AE 15 — Financial Accounting and Reporting, Topic 2 (Integrated)

Property, Plant and Equipment

Recognition, initial measurement and acquisition of property, plant and equipment
including land, building and machinery

Miles N.M. Santos, CPA

Faculty — College of Business, Management and Accountancy
Colegio de la Purisima Concepcion

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Property, plant and equipment

The major characteristics of property, plant and equipment are:

a. The property, plant and equipment are tangible assets, meaning with physical
substance.

b. The property, plant and equipment are used in business, meaning used in production or
supply of goods or services, for rental purposes and for administrative purposes.
c. The property, plant and equipment are expected be used over a period of more than one
year.
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 PPE non-PPE

1. Land used in business 1. Land held for speculation

2. Land held for future site 2. Land held for undetermined future use

3. Buildings used in business 3. Land and/or building classified as investment property

4. Equipment used in the production of goods 4. Property held for sale in the ordinary course of
business

5. Equipment held for environmental and safety reasons 5. Non-current assets held for sale under IFRS 5

6. Equipment held for rentals 6. Biological assets related to agricultural activity

7. Major spare parts and long-lived stand-by equipment 7. Intangible assets

8. Furniture and fixture 8. Minor spare spare parts and short-lived stand-by
equipment

9. Bearer plants

PPE versus non-PPE 3

Recognition

An item of PPE is recognized if:

a. It is probable that future economic benefits associated with the item will flow to
the entity; and
b. The cost of the item can be measured reliably.

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Initial measurement

An item of PPE is initially measured at cost. Cost comprises the following:

a. Purchase price, including import duties, non refundable purchase taxes, less trade
discounts and rebates (or its cash price equivalent)
b. Direct costs of bringing the asset to the location and condition necessary for it to be
used in the manner intended by management; (directly attributable costs)
c. Initial estimate of dismantlement, removal and site restoration costs for which
the entity incurs an obligation by acquiring the asset other than to produce
inventories. (present value of asset restoration costs)
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 Directly attributable costs Costs that are expensed outright

1. Cost of employee benefits arising directly 1. Cost of opening a new facility

from the construction or acquisition of PPE

2. Cost of site preparation 2. Cost of introducing a new product or service

3. Initial delivery and handling costs 3. Cost of conducting business in a new location
or with a new class of customers; and

4. Installation and assembly costs 4. Administration and general overhead costs

5. Testing costs, net of disposal proceeds of

samples generated during testing; and
professional fees

Directly attributable costs versus costs that are expensed outright 6

Cessation of capitalizable costs

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 the management. Therefore, costs incurred in
using or redeploying PPE are not capitalized.

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Acquisition of PPE

No. 1 — Acquisition on a cash basis

The cost of asset acquired on a cash basis simply includes the cash paid plus directly attributable costs
such as freight, installation costs and other costs necessary in bringing the asset to the location and
condition for the intended use.

No. 2 — Acquisition on a cash basis at a lump-sum price

Acquisition at a lump-sum price occurs when there are several PPE items that were bought but the cash
paid plus directly attributable costs are not separately identified for each item. The cost of each item shall
be the allocated lump-sum price plus other directly attributable costs based on their relative fair
values.

Allocated costs = (FV ÷ Total FV of PPE ) x Lump-sum price

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Acquisition of PPE

No. 3 — Acquisition on account

Normally, when a PPE is acquired through credit, the price will be subjected to discounts if paid within the
discount period. In this case, regardless discounts are taken or not, the cost of PPE shall be initially
measured at invoice price minus the discount.

No. 4 — Acquisition on installment basis

When installment payment is offered to acquire a PPE, there is always a difference between the cash price,
if known and determinable, and the installment price. Under this scenario, the initial measurement of
PPE shall always be the cash price.

When the cash price is not available, its initial measurement shall be the present value using an implied
interest rate.

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Acquisition of PPE

No. 5 — Acquisition through issuance of share capital

Where a property is acquired through the issuance of share capital, the property shall be measured at an
amount equal to the following in the order of priority:

1. Fair value of the property received

2. Fair value of the share capital
3. Par value or stated value of the share capital

No. 6 — Acquisition through issuance of bonds

Where a property is acquired through the issuance of bonds, the property shall be measured at an amount
equal to the following in the order of priority:

1. Fair value of the bonds payable

2. Fair value of the asset received
3. Face amount of the bonds payable
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Acquisition of PPE

No. 7 — Acquisition through exchange of assets

If the exchange of assets is with commercial substance, the cost of the property is equal to fair value of the
asset given plus or minus cash payment or cash received.

If the exchange lacks commercial substance, the cost of the property is equal to its carrying amount of the
asset given at the date of exchange.

In every exchange of assets, a new asset shall be recognized at an amount in accordance with the
foregoing rules and the old asset which is the asset given shall be derecognized.

In derecognition of the old asset, both the costs and its corresponding accumulated depreciation
are written off the books.

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Acquisition of PPE

No. 8 — Acquisition through exchange of assets (trade in)

There is trade in of assets when the exchange took place between a non dealer acquiring an asset from a
dealer. In this case, the entity acquiring the asset through trade in shall initially measure the new asset at
the following in order of priority:

1. Fair value of asset given plus cash payment

2. Trade in value of asset given plus cash payment

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Acquisition of PPE

No. 9 — Donation

When a PPE is acquired through donation, the asset shall be initially measured at its fair value less
expenses incurred in connection with the donation, plus directly attributable costs incurred by the
donee.

Property and equipment xx

Donated capital xx

No. 10 — Construction

The cost of a self-constructed property, plant and equipment shall include direct materials, direct labor and
other indirect costs and incremental overheads.
However, costs incurred after the constructed asset is readily available for the intended use of the
management shall be expensed.
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Land

Land is classified as PPE if it is used in the entity’s operations as “owner-occupied”

property, e.g., land on which the entity’s office building was constructed and land used
as a plant site. Land held for future plant site is also classified as PPE.

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Land not classified as PPE

1. Land being sold in the ordinary course of business - classified as “inventory”

2. Land held for sale under IFRS 5 - classified as “non-current asset held for sale”
3. Land held for long-term capital appreciation - classified as “investment
property”
4. Land held for a currently undetermined future use - classified as “investment
property”
5. Land held as site for a building constructed or developed for future use as
investment property - classified as “investment property”
6. Land leased out under operating lease - classified as “investment property”

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Cost of land

1. Purchase price including other necessary costs, such as broker’s commissions

2. Closing costs, such as titling costs, attorney fees, and recording fees
3. Costs incurred in getting the land in the condition for its intended use, such as surveying, grading,
filling, draining and clearing
4. Unpaid realty taxes prior to the date of acquisition assumed by the buyer
5. Assumption of any liens, mortgages, or encumbrances on the property
6. Special assessment for local government-maintained improvements such as pavements, street lights,
sewers and drainage systems
7. Option paid to acquire the land while options paid on land that were not subsequently acquired are
expensed
8. Costs incurred to induce the tenants to vacate premises and costs of relocating and reconstructing
property belonging to others
9. Initial estimate of restoration costs for which the entity incurs obligation
10. Any additional improvements that have indefinite useful life such as costs of draining, clearing,
grading, leveling and filling, surveying, subdividing, and other permanent improvements

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Land improvement

Land improvements are enhancements to the land which have definite useful life, such
as private driveways, walks, fences, parking lots, drainages, and water systems, and
cost of trees, shrubs, plants and other landscaping.

Land normally has an indefinite useful life, thus it is not subject to depreciation. On the
other hand, land improvements have definite useful life. Therefore, land improvements
are segregated from the cost of land and depreciated over their estimated useful lives.

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Building

Building is classified as PPE if it is used in the entity’s operations as “owner-occupied”

property, e.g., building used to sell goods or services and building used for
administrative purposes. Building being constructed or developed for future use as
“owner-occupied” property is also classified as PPE.

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Buildings not classified as PPE

1. Building being sold in the ordinary course of business - classified as “inventory”

2. Building held for sale under IFRS 5 - classified as “non current asset held for
sale”
3. Building owned or held as leased asset by the entity and leased out under one or
more operating leases - classified as “investment property”
4. Building that is vacant but is held to be leased out under one or more operating
leases - classified as “investment property”
5. Building being constructed or developed for future use as investment property -
classified as “investment property”

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Cost of purchased building

1. Purchase price including other necessary costs, such as broker’s commissions

2. Assumption of any liens, mortgages, or encumbrances on the property
3. Option paid to acquire the building while options paid on buildings that were not
subsequently acquired are expensed
4. Unpaid taxes prior to the date of acquisition assumed by the buyer
5. Costs incurred to induce the tenants to vacate premises
6. Costs in getting the building in the condition for its intended use, such as remodeling,
renovation and other repairs prior to occupancy

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Cost of self-constructed building

1. Materials, labor, overhead costs incurred during construction

2. Architectural costs, supervision costs and cost of building permit
3. Excavation costs
4. Insurance costs and safety inspection fees
5. Costs of temporary structures built during construction, such as temporary safety fence,
construction offices, sleeping quarters for laborers, and materials and tools shed
6. Interest on borrowings made to finance construction

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Costs not included in the cost of building

1. Internal profits or savings on construction - these are not recognized

2. Cost of abnormal amounts of wasted material, labor or other resources due to inefficiencies
- recognized as expense
3. Costs of uninsured hazards or claims for uninsured accidents - recognized as an expense
4. Costs of private driveways, walks, permanent fences, parking lots, drainages and water
systems that are not included in the building’s blueprint - these are capitalized as building
improvements

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Building improvements

Building improvements refer to costs incurred subsequent to occupancy of a purchased building or subsequent to
completion of a self-constructed building that either increase the useful life of the building or improve its current state.

Building improvements include the following:

1. Cost of elevator, escalator, or similar items that was not originally included in the purchased building or in the
blueprint of a self-constructed building
2. Ventilation systems, plumbing, and lighting systems installed after occupancy of a purchased building or after
completion of a self-constructed building.
3. Immovable fixtures attached to the building which, if removed, would necessarily cause damage to the building,
e.g., partitions, compartments and cranes.

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Equipment

The term equipment in accounting includes delivery and transportation equipment,

office equipment, machinery, furniture and fixtures, furnishings, factory equipment,
and similar fixed assets.

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Cost of equipment

1. Purchase price including other necessary costs, such as brokers’ commissions and non
refundable purchase taxes
2. Freight, handling charges, and insurance on the equipment while in transit
3. Cost of necessary special foundations or platforms
4. Assembling and installation costs
5. Cost of testing and conducting trial runs
6. The initial estimate of decommissioning and restoration costs for wich the entity has a
present obligation

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Costs not included in equipment

1. Cost of relocating the equipment after it has been put to the location and condition
originally intended by the management
2. Cost of training personnel who will be responsible in the operating the equipment
3. Cost of dismantling and removing an old equipment belonging to the entity prior to the
installation of a new equipment

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