Conceptual

Framework and
Accounting
Standards
ATTY. ROWEL T. DE LEON, CPA
 09
PAS 16
PAS 16 – PROPERTY, PLANT and EQUIPMENT

 Prescribes the accounting treatment for PPE.

 Addresses the principal issues of recognition as assets, measurement of carrying amount and
recognition of depreciation charges.

 Applies to all items of PPE except:

1. Asset classified as held for sale. (PFRS 5)

2. Biological Assets other than bearer plants (PAS 41)
3. The recognition and measurement of exploration and evaluation assets. (PFRS 6)
4. Mineral rights and mineral reserves such as oil, natural gas, and similar non-regenerative resources.
PPE

 Are tangible assets used in business which are

long-term in nature. (Examples are)

1. Land used in business

2. Land held for future plant sid
3. Building used in business
4. Equipment used in the production of goods
5. Equipment held for environmental and safety
reasons
6. Furniture and Fixture
7. Bearer Plants
PPE

 The following are not PPE

1. Land held for speculation

2. Land held for an undetermined future use
3. Land and/or building classified as investment
property
4. Property held for sale in the ordinary course of
business.
5. Intangible assets
6. Biological assets
 Recognition of PPE

 PPE is recognized if, (1) it is probable that

future economic benefits associated with
the item will flow to the entity; and (2) the
cost of the item can be measured reliably.
 Initial Measurement of PPE

 PPEs are initially measured at cost. The

composition of the cost are as follows:

1. Purchase price, including import duties,

nonrefundable purchase taxes, less trade discounts
and rebates

2. Direct costs of bringing the asset to the location

and condition necessary for it to be used in the
manner intended by the management.

3. Initial estimate of dismantlement, removal, and

site restoration costs for which the entity incurs an
obligation by acquiring or using the asset than to
produce inventories.
 Initial Measurement of PPE

 Example of Direct Costs are:

1. Employee benefits arising directly from the

construction or acquisition of PPE

2. Cost of site preparation

3. Delivery and Handling costs (Freight)

4. Installation and assembly costs

5. Testing costs, net of disposal proceeds of samples

generated during testing; and

6. Professional fees
 Initial Measurement of PPE

 Costs that are expensed outright:

1. Cost of opening a new facility

2. Cost of staff training

3. Admin and other general overhead costs

4. Cost of opening a new facility

MEASUREMENT OF COST

 Cost is measured at the cash price equivalent at

the acquisition date.

 If payment is deferred beyond normal credit

terms, the difference between the cash price
equivalent and the total payment is recognized as
interest over the credit period.

 The cost of PPE acquired through an exchange of

non-monetary assets is measured using the
following order of priority:

1. Fair Value of the asset given up

2. Fair Value of the asset received
3. Carrying amount of the asset given up.
 Cessation of capitalization
of costs
 Capitalization of costs ceases when the
PPE is in the location and condition
necessary for it to operate in the manner
intended by the management. Hence,
costs incurred in using or redeploying PPE
are not capitalized.
 SUBSEQUENT
MEASUREMENT
 Two models used in measuring PPE
(subsequently)

1. Cost Model
2. Revaluation Model
COS MODEL

 A PPE is carried at its cost less any accumulated

depreciation and accumulated impairment
loss.

 Depreciation – defined as the systematic

allocation of the depreciable amount of an asset
over its useful life

 Depreciable amount – is the Cost of an asset, or

other amount substituted for cost, LESS its
Residual Value
COST MODEL

 Residual Value – The estimated amount that an

entity would currently obtain from disposal of the
asset, after deducting the estimated costs of
disposal.

 Useful life – the period which an asset is

expected to be available for use by an entity; or
the number of production or similar units
expected to be obtained from the asset by an
entity.
 DEPRECIATION

 Depreciation is recognized as expense (in profit or

loss) unless it is included in the cost of producing
another asset. For example, depreciation of a
factory building is included in the cost of
inventories.

 Depreciation STARTS when the asset is available

for use in the manner intended by management.

 Depreciation STOPS when the asset is:

1. Derecognized

2. Classified as held for sale under PFRS 5

3. Fully depreciated
 DEPRECIATION

 Carrying Amount – is the amount which an asset

is recognized after deducting any accumulated
depreciation and accumulated impairment
losses.

 As a rule, depreciation does NOT cease when the

asset becomes idle or is retired from active use.

 Land and Buildings are accounted for separately

since Land is not depreciated because it has an
unlimited useful life. On the other hand, buildings
are depreciated because they have limited useful
life.
DEPRECIATION METHOD

 Under PAS 16 there are three (3):

1. Straight-line Method

2. Diminishing Balance Method

3. Units of Production Method

 When making a judgment as to what depreciation

to be used, PAS 16 requires the management to
choose a method that best reflects the expected
pattern of consumption of the future economic
benefits embodied in the asset.
 DEPRECIATION

 Straight-line method depreciation is recognized

evenly over the useful life of the asset.
Depreciation is computed as follows:
Depreciable Amount/Useful life = Annual
Depreciation
SAMPLE: STRAIGHT-LINE

Sample Problem:
ENG co. acquired an equipment for P200,000. Its estimated useful life is 5 years and its residual value is
P10,000. Compute for the annual depreciation using the straight-line method.

1. At the end of the useful life, the balance of the equipment will be equivalent to P10,000.
2. ENG co will uniformly recognize depreciation expense per year amounting to P38,000
REVALUATION MODEL

 Under the revaluation model, a PPE is

subsequently measured at a revalued amount,
being its fair value at the date of revaluation less
any subsequent accumulated depreciation and
accumulated impairment losses.

 Fair Value – is the price that would be received

to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at
the measurement date.
Accounting for revaluations of PPE

 An increase or decrease in the carrying

amount of a PPE resulting from revaluation is
recognized in OTHER COMPREHENSIVE
INCOME and accumulated in EQUITY under
the “Revaluation Surplus” account EXCEPT
for the following:

1. An increase that represents a reversal of a

previous impairment loss is recognized in profit
or loss as impairment gain.

2. A decrease in excess of the credit balance in the

Revaluation Surplus of the asset is recognized in
profit or loss as an impairment loss.
ACCOUNTING FOR REVALUATIONS

FORMULA:

 *The Fair value is determined using an appropriate valuation technique in accordance with PFRS 13
Fair Value Measurement.
ACCOUNTING FOR REVALUATIONS (SAMPLE PROBLEM)

 On December 31, 2021, an entity’s building with a historical cost of P20M and accumulated dep of
P5M is determined to have a fair value of P25M. The building’s remaining useful life is 20 years.

 Requirements (1) Computed for the revaluation surplus (2) Compute for the annual depreciation
after the revaluation. Use the straight-line method.
Subsequent accounting for revaluation surplus

 If the revalued asset is non-depreciable, e.g. land, the whole of the revaluation surplus is transferred
directly to retained earnings when the asset is derecognized.

 If the revalued asset is depreciable, a portion of the revaluation surplus may be transferred directly
to retained earnings as the asset is used.

 Transfers from revaluation surplus to retained earnings are not made through profit or loss.
DERECOGNITION

 Refers to the removal of a previously recognized

asset or liability from the entity’s SOFP.

 The carrying amount of a PPE is derecognized

when:

1. It is disposed of (e.g, sold); or

2. No future economic benefits are expected from
the asset’s use or disposal.

 On derecognition the difference between the

carrying amount of the PPE and the net disposal
proceeds, if any, is recognized as gain or loss in
profit or loss
DISCLOSURE

 General Disclosure:

1. The measurement bases used.

2. The depreciation methods used.
3. The useful lives or depreciation rates used.
4. The gross carrying amount and the accumulated
depreciation at the beginning and end of the
period.
5. A reconciliation of the carrying amount at the
beginning and end of the period showing;
additions, disposals, and other changes.
DISCLOSURE

 Additional Disclosures:

1. Restrictions on title and PPE pledged as security

for liabilities.
2. Expenditure to construct PPE during the period
3. Contractual commitments for the acquisition of
PPE.
DISCLOSURE

 Disclosures for revalued PPE:

1. Date of the revaluation

2. Whether an independent valuer was involved
3. The carrying amount of each revalued class of
PPE if they had measured under the cost model
4. The revaluation surplus, including changes
during the period and any restriction on its
distribution to shareholds.
DISCLOSURE

 Encouraged Disclosures:

1. Carrying amount of temporarily idle PPE

2. Gross Carrying amount of any fully depreciated
PPE that is still in use.
3. Carrying amount of PPE retired from active use
and not classified as held for sale in accordance
with PFRS 5
4. When the cost model is used, the fair value of
PPE when this is materially different from the
carrying amount.