PROPERTY, PLANT & EQUIPMENT

IAS 16 & 23

Property, Plant & Equipment

Recognition

a) Probable Future Economic Benefits (FEBs)

b) Cost reliably measurable

Measurement

At recognition -cost
After recognition Cost / revaluation, depreciation, impairment

Derecognition

On disposal or no further benefits expected

Gain / loss to P&L

Disclosure

All relevant information to be disclosed

LO 1: Describe property, plant, and equipment.

Tangible items that

(a) are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and

(b) are expected to be used during more than one period.

PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment are assets of a durable nature.
Other terms commonly used are plant assets and fixed assets.
Used in operations and not for

resale.
Long-term in nature and usually

depreciated.
Possess physical substance.

Includes:
Land,
Building structures
(offices, factories,
warehouses), and

Equipment
(machinery, furniture,
tools).

LO 1

LO 2: Identify the costs to include in initial valuation of

property, plant, and equipment

Cost comprises

A
T

C
O
S
T

(a) purchase price, including duties & nonrefundable purchase taxes, minus trade
discounts & rebates
(b) any costs 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.

c) Obligatory dismantling/ restoration costs

ACQUISITION OF PP&E
Cost of Land

Improvements with limited lives, such as private

driveways, walks, fences, and parking lots, are recorded
as Land Improvements and depreciated.

Land acquired and held for speculation is classified as

an investment.

Land held by a real estate concern for resale should be

classified as inventory.

LO 2

ACQUISITION OF PP&E
Self-Constructed Assets
Costs include:

Materials and direct labor

Overhead can be handled in two ways:

1. Assign no fixed overhead.
2. Assign a portion of all overhead to the construction
process.

Companies use the second method extensively.

LO 3

ACQUISITION OF PP&E
Illustration: The expenditures and receipts below are related to land,
land improvements, and buildings acquired for use in a business
enterprise. Determine how the following should be classified:
a. Money borrowed to pay building contractor
(signed a note)

a. Notes Payable

b. Payment for construction from note proceeds

b. Buildings

c.

c.

Cost of land fill and clearing

Land

d. Delinquent real estate taxes on property

assumed by purchaser

d. Land

e. Premium on 6-month insurance policy during

construction

e. Buildings
LO 2

ACQUISITION OF PP&E
Illustration: Determine how the following should be classified:
f.

Refund of 1-month insurance premium

because construction completed early

f.

(Buildings)

g. Architects fee on building

g. Buildings

h. Cost of real estate purchased as a plant site

(land 200,000 and building 50,000)

h. Land

i.

Commission fee paid to real estate agency

i.

Land

j.

Cost of razing and removing building

j.

Land

k.

Installation of fences around property

k.

Land
Improvements
LO 2

ACQUISITION OF PP&E
Illustration: Determine how the following should be classified:
l.

Proceeds from residual value of demolished

building

m. Interest paid during construction on money

borrowed for construction
n. Cost of parking lots and driveways
o. Cost of trees and shrubbery planted
(permanent in nature)

p. Excavation costs for new building

l.

(Land)

m. Buildings
n. Land
Improvements
o. Land

p. Buildings

LO 2

LO 2: Identify the costs to include in initial valuation of

property, plant, and equipment
A company purchased some heavy machinery. The invoice for the machinery showed
the following items:
Rs.000
Cost of machinery
Cost of delivery
Cost of 12-month warranty on the machinery
Total amount payable

46,000
900
1,600
48,500

In addition, the company incurred Rs.3.4 million in making modifications to its factory so
that the heavy machinery could be installed. What should be the cost of the machinery
in the companys machinery account in the ledger?

LO 2: Identify the costs to include in initial valuation of

property, plant, and equipment
A business acquired new premises at a cost of Rs.400 million on 1 January
2015. In the period to the year end of 31 March 2015 the following further
costs were incurred.
Rs.000
Costs of initial adaptation of the building
12,000
Legal costs relating to the purchase
2,500
Monthly cleaning contract
3,400
Cost of air conditioning unit necessary for
machinery to be used
2,800
Cost of machinery
12,300
What amount should appear as the cost of premises in the companys
statement of financial position at 31 March 2015?

Ark Industries bought a plot of land for development of office buildings.

The plot had a series of dilapidated buildings on it which had to be
demolished before construction could begin. The rubble was sold off.
Development of the land was scheduled into six phases. The land
scheduled for development in phases five and six was leased on a
short-term basis as a parking lot for heavy vehicles.
Should the revenue earned from sale of the rubble and the parking
lot be deducted from the cost of the asset?

LO 5: Understand accounting issues related to

acquiring and valuing plant assets.
Companies should record property, plant, and equipment:

at the fair value of what they give up or

at the fair value of the asset received,

whichever is more clearly evident.

LO 5

Smart Tech manufactures a specialised tracking device and MZ Ltd constructs the
machinery used to manufacture the devices. Each machine that MZ manufactures is
built to the customers specifications. Due to the downturn in the market for its
product, Smart Tech negotiates extended payment terms for a new machine to be
constructed by MZ. Smart Teach will pay $50,000,000, two years after delivery of
the new machine. Due to the customised nature of the equipment, there is no list
price to determine the equivalent price under normal credit terms.

How should Smart Tech measure the value of the equipment for recognition in
the financial statements ?

An oil exploration and production entity has an obligation, at the date of installation,
to decommission an oilrig at the end of its thirty-year life in accordance with the local
legislative requirements.
The decommissioning costs for the rig are estimated to be 140,000,000 with a net
present value of 8,023,197, based on a discount rate of 10%.

How should the estimated cost of dismantling and removing the asset and
restoring the site be recognised?

LO 5: Understand accounting issues related to

acquiring and valuing plant assets.
Cash Discounts Discounts for prompt payment.
Deferred-Payment Contracts Assets purchased on
long-term credit contracts are valued at the present value of the
consideration exchanged.

Lump-Sum Purchases Allocate the total cost among the

various assets on the basis of their relative fair market values.

Issuance of Shares The market price of the shares

issued is a fair indication of the cost of the property acquired.

LO 5

LO 5: Understand accounting issues related to

acquiring and valuing plant assets.
Non-monetary exchange

FV
measurable

YES

FV of asset given up or
received
NO
Carrying amount of asset
given up

Commercial
Substance

Exchanges of Non-Monetary Assets

Meaning of Commercial Substance
Exchange has commercial substance if the future cash flows
change as a result of the transaction. That is, if the two parties
economic positions change, the transaction has commercial
substance.

LO 5

Exchanges of Non-Monetary Assets

Illustration: Information Processing, Inc. trades its used machine for a
new model at Jerrod Business Solutions Inc. The exchange has
commercial substance. The used machine has a book value of 8,000
(original cost 12,000 less 4,000 accumulated depreciation) and a fair
value of 6,000. The new model lists for 16,000. Jerrod gives
Information Processing a trade-in allowance of 9,000 for the used
machine. Information Processing computes the cost of the new asset
as follows.

ILLUSTRATION 10-11
Computation of Cost of
New Machine

LO 5

Exchanges of Non-Monetary Assets

Illustration: Information Processing records this transaction as follows:
Equipment

13,000

Accumulated DepreciationEquipment

4,000

Loss on Disposal of Equipment

2,000

Equipment
Cash
Loss on
Disposal

12,000
7,000
ILLUSTRATION 10-12
Computation of Loss
on Disposal of Used
Machine

LO 5

Exchanges of Non-Monetary Assets

Illustration: Interstate Transportation Company exchanged a
number of used trucks plus cash for a semi-truck. The used trucks
have a combined book value of $42,000 (cost $64,000 less $22,000
accumulated depreciation). Interstates purchasing agent,
experienced in the secondhand market, indicates that the used
trucks have a fair market value of $49,000. In addition to the trucks,
Interstate must pay $11,000 cash for the semi-truck. Interstate
computes the cost of the semi-truck as follows.
Illustration 10-13
Computation of
Semi-Truck Cost

LO 5

Exchanges of Non-Monetary Assets

Illustration: Interstate records the exchange transaction as follows:
Truck (semi)

60,000

Accumulated DepreciationTrucks

22,000

Trucks (used)
Gain on Disposal of Trucks

Cash
Gain on
Disposal

64,000
7,000

11,000
ILLUSTRATION 10-14
Computation of Gain
on Disposal of Used
Trucks

LO 5

Exchanges of Non-Monetary Assets

Illustration: Interstate records the exchange transaction as
follows:

Trucks (semi)

53,000

Accumulated DepreciationTrucks

22,000

Trucks (used)

64,000

Cash

11,000

ILLUSTRATION 10-15
Basis of Semi-Truck
Fair Value vs. Book Value

LO 5

LO 6: Describe the accounting treatment for costs subsequent

to acquisition.
Recognize costs subsequent to acquisition as an asset when
the costs can be measured reliably and it is probable that the
company will obtain future economic benefits.
Evidence of future economic benefit would include increases in
1. useful life,

2. quantity of product produced, and

3. quality of product produced.

LO 6

COSTS SUBSEQUENT TO ACQUISITION

ILLUSTRATION 10-21 Summary of Costs Subsequent to Acquisition

LO 6

DISPOSITION OF PP&E
Illustration: Camel Transport Corp. had to sell a plant located on
company property that stood directly in the path of an interstate
highway. Camel received $500,000, which substantially exceeded
the book value of the land of $150,000 and the book value of the
building of $100,000 (cost of $300,000 less accumulated depreciation
of $200,000). Camel made the following entry.

Cash

500,000

Accumulated DepreciationBuildings

200,000

Buildings

300,000

Land

150,000

Gain on Disposal of Plant Assets

250,000
LO 7

ACQUISITION OF PP&E
Interest Costs During Construction
Three approaches have been suggested to account for the
interest incurred in financing the construction.
$0

Capitalize no
interest during
construction
ILLUSTRATION 10-1
Capitalization of Interest
Costs

Increase to Cost of Asset

Capitalize actual
costs incurred during
construction

$?

Capitalize
all costs of
funds

IFRS
LO 4

ACQUISITION OF PP&E
Interest Costs During Construction

IFRS requires capitalizing actual interest (with

modification).

Consistent with historical cost.

Capitalization considers three items:

1. Qualifying assets.
2. Capitalization period.

3. Amount to capitalize.

LO 4

INTEREST COSTS DURING

CONSTRUCTION
Qualifying Assets
Require a substantial period of time to get them ready for
their intended use or sale.
Two types of assets:

Assets under construction for a companys own use.

Assets intended for sale or lease that are constructed or

produced as discrete projects.

LO 4

Interest Costs During Construction

Capitalization Period
Begins when:
1.

Expenditures for the assets are being incurred.

2.

Activities for readying the asset for use or sale are in

progress .

3.

Interest costs are being incurred.

Ends when:

The asset is substantially complete and ready for use.

LO 4

Interest Costs During Construction

Amount to Capitalize
Capitalize the lesser of:
1. Actual interest cost incurred.
2. Avoidable interest - the amount of interest cost during
the period that a company could theoretically avoid if it
had not made expenditures for the asset.

LO 4

Interest Costs During Construction

Illustration: Assume a company borrowed $200,000 at 12% interest
from State Bank on Jan. 1, 2015, for specific purposes of constructing
special-purpose equipment to be used in its operations. Construction on
the equipment began on Jan. 1, 2015, and the following expenditures
were made prior to the projects completion on Dec. 31, 2015:
Actual Expenditures during 2015:
January 1

100,000

April 30

150,000

November 1

300,000

December 31

100,000

Total expenditures

650,000

Other general debt existing on

Jan. 1, 2015:

$500,000, 14%, 10-year

bonds payable
$300,000, 10%, 5-year
note payable
LO 4

Interest Costs During Construction

Step 1 - Determine which assets qualify for capitalization of
interest.
Special purpose equipment qualifies because it requires a period of
time to get ready and it will be used in the companys operations.

Step 2 - Determine the capitalization period.

The capitalization period is from Jan. 1, 2015 through Dec. 31, 2015,
because expenditures are being made and interest costs are being
incurred during this period while construction is taking place.

LO 4

Interest Costs During Construction

Step 3 - Compute weighted-average accumulated expenditures.

Date
Jan. 1
Apr. 30
Nov. 1
Dec. 31

Weighted
Average
Actual
Capitalization Accumulated
Expenditures
Period
Expenditures
$ 100,000
12/12
$ 100,000
150,000
8/12
100,000
300,000
2/12
50,000
100,000
0/12
$ 650,000
$ 250,000

A company weights the construction expenditures by the amount of time

(fraction of a year or accounting period) that it can incur interest cost on the
expenditure.
LO 4

Interest Costs During Construction

Step 4 - Compute the Actual and Avoidable Interest.
Selecting Appropriate Interest Rate:
1.

For the portion of weighted-average accumulated expenditures that

is less than or equal to any amounts borrowed specifically to
finance construction of the assets, use the interest rate incurred on
the specific borrowings.

2.

For the portion of weighted-average accumulated expenditures that

is greater than any debt incurred specifically to finance construction
of the assets, use a weighted average of interest rates incurred on
all other outstanding debt during the period.

LO 4

Interest Costs During Construction

Step 4 - Compute the Actual and Avoidable Interest.
Actual Interest
Specific Debt

Debt
200,000

500,000
300,000
1,000,000

General Debt

Avoidable Interest

Interest
Rate
12%

Actual
Interest
$
24,000

14%
10%
$

70,000
30,000
124,000

Accumulated
Expenditures
$ 200,000
50,000
$ 250,000

Weighted-average
interest rate on
general debt

$100,000
$800,000

Interest
Rate
12%
12.5%

= 12.5%

Avoidable
Interest
$
24,000
6,250
$
30,250
LO 4

Interest Costs During Construction

Step 5 Capitalize the lesser of Avoidable interest or Actual
interest.

Avoidable interest
Actual interest

30,250
124,000

Journal entry to Capitalize Interest:

Equipment
Interest Expense

30,250
30,250

LO 4

Interest Costs During Construction

Comprehensive Illustration: On November 1, 2014, Shalla
Company contracted Pfeifer Construction Co. to construct a building
for $1,400,000 on land costing $100,000 (purchased from the
contractor and included in the first payment). Shalla made the
following payments to the construction company during 2015.

LO 4

Interest Costs During Construction

Pfeifer Construction completed the building, ready for occupancy, on
December 31, 2015. Shalla had the following debt outstanding at
December 31, 2015.
Specific Construction Debt
1. 15%, 3-year note to finance purchase of land and
construction of the building, dated December 31, 2014, with
interest payable annually on December 31
Other Debt
2. 10%, 5-year note payable, dated December 31, 2011, with
interest payable annually on December 31
3. 12%, 10-year bonds issued December 31, 2010, with
interest payable annually on December 31

$750,000

$550,000
$600,000

Compute weighted-average accumulated expenditures for 2015.

LO 4

Interest Costs During Construction

Compute the actual interest cost, which represents the maximum
amount of interest that it may capitalize during 2015.

ILLUSTRATION 10-6
Computation of Actual
Interest Cost

The interest cost that Shalla capitalizes is the

lesser of $120,228 (avoidable interest) and
$239,500 (actual interest), or $120,228.
LO 4

Interest Costs During Construction

Shalla records the following journal entries during 2015:
January 1

March 1
May 1
December 31

Land
Buildings (or CIP)
Cash

100,000
110,000

Buildings
Cash

300,000

Buildings
Cash

540,000

Buildings
Cash
Buildings (Capitalized Interest)
Interest Expense
Cash

450,000

210,000
300,000
540,000
450,000

120,228
119,272
239,500
LO 4

Interest Costs During Construction

At December 31, 2015, Shalla discloses the amount of interest
capitalized either as part of the income statement or in the notes
accompanying the financial statements.
ILLUSTRATION 10-7
Capitalized Interest
Reported in the Income
Statement

ILLUSTRATION 10-8
Capitalized Interest
Disclosed in a Note

LO 4

Interest Costs During Construction

Special Issues Related to Interest Capitalization
1. Expenditures for Land

If land is purchased as a site for a structure, interest

costs capitalized during the period of construction are
part of the cost of the plant, not the land.

Conversely, if the company develops land for lot sales,

it includes any capitalized interest cost as part of the
acquisition cost of the developed land.

2. Interest Revenue

In general, companies should not offset interest revenue

against interest cost unless earned on specific borrowings.
LO 4

LO : Distinguish between Investment Property and PPE

Investment property is property (land or a buildingor part of a buildingor both) held to earn
rentals or for capital appreciation or both, rather than for:
(a) use in the production or supply of goods or services or for administrative purposes; or

(b) sale in the ordinary course of business.

Generates cash flows largely independently of the other assets held by an entity. This
distinguishes investment property from owner-occupied property.

Investment Property
Recognition

a) Probable Future Economic Benefits (FEBs)

b) Cost reliably measurable

Measurement

At recognition cost (purchase cost & directly attributable

expenses)
After recognition Cost / Fair value -depreciation, impairment

Derecognition

On disposal or no further benefits expected

Gain / loss to P&L

Disclosure

All relevant information to be disclosed

Entity A is a financial services entity that is involved in real estate development.

A has purchased land in London some years ago. The purchase price was 10 million
and the fair value of the land as determined by an independent valuer is 23.7 million.
The entity is undecided about whether to develop the land for sale to a third party or
sell it, but will determine a use within the next accounting period.

The entitys accounting policy is to recognise investment property at fair value.

How should the land be treated in the financial statements of A?