PROPERTY, PLANT AND EQUIPMENT

PROPERTY, PLANT AND EQUIPMENT

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.

Characteristics of PPE:
1. Tangible asset
2. Used in business
3. Used over a period of more than 1 year

Examples of PPE
1. Property not subject to depreciation (land as plant site)
2. Property subject to depreciation (equipment, machinery, furniture & fixtures, etc)
3. Property subject to depletion (timber, oil, mining lands and leases)

Recognition of PPE
- cost of an item of PPE shall be recognized as an asset when it meets the 2 criteria:
a. It is probable that future economic benefits associated with the asset will flow to
the entity.
b. The cost of an asset can be measured reliably

Measurement at Recognition – PPE shall be measured at cost

Elements of Cost
a. Purchase Price
b. Cost directly attributable to bring the asset to the location to be capable of operating

Cost directly attributable
1. Cost of employee benefits
2. Cost of site preparation
3. Initial delivery & handling cost
4. Installation & assembly cost
5. Professional fees
6. Cost of testing whether asset
is functioning properly
Cost that are expense rather than recognized as PPE
1. Cost of opening a facility
2. Cost of introducing a new product/ services
3. Cost of conducting business in a new location
4. Administration & other general overhead cost
5. Initial operating loss
6. Cost of relocating/ reorganizing past entity
operation

Measurement after Recognition

- may use Cost Model or Revaluation Model
a. Cost Model –carried at cost less any accumulated depreciation and any accumulated
impairment loss
b. Revaluation Model – carried at revalued amount, being the Fair Value at the date of
revaluation less any subsequent A.D. and subsequent Impairment Loss.

Acquisition of Property
1. Cash Basis – cost is equal to cash price equivalent
-if “lump sum price” it is necessary to apportion the single price to the asset acquired in order to have a
proper basis for computing depreciation.
2. On account – cost is equal to invoice price less the discount, whether discount is taken or not
3. Installment Basis – cash price equivalent at an installment price
4. Issuance of Capital Stock or Bonds Payable – shall be measured at:
a. Fair Value of Property receive
b. Market Value of C/S or Bonds Payable
c. Par Value of C/S or Face Value of B/P
5. Exchange (Asset to Asset) – shall be measured at:
a. Fair Value of property given
b. Fair Value of property received
c. Cost or Book Value of property given
- if there is lack of commercial substance shall be measured at carrying amount of the asset given up.
6. Donation –
a. if receive from shareholders – cost is Fair Value of item received, credited to APIC
b. if received from non- shareholders – cost is Fair Value of item received, credited to Income
7. Government Grants (PAS 20)
- assistance by government in the form of transfer of resources to an enterprise in return for part or
future compliance with certain conditions relating to the operating activities of the enterprise.
-carried at Fair Value, should be recognized when there is a reasonable assurance that:
a. the enterprise will comply with the conditions attaching to them.
b. the grant will be received.
- Accounting for government grants:
1. Income Approach – grants should be recognized as income over the periods necessary to
match them with the related cost w/c they are intended to compensate on a systematic
basis.
2. Capital Approach – grants should be credited directly to stockholder’s equity. Grants are not
earned but represent an incentive provided by government w/o related cost.
8. Construction – Cost includes the Direct Material, Direct Labor and Factory Overhead
Borrowing Cost (PAS 23) includes the following:
- in general, recognized as an expense in the period in which it is incurred regardless of how borrowing
is applied.
- if directly attributable to the acquisition, construction or production of a qualifying asset, as an allowed
alternative treatment, the borrowing cost should be capitalized as part of asset.
a. Asset financed by “specific borrowing” – capitalized the actual borrowing cost incurred less
any investment income
b. Asset financed by “general borrowing” – capitalized the amount computed by multiplying
average carrying amount of asset by capitalization rate or the actual borrowing cost
whichever is lower. (Capitalization rate is computed by dividing the total borrowing cost by
total general borrowing.)
Classes of PPE
1. Land 6. Motor vehicles
2. Land and Building 7. Furniture’s and Fixtures
3. Machinery 8. Office Equipment
4. Ships 9. Land Improvements (which is depreciable)
5. Aircrafts
Recognition of Subsequent Cost
- Subsequent cost shall be recognized when it met the two (2) criteria.
- PPE shall benefit future periods when:
1. it extends the life of the property
 2. it increases the capacity of the property or the quality of the output
3. it improves the efficiency and safety of property
Subsequent Cost:
1. Additions – increase the physical or capacity of the asset
2. Improvements / Betterments – increase the service life or the capacity of the asset.
3. Replacements – substitution of an equal or lesser quality.
a. Replacement of old asset by new one- shall be capitalized
b. Replacement of major part – (extraordinary repair) shall be capitalized
c. Replacement of minor part – (ordinary repair) expense outright
4. Repairs – expense outright but if extraordinary repair shall be capitalized
5. Rearrangement cost – relocating or reinstallation of an asset which proves to be less efficient in
its original location (capitalized)
Derecognition of PPE
- the C.A. of the PPE shall be derecognized on/ when:
1. On disposal – by retirement, destruction, exchange or sale
2. no future economic benefit is expected from its use or disposal
- means the cost and accumulated depreciation of PPE should be removed from the account.
- Gain/ loss from PPE should be included in profit or loss.

THEORIES
1. Cost of day-to-day servicing such as labor and consumables should be
a. Charges to repairs and maintenance expense
b. Include in the carrying amount of the property, plant and equipment
c. Deferred and amortized over a reasonable period
d. Charged to retain earnings
2. The cost of an item of property, plant and equipment comprises all of the following except
a. Purchase price
b. import duties and nonrefundable purchase taxes
c. Any cost directly attributable in bringing the asset to the location and condition for its intended
use
d. Initial estimate of the cost of dismantling and removing the item and restoring the site, the
obligation for which the entity does not incur when the item was acquired
3. It is 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 settling a liability.
a. Entity-specific value b. Fair value c. Value in use d. Discounted value
4. Government grants shall be
a. Credited to equity
b. Credited to retained earnings
c. Recognized as income immediately
d. Recognized as income on a systematic and rational basis over the periods necessary to match
them with the related costs.
5. In the case of grants related to an asset, which is the accounting treatment?
a. Record the grant at a nominal value in the first year and write it off in the subsequent year.
b. Either set up the grant as deferred income or deduct it in arriving at the carrying amount of the
asset.
c. Record the grant at a fair value
6. In the case of grants related to income, which is the accounting treatment?
a. Credit the grant to “general reserve” under shareholders’ equity
 b. Present the grant in the income statement as “other income” or as a separate line item, or deduct
it from the related expense
c. Credit the grant to “retained earnings” on the balance sheet
d. Credit the grant to sales or other revenue from operations
7. The essence of government assistance is that no quantifiable value can be reasonably placed upon it.
Examples of government assistance include all of the following, except
a. Free technical or marketing advice
b. Provision of guarantee
c. Loans at NIL or low interest rates
d. Indirect benefits such as provision of infrastructure in a development area where the entity is
located or the imposition of trading constraints on competitors
8. Borrowing cost include all of the following, except
a. Interest on borrowing
b. Amortization of premium or discount related to borrowing
c. Finance charges with respect to a finance lease
d. Exchange differences from translation of foreign currency borrowing
9. When computing the amount of the interest cost to be capitalized, the concept of “avoidable
interest” refers to
a. The total interest cost actually incurred
b. A cost of capital charge for stockholders’ equity
c. That portion of total interest cost which would have been incurred if expenditures for asset
construction had not been made
d. that portion of average accumulated expenditures on which no interest cost was incurred
10. What is the benchmark treatment for borrowing costs?
I. Borrowing costs are recognized as expense in the period in which they are incurred regardless at
how borrowings are applied.
II. Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset shall be capitalized as part of the cost of that asset.
a. I only b. II only c. Either I or II d. Neither I nor II
11. Qualifying assets for purposes of capitalization of borrowing costs include all of the following, except
a. Manufacturing plants
b. Power generation facilities
c. Inventories that require a substantial period of time to bring them to a salable condition
d. Assets those are ready for their intended use when acquired
12. The capitalization of borrowing costs as part of the cost of a qualifying asset should commence when
(choose the incorrect one)
a. Expenditures for the asset are being incurred
b. Borrowing costs are being incurred
c. Activities that are necessary to prepare the asset for its intended use or sale are in progress
d. Substantially all the activities necessary to prepare the qualifying asset for its intended use or sale
are complete
13. Capitalization of borrowing costs
a. Shall be suspended during temporary period of delay
b. shall be suspended only during extended period of delay in which active development is delayed
c. Should never be suspended once capitalization commences
d. May be suspended only during extended period of delay in which active development is delayed
14. Which of the following is not a disclosure requirement under PAS 23 on borrowing costs?
a. Accounting policy adopted for borrowing costs
 b. Amount of borrowing costs capitalized during the period
c. Segregation of assets that are “qualifying assets” from other assets on the balance sheet or as a
disclosure in the footnotes to the financial statements
d. Capitalization rate used to determine the amount of borrowing costs eligible for capitalization
15. For the item of property, plant and equipment with insignificant changes in Fair value, revaluations
are necessary only every
a. Five years b. Ten years c. Three to five years d. Five to ten years
16. If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be credited
directly to
a. Equity under the heading revaluation surplus c. Retained earnings
b. Equity under the heading unrealized gain d. Income
17. The evidence of an asset’s fair value less cost to sell is
a. A price in a binding sale agreement in an arm’s length transaction, adjusted for incremental cost
directly attributable to the disposal of an asset
b. The market price of the asset in an active market
c. Best estimate of knowledgeable, willing parties in an arm’s length transaction
d. the higher between the price in a binding sale agreement and the market price of the asset in an
active market
18. The estimates of future cash flows in calculating value in use include all of the following, except
a. Cash inflows from continuing use of the asset
b. Cash outflows necessarily incurred to generate the cash inflows from continuing use of the asset
c. Net cash flows from the disposal of the asset at end of its useful life
d. Income tax payments
19. Estimates of future cash flows normally would cover projections over a maximum of
a. five years b. Ten years c. Fifteen years d. Twenty years
20. When impairment testing a cash-generating unit, any corporate asset such as the head office
business or compute equipment or the entity’s headquarters should
a. Be allocated on a reasonable and consistent basis
b. Be separately impairment tested
c. Be included in the head office asses or parent’s assets and impairment tested along with that
cash-generating units
d. Not be allocated to cash-generating units

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