PROPERTY, PLANT AND EQUIPMENT

PPE

Are tangible assets that are held for use in

production or supply of goods or services, for
rental to others, or for administrative purposes, and
are expected to be used during more than one
period.
 MAJOR CHARACTERISTICS OF PPE

1 2 3
Tangible Used in More than
Assets Business one year
 INITIAL MEASUREMENT : COST

Cost
is the amount of cash or cash equivalent paid and the
fair value of the other consideration given to acquire an
asset at the time of acquisition or construction.
 ELEMENTS OF COST

1 2 3
Purchase Directly Dismantling
price Attributable cost
Cost (estimated )
 DIRECTLY ATTRIBUTABLE COST

• Initial delivery and handling cost

• Installation and Assembly Cost
• Cost of Site Preparation
• Professional Fees
• Cost of testing wether the asset is functioning properly
• Cost of employee benefits arising directly from the acquisition
 COST NOT QUALIFYING FOR RECOGNITION -EXPENSE
OUTRIGHT

• Cost of opening new facility

• Cost of introducing new product or services, including cost of advertising
and promotion
• Cost of conducting business in a new location or with a new class of
customer, including cost of staff training
 COST NOT QUALIFYING FOR RECOGNITION -EXPENSE
OUTRIGHT
• Administration and other general overhead
• Cost incurred while an item is capable of operating in the
manner intended by the management has yet to be brought into
use or is operating at less than full capacity
• Initial operating losses
• Cost of recolating or reorganizing part or all of an entity's
operations
 ACQUISITION OF PROPERTY

• CASH BASIS • ISSUANCE OF BONDS

• ON ACCOUNT SUBJECT TO PAYABLE
CASH DISCOUNT • EXCHANGE
• INSTALLMENT BASIS • DONATION
• ISSUANCE OF SHARE • GOVERNMENT GRANT
CAPITAL • CONSTRUCTION
 ACQUISITION ON CASH BASIS

• The cost of an item of PPE is the 'cash price' equivalent at the

recognition date.
• The cost of an asset acquire 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 the location and
condition for the intended use.
When several assets are acquired at a 'basket price' or "lump sum price",
it is necessary to apportion the single price to the assets acquired on the
basis of relative fair value.
 ACQUISITION ON ACCOUNT

• When asset is acquired on account subject to a cash discount, the

cost is equal to the invoice price minus the discount, regardless of
wether the discount is taken or not.
• If the discount is not taken, the same is charged to purchase discount
lost account (shown as other expense).
• 2%×200,000=2,000
 ACQUISITION ON INSTALLMENT BASIS

• When payment for item of PPE is deferred beyond normal credit

terms, its cost is the cash price equivalent.
• If an asset is offered at a cash price and at an installment price and
is purchased at the installment price, the asset shall be recorded at
the cash price.
"No Available Cash Price"

If an asset is acquired by installment and there is no

Available Cash Price, the asset is recorded at an amount
equal to present value of all payments using an Implied
Interest Rate.
 ISSUANCE OF SHARE CAPITAL

If shares are issued for consideration other than actual cash , the proceeds shall be measured at
the fair value of the consideration received.

Accordingly, 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:

Fair value of the property received

Fair value of the share capital
Par value or stated value of the share capital
 ISSUANCE OF BONDS PAYABLE

When an entity acquires an asset by issuing bonds payable, PFRS 9, paragraph 5.1.1, provides that
the entity shall measure the financial liability at fair value plus transaction costs that are directly
attributable to the issue 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 received
c. Face amounts of bonds payable
 EXCHANGE

PAS 16, paragraph 24, provides that the cost of an item of property, plant and equipment acquired
in exchange for nonmonetary asset or a combination of monetary and nonmonetary asset is
measured at fair value.

However, the exchange is recognized at carrying amount under the following circumstances:

A. The exchange transaction lacks commercial substance .

B. The fair value of the asset given or the fair value of the asset received is not reliably
measurable.
"Commercial Substance" is a new notion and is defined as the event or transaction causing the cash
flows of the entity to change significantly by reason of the exchange.

Stated differently, an exchange transaction has commercial substance when the cash flows of the
assets received differ significantly from the cash flows of the asset transferred.

Exchange- With Commercial Substance

If property is acquired in an exchange with commerical substance, the cost of the property is equal
to the following:

a. Fair value of asset given plus any cash payment -on the part of the payor
b. Fair value of asset given minus any cash received -on the part of the recipient
Exchange -No Commerical Substance

If the exchange transaction lacks commercial substance, the acquire item of PPE
is measured at the carrying amount of the asset given.

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 payor and
deducted from carrying amount on the part of the recipient.
Trade in

"Trade in" is a form of exchange. Trade in involves a nondealer acquiring the asset from a dealer.

Trade in usually involves a significant amount of cash and therefore, the transaction has
commercial substance.

As an exchange with commerical substance , the new asset is recorded at the following in order of
priority:

a. Fair value of asset given plus cash payment

b. Trade in value of asset given plus cash payment in the absence of the fair value of the asset
given.
DONATION

At present, IFRS does not address donation or contribution.

However, IFRS explicitly addresses government grant.

In this regard, reference is made to local GAAP in relation to accounting for donation.

Philippine GAAP provides that "contributions, including shares of an entity,received from shareholders shall be recorded
at the fair value of the items received, with the credit going to donated capital if significant".

Expenses incurred in connection with the donation, like payment of registration fees and legal fees shall be charged to the
donated capital account. The reason is that such expenses do not increase or enhance the value of the asset.

However, directly attributable costs incurred, such as installation and testing cost necessary to bring the donated asset to the
location and condition for its intended use shall be capitalized.
 DONATION

Philippine GAAP, further provides that business entities sometimes receive from nonshareholders gifts or
grants of funds or other assets that are restricted for property and equipment additions.

Gifts or grant shall be recorded at fair value when they are received or receivable.

Gift or grant from nonshareholders is generally subsidy and therefore recognized as income

In the rare case when gift or grant is not subsidy, the offsetting credit is a liability account until the initial
restrictions are met.

When the initial restrictions are met, the liability is recognized as income.
 CONSTRUCTION

The cost of self-constructed asset is determined using the same principles as for an
acquired asset.

The cost of self-constructed property, plant and equipment shall include:

1. Direct cost of materials

2. Direct cost of labor
3. Indirect cost and incremental overhead specifically identifiable or traceable to the
construction.
THANK YOU
Presented by : John Paul Zarzua