Property, Plant and Equipment

- are tangible assets that are held for use in production or supply of goods or services, rental
to others, or for administrative purposes , and are expected to be used during more than one
period

Recognition of PPE
a.
b.

It is probable that the future economic benefits associated with the asset will flow to the
entity.
The cost of the asset can be measured reliably.

Spare parts and servicing equipment

-

Most spare parts and servicing equipment are usually recognized as an expense when consumed,
however, major spare parts and stand-by equipment qualify as PPE when the entity expects to
use them during more than one period. Similarly, if the spare parts and servicing equipment
can be used only in connection with an item of PPE, then accounted as PPE.

Safety and environmental equipment

- Even though it does not directly increase the future economic benefits of any particular
item of PPE, it may be necessary in order for the entity to obtain the future economic
benefits from its other assets in excess of what it could obtain if such equipment had not
been acquired.

Initial Measurement
-

At cost (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
a.
b.
c.

Purchase price, including import duties and nonrefundable purchase taxes, after deducting
trade discounts and rebates.
Cost directly attributable to bringing the asset to the location and condition necessary for
it to be capable of operating in the manner intended by management.
Initial estimate of costs of dismantling and removing the item and restoring the site on
which it is located, the obligation which entity incurs either when the item is acquired or
as a consequence of having used the item during a particular period for purposes other than
to produce inventories during that period.

Directly attributable cost

a.
b.
c.
d.
e.
f.

Cost of employee benefits arising directly from the construction or acquisition of the item
of PPE.
Cost of site preparation
Initial delivery and handling cost
Installation and assembly cost
Professional fees
Cost of testing whether the asset is functioning properly, after deducting the net proceeds
from selling any items while bringing the asset to that location and condition, such as
samples produced when testing equipment.

Subsequent measurement
a.
b.

Cost model means that PPE are carried at cost less any accumulated depreciation and any
accumulated impairment loss.
Revaluation model means that PPE are carried at revalued amount, being the fair value at
the date of revaluation less any subsequent accumulated depreciation and subsequent
accumulated impairment loss.

Acquisition
1.
2.
3.
4.

Cash basis cash price equivalent

On account invoice price minus the discount, regardless of whether the discount is taken
or not.
Installment basis
a. Cash price equivalent
b. Present value of all payments using an implied interest rate
Issuance of share capital
a. Fair value of the property received
b. Fair value of the share capital
c. Par value of the share capital

5.

Issuance of bonds payable

a. Fair value of the bonds payable
b. Fair value of the asset received
c. Face value of the bonds payable
6. Exchange
*Commercial substance the event or transaction causing the cash flows of the entity to
change by reason of the exchange.
a. The cash flows of the asset received differ from the cash flows of the asset transferred
and the difference is significant relative to the fair value of the asset exchanged.
b. The entity-specific value of the portion of the entitys operation affected by the
transaction changes as a result of the exchange and the change is significant relative to
the fair value of the asset exchanged.
*Entity-specific value the present value of the cash flows an entity expects to arise from
the continuing use of an asset and from its disposal at the end of its useful life or expects
to incur when setting a liability.
1.

With commercial substance no cash involved

a. Fair value of the property given
b. Fair value of the property received
c. Carrying amount of the property given
2. With commercial substance cash involved
a. Fair value of the property given plus cash payment on the part of the payor
b. Fair value of the property given minus cash payment on the part of the recipient
3. Without commercial substance no gain or loss is recognized
a. Carrying amount of the asset given plus the cash payment on the part of the payor
b. Carrying amount of the asset given minus the cash payment on the part of the
recipient
7. Donation fair value
8. Government grant
9. Construction
a. Direct cost of materials
b. Direct cost of labor
c. Indirect cost and incremental overhead specifically identifiable or traceable to the
construction.

Saving or loss on construction

a.

b.

Where the actual cost of the construction is less than the price at which the constructed
asset can be purchased from outside parties, the difference is saving but not income.
This saving will be realized in future periods by reason of lower depreciation charges on
the asset.
Where the actual cost of the construction is more than the price at which the constructed
asset can be purchased from outside parties, the difference is not loss, thus the assed
shall be recorded at the actual cost. It is because there is no assurance that the asset
if purchased is the same as that constructed.

Derecognition
- The cost of the PPE together with the related accumulated depreciation shall be removed from
-

the accounts.
PAS 16, paragraph 67, provides that the carrying amount of an item of PPE shall be
derecognized on disposal or when no future economic benefits are expected from its use or
disposal.
The gain of loss shall be included in profit or loss. The gain or loss is the difference
between the net disposal proceeds and the carrying amount of the item.

Optional disclosure

a.
b.
c.
d.

The carrying amount of temporarily idle PPE

The gross carrying amount of any fully depreciated PPE still in use
The carrying amount of PPE retired from active use and classified as held for sale
When the cost model is used, the fair value of PPE when this is materially different from the
carrying amount.

Government Grant
- PAS 20, paragraph
-

3, defines government grant as assistance by government in the form of

transfer of resources to an entity in
return for past or future compliance with certain
conditions relating to the operating activities of the entity.
Called by other names such as subvention, subsidy or premium

Recognition
a.
b.

The entity will comply with the conditions attaching to the grant.
The grant will be received.

Classification
a. Grant related to asset
-

b.
-

This is government grant whose primary condition is that an entity qualifying for the grant
shall purchase, construct or otherwise acquire long-term asset.
Grant related to income.
By residual definition, this is government grant other than grant related to asset.

Accounting for government grant

-

The grant is taken to income over one or more periods in which the related cost is incurred.
1. Grant in recognition of specific expenses shall be recognized as income over the period
of the related expense.
2. Grand related to the depreciable asset shall be recognized as income over the periods and
in proportion to the depreciation charges to the related asset.
3. Grant related to nondepreciable asset requiring fulfillment of certain conditions shall
be recognized as income over the periods which bear the cost of meeting the condition.
4. A government grant that becomes receivable as compensations for expenses or losses
already incurred or for the purpose of giving immediate financial support to the entity
shall be recognized as income of the period in which it becomes receivable.

Presentation of government grant

1.
2.

Grant related to asset

a. By setting the grant as deferred income
b. By deducting the grant in arriving at the carrying amount of the asset.
Grant related to income
a. The grant is presented in the income statement, either separately or under
general heading other income
b. Alternatively, the grant is deducted from the related expense.

Repayment of government grant

-

A government grant that becomes repayable because of noncompliance with conditions shall be
accounted for as a change in accounting estimate.
1. Repayment of grant related to income shall be applied first against any unamortized
deferred income and any excess shall be recognized immediately as expense.
2. Repayment of grant related to asset shall be recorded by increasing the carrying amount
of the asset.

Government assistance
-

The action by government designed to provide an economic benefit specific to an entity or

range of entities qualifying under certain criteria.
a. Free technical or marketing advice
b. Provision of guarantee
c. Government procurement policy that is responsible for a portion of the entitys sales.

Disclosures
a.
b.
c.

The accounting policy adopted for government grant including the method of presentation
adopted in the financial statements.
The nature and extent of government grant recognized in the financial statements and an
indication of other forms of government assistance from which the entity has directly
benefited.
Unfulfilled conditions and other contingencies attaching to government assistance that
has been recognized.

Borrowing Costs
-

PAS 23, paragraph 5, borrowing costs are defined as interest and other costs that an entity
incurs in connection with borrowing of funds.
Paragraph 6, inclusions
a. Interest expense calculated using the effective interest method.
b. Finance charge with respect to finance lease.
c. Exchange difference arising from foreign currency borrowing to the extent that it is
regarded as an adjustment to the interest cost.

Qualifying asset
-

An asset that necessarily takes a substantial period of time to get ready for its intended
use or sale.

Exclusions
a.
b.

c.

Assets that are measured at fair value, such as biological assets.

Inventories that are manufactured or produced in large quantities on a repetitive basis,
such as manufacturing whisky, even if they take a substantial period of time to get ready
for sale.
This is in accordance with the basis of conclusions 6 on PAS 23.
Assets those are ready for their intended use or sale when acquired.

Accounting for borrowing cost

- PAS 23, paragraph 8
1.
2.

If the borrowing is directly attributable to the acquisition, construction or production

of a qualifying asset, the borrowing cost is required to be capitalized as cost of the
asset.
All other borrowing costs shall be expensed as incurred.

Specific borrowing
PAS 23, paragraph 12, provides that if the funds are borrowed specifically for the purpose
of acquiring a qualifying asset, the amount of capitalizable borrowing cost is the actual
borrowing cost incurred during the period less any investment income from the temporary
investment of those borrowings.

General borrowing
-

PAS 23, paragraph 14, provides that if the funds are borrowed generally and used for
acquiring a qualifying asset, the amount of capitalizable borrowing cost is equal to the
average carrying amount of the asset during the period multiplied by a capitalization rate
or average interest rate. However, the capitalizable borrowing cost shall not exceed the
actual interest incurred.
The capitalization rate or average interest rate is equal to the total annual borrowing cost
divided by the total general borrowings outstanding during the period.

Specific borrowing used for general purposes

-

The borrowing shall be treated as general borrowing. Thus the capitalizable borrowing cost
is equal to the average expenditures on the asset multiplied by the average interest rate.

Commencement of capitalization
a.
b.
c.

When the entity incurs expenditures for the asset.

When the entity incurs borrowing costs.
When the entity undertakes activities that are necessary to prepare the asset for the
intended use or sale.
*Activities necessary to prepare include technical and administrative work prior to the
commencement of physical construction, such as drawing up plans and obtaining permit for
a building.

Suspension of capitalization
The capitalization of borrowing costs shall be suspended during extended periods in which
-

the active development is interrupted.

However, during a period when substantial technical and administrative work is being carried
out, and when a temporary delay is a necessary part of the process of getting an asset ready
for its intended use of sale, the capitalization is not suspended.

Cessation of capitalization
-

Capitalization ceases when substantially all the activities

qualifying asset for its intended use or sale are complete.

necessary

to

prepare

the

Disclosures
a.
b.

The amount of borrowing costs capitalized during the period.

The capitalization rate used to determine the amount of borrowing costs eligible for
capitalization.

Land, Building and Machinery

Costs chargeable to land
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.

Purchase price
Legal fees and other expenditures for establishing clean title
Brokers commission
Escrow fees
Fees for registration and transfer of title
Cost of relocation or reconstruction of property belonging to others in order to acquire
possession
Mortgages, encumbrances and interest on such mortgages assumed by buyer
Unpaid taxes up to date of acquisition assumed by buyer
Cost of survey
Cost of clearing and demolishing unwanted old structures, less proceeds from salvage
Payments to tenants to induce them to vacate the land
Cost of permanent improvements, such as cost of grading, leveling and landfill
Cost of option to buy the acquired land. If the land is not acquired, the cost of option
is expensed outright

Land improvements
- Fences, water systems, drainage systems, sidewalks, pavements and cost of trees, shrubs and
other landscaping.

Special assessments
-

Taxes paid by the landowner as a contribution to the cost of public improvements.

Part of cost of land, because public improvements increase definitely the value of the land.

Building when purchased

a.
b.
c.
d.
e.
f.

Purchase price
Legal fees and other expenses incurred in connection with the purchase
Unpaid taxes up to date of acquisition assumed by buyer
Interest, mortgages, liens and other encumbrances on the building assumed by the buyer
Payments to tenants to induce them to vacate the building
Any renovating or remodeling costs incurred to put a building purchased in a condition
suitable for its intended use such as lighting installations, partitions and repairs.

Building when constructed

a.
b.
c.
d.
e.
f.
g.
h.
i.
j.

Materials used, labor employed and overhead incurred during the construction
Building permit or license
Architect fee
Superintendent fee
Cost of excavation
Cost of temporary buildings used as construction offices and tools or materials shed
Expenditures incurred during the construction period such as interest on construction
loans and insurance
Expenditures for service equipment and fixtures made a permanent part of the structure
Cost of temporary fence around the construction site and cost of subsequent removal
thereof. However, the construction of a permanent fence after the completion of the
building is recognized as land improvement.
Safety inspection fee

Specific principles in land and building

a.
b.
c.

If land and building are acquired at a single cost, the single cost is allocated to the
land and building on the basis of their relative fair value.
If land and an old building which is to be razed are acquired at a single cost, the
single cost is allocated to the land only
If the building owned by the entity is leased to tenants and the building is demolished
to make room for the construction of a new one, any payments to tenants to induce them to
vacate the building shall be charged to the cost of the new building.

Machinery
a.
b.
c.
d.
e.

Purchase price
Freight, handling, storage and other cost related to the acquisition
Insurance while in transit
Installation cost, including site preparation and assembling.
Cost of testing and trial run, and other cost necessary in preparing the machinery for
its intended use
f. Initial estimate of cost of dismantling and removing the machinery and restoring the site
on which it is located, and for which the entity has present obligation.
g. Fee paid to consultants for advice on the acquisition of the machinery
h. Cost of safety rail and platform surrounding machine
i. Cost of water device to keep machine cool.
If the machinery is moved to a new location, the undepreciated cost of the old installation
cost is expensed and the new installation cost is charged to the new asset.
If a machinery is removed and retired to make room for the installation of a new one, the
removal cost not previously recognized as a provision is charged to expense on the theory
that this is part of the service cost related to the retirement of the old machinery.
VAT If charged to input tax to be offset against output tax.

Tools

a.
b.

Machine tools used in connection with the operation of the machine.

Hand tools not used in operating the machine.

Patterns and dies

-

Used in designing or forging out a particular product.

Regular products, then assets, if used for specifically ordered products, then expensed
outright and form part of the cost of the special product.

Equipment
a.
b.
c.

Delivery equipment registration fees are expensed outright.

Store and office equipment with the selling function, then store equipment, otherwise,
office equipments
Furniture and fixtures in a broad sense, these include store and office equipment.

Capital expenditures
-

an expenditure that benefits current period and future period, and reported as an asset.

Revenue expenditures
- an expenditure that benefits only the current period, and reported as an expense.
Recognition of subsequent cost
1.
2.

It is probable that future economic benefits associated with the subsequent cost will
flow to the entity.
The subsequent cost can be measured reliably.

Subsequent costs
a.
b.

Addition modifications or alterations which increase the physical size of the asset
Improvements or betterments modifications or alterations which increase the service
life of the asset.
c. Replacement substitution but the new asset is not better than the old asset when
acquired.
d. Repairs expenditures used to restore assets to good operating condition upon their
breakdown or replacement of broken parts.
i.
Extraordinary repairs large sums and normally extend the useful life of the
asset, and capitalized.
ii.
Ordinary repairs small sums and are frequently encountered, and normally
charged to expense when incurred.
* Maintenance is preventive while the repair is restorative.
e. Rearrangement cost the relocation of reinstallation of an asset which proves to be less
efficient in its original location.

Accounting for major replacement

If separate identification is practicable, it is debited to the asset account. However, if

it is not practicable, it may use the cost of the replacement as an indication of the likely
original cost of the replaced part at the time is was acquired or constructed. The current
replacement cost shall be discounted.