
Note payable Fraction Interest expense
First year P300,000 3/6 P30,000
Second year P200,000 2/6 Multiply P20,000
Third year P100,000 1/6 P10,000
P600,000 P60,000
No available cash price
If an asset is acquired by installment and there is no available cash price,
the asset must be recorded initially at an amount equal to present value of
all payment using an implied interest rate.

Down payment Pxxx

Present value ( installment amount x present value of ordinary annuity of 1 using implied rate) Pxxx
Total cost of asset Pxxx

If the note is payable by lump sum, the face amount of note is simple
multiplied by present value of one using effective rate and the product is
added to the down payment to come up with the cost of asset.
Issuance of share
The Accounting Standards Council (ASC) pronounce that if shares are
issued for consideration other than actual cash, the proceeds shall be
measured by the fair value of the consideration receive. Moreover, for
equity settled transactions, the entity shall measure the goods or services
received and the corresponding increase in equity at the fair value of the
goods or services received. Accordingly the property shall be measured at
an amount equal to the following in the order of priority:
a. Fair value of property receive
b. Fair value of share capital
c. Par or state value of share capital
Issuance of bonds
When the entity acquires an asset by issuing bonds payable, the entity shall
measure the financial liability at its fair value plus transaction cost that are
directly attributable to the use of the financial liability. Accordingly, the
asset acquired by issuing bonds payable is measured in the following order:

a. Fair value of bonds payable

b. Fair value of asset receive
c. Face value of bonds payable
Exchange
PAS 16 provides that state that the cost of an item of PPE acquired in
exchange for non monetary asset or a combination of monetary and
nonmonetary asset is measured at fair value, unless the exchange
transaction lacks commercial substance or the fair value of neither the asset
receive nor the asset given up is reliably measurable.

Commercial substance is defined as the event or transaction causing the

cash flows of the entity to change significantly by reason of the exchange.
Exchange- no cash involved
If a property is acquired in an exchange with commercial substance and
there is no cash involved, the cost is measured at the following in the order
of priority:
a. Fair value of property given
b. Fair value of property receive
c. Carrying amount of property given
Exchange- cash is involved
If a property is acquired in an exchange and there is a cash involved, the
cost of the property is equal to the following:
a. Fair value of asset given plus cash payment- on the part of the payor
b. Fair value of asset given minus the cash receive- on the part of the
recipient
Exchange- no commercial substance
If the exchange transaction lacks commercial substance, the acquired item
of PPE is measured at the carrying amount of the asset given.
Note: no gain or loss is recognized when the exchange lacks commercial
substance. Any cash involved is added to the carrying amount on the part of
the payor and deducted from carrying amount on the part of the recipient.
Trade in
Trade in is considered as a form of exchange by acquiring property by
exchanging another property as part of payment and the balance payable
in cash or any other form of payment in accordance with agreed terms.
As an exchange with commercial substance, the new asset is recorded at the
following in the order of priority:
a. Fair value of asset given plus cash payment -fair value approach
b. Trade in value of asset given plus cash payment (in effect, this is the fair
value of the asset receive)- trade in value approach
Donation
At present, the IFRS clearly does not addressed donation or contribution.
The body openly viewed it as government grant.
On the other sided, Philippine GAAP further provides that entities
sometimes received from non shareholders gifts or grants of funds or other
asset that are restricted for property and equipment additions. Capital gift
or grants shall be recorded at their fair value when they are received or
receivable. When such items are received by entities, these are general
subsidies and therefore recognized as income.
Construction
The capitalizable cost of self-constructed asset is determined using the same
principles as for an acquired asset. The cost of self-constructed asset PPE
shall include:
a. Direct cost of materials
b. Direct labor
c. Indirect cost and incremental overhead specifically indetified or
traceable to the construction
Derecognition of PPE
Derecognition means that the cost of the PPE together with the recorded
accumulated depreciation related to PPE shall be removed from the
accounts.
The standard provides, PAS 16, the carrying amount of the PPE shall be
derecognized on disposal or when no future economic benefit are expected
from its use or disposal. The gain or loss from the derecognition of an item
of PPE shall be included in the profit or loss.
Fully depreciated asset
A fully depreciated asset means that the carrying amount of the asset is
equal to zero or the carrying amount equal to the residual value. When
asset comes to point that it is fully depreciated, the asset account and
related depreciation account are closed and the residual value is set up in a
separate account.
However, some instances that the fully depreciated asset are continually use
by the entity. The cost of fully depreciated asset remaining in service and
the related accumulated depreciation ordinarily shall not be removed from
the accounts. An entities are encourage but not required to disclose fully
depreciated property.
Property classified as held for sale
PFRS 5, provides that PPE is classified as “held for sale” if the asset is
available for immediate sale in the present condition within one year from
the date of classification as held for sale.
When such asset is classified as held for sale, it shall be excluded from the
PPE but presented separately as current asset. Further, the standard
provides that an entity shall measure a noncurrent asset classified as held
for sale at the lower of carrying amount or fair value less cost of disposal.
The write down to fair value less cost of disposal is treated as an
impairment loss. In addition, noncurrent asset classified as held for sale not
be depreciated.
Idle or abandoned property
PFRS 5, states that an entity shall not classify as held for sale a noncurrent
asset that is to be abandoned. Temporarily idle activity or abandonment
does not prelude depreciating the asset as future benefit are consumed not
only through usage but also through wear and tear and obsolescence.
Noncurrent asset to be abandoned includes an item of PPE that is to be
used until the end of the economic life.