*Old and New Installation Cost:

PROPERTY, PLANT AND EQUIPMENT  The machinery is moved to a new location- the undepreciated old cost is
EXPENSED. New installation cost is charged to the NEW ASSET.
 The machinery is removed and retired- the undepreciated old cost is
 Tangible items that are held for use in the production or supply of EXPENSED. New installation cost is charged to the NEW ASSET. In addition,
goods and services, for rental to others, or for administrative the removal cost is charged to EXPENSE.
purposes and expected to be used during more than one period.
 Include bearer plants- a living plant that is used in the production * Nonrecoverable Purchase Tax ( VAT ):
or supply of agricultural produce, expected to bear produce for  VAT is not capitalizable but debited to input tax to be offset against output
more than one period, and has remote likelihood of being sold as vat.
agricultural produce except for incidental scrap sales.
* Royalty payment on machines:
 Owner occupied property.  If based on UNITS PRODUCED- included as part of MOH.
 If based on UNITS PRODUCED AND SOLD- reported as selling expenses.
INITIAL RECOGNITION
COSTS CHARGEABLE TO LAND
 Probable that future economic benefits associated with the asset 1. Purchase price;
will flow to the entity. 2. Survey costs;
 Cost of the asset can be measured reliably. 3. Cost to register the land and other cost of transferring the title in the
name of the buyer;
4. Legal fees and other expenditures for establishing clean title;
Recognition Issues:
5. Commission cost paid to brokers or agents;
a. to be sold by the company Inventory ( consumable goods )
6. Cost of clearing unwanted old structures, less proceeds from salvage
b. Spare parts and servicing Carried as inventory or consumable excluding demolition costs;
equipment goods but treated as PPE if 7. Liabilities on the land assumed by the buyer (mortgages, encumbrances,
expected to be used for more than a and interest on such mortgages assumed by the buyer);
period. 8. Unpaid real property taxes on the land up to the date of acquisition
c. Major spare parts, standby Recognized as PPE if they met the assumed by the buyer;
equipment and servicing equipment requirements otherwise classified as 9. Payments to tenants to convince them to vacate the land;
inventory. 10. Cost to relocate or reconstruct property of others occupying the land to
obtain ownership.
* Safety and Environmental Equipment 11. Option of land acquired.
 Do not directly increase the future economic benefits of any 12. Cost of permanent improvement (draining cost, cost of filling the land,
particular existing item of PPE, the acquisition of such PPE may be cost of grading and leveling).
a necessity to obtain future economic benefits.
NOTES:
INITIAL MEASUREMENT 1. Land Improvements
 At COST  not subject to depreciation- capitalizable as cost of the land
Examples: cost of surveying, clearing, grading, leveling and
subdividing.
Components of Cost  Depreciable- part of blueprint of the building- building
 Purchase price, including import duties and nonrefundable Not part of the blueprint- land improvement
purchase taxes and any directly attributable cost of bringing the Examples: Fences, water systems, drainage systems, side-walks
asset to working conditions for its intended use. Any trade and pavements, landscaping.
discounts or rebates are deducted in arriving at the purchase 2. Special Assessments
price.  capitalizable as cost of land
3. Real property tax
 expensed when incurred. However, unpaid real property taxes assumed by
Directly Attributable Costs (TPPRIDE) the buyer should be capitalized.
1. Cost of testing after deducting the net proceeds from selling any items
produced; LAND ACCOUNT
2. Cost of site preparation; ITEMS TREATMENT
3. Professional fess of architects and engineers; 1. Land used as plant site PPE
4. Estimated cost of dismantling and removing the asset and restoring the 2. Land held for a currently undetermined Investment Property
site; use
5. Installation and assembly cost; 3. Land held for long-term capital Investment Property
6. Initial Delivery and handling cost; appreciation
7. Costs of employee benefits arising directly from the construction or 4. Land held as site for a building being Investment Property
acquisition of the item of PPE. constructed or developed for future use as
investment property.
COST OF MACHINERY WHEN PURCHASE 5. Land leased out under operating lease Investment Property
1. Nonrefundable Sales tax;
6. Land leased out under finance lease Not reported on books
2. Cost of Water device to keep the machine cool;
7. Land held definitely as future plant site PPE
3. Cost of Adjustment to machinery for operational efficiency and to increase
8. Land held for sale in the ordinary course of Inventory
capacity;
business.
4. Construction of base (safety rail and platform);
9. Land held for sale under PFRS 5 Noncurrent asset held for
5. Purchase Price;
sale
6. Insurance while in transit;
7. Freight, handling, storage and other cost related to the acquisition; 10. Land related to agricultural activity Investment Property/ PPE
8. Installation cost, including site preparation and assembling;
9. Cost of testing and trial run; BUILDING ACCOUNT
10. Fees paid to consultants for advice on acquisition of machinery; ITEMS TREATMENT
11. Unloading charge; 1. Building used as plant site PPE
12. Initial estimate cost of dismantling and removing the machinery and 2. Building being constructed or developed Investment Property
restoring the site on which it is located. for future use as investment property.
3. Building owned by the company and Investment Property
leased out under operating lease
 4. Building owned by the company and Not reported on the books relative fair values.
leased out under finance lease. of the company. ii. @ fair value model The land and building Added to the New building
5. Building held for sale in the ordinary Inventory will be classified as cost as
one item under investment investment
course of business. Investment property. property. property.
6. Building held for sale under PFRS 5 Investment Property/ PPE 3. Old building is usable Allocate the Allocate the to New Building
but likely to be purchase price to land and
COSTS CHARGEABLE TO BUILDING WHEN PURCHASED demolished right away.. land and building building based
1. Purchase Price; based on their on their
2. Legal Fees and other expenses incurred in connection with the purchased; relative fair values relative fair
(allocated cost to values
3. Liabilities on the building assumed by the buyer including unpaid real
building is charged (allocated cost
property taxes; to loss) to building is
4. Renovation and remodeling cost to make suitable for intended use; charged to
5. Payments to tenants to convince them to vacate the premises. loss)

COSTS CHARGEABLE TO BUILDING WHEN CONSTRUCTED *Common costs on the acquisition

1. Construction costs (materials, labor, overhead incurred); 1. Payment to broker and other real estate agents in order to acquire the properties;
2. Building permit and license; 2. Unpaid real property taxes on the date of acquisition;
3. Liabilities assumed by the buyer;
3. Architect fees;
4. Option cost of property acquired;
4. Fees paid for supervision; 5. Payment to tenants to vacate the premises;
5. Excavation cost; 6. Escrow fees on the properties acquired.
6. Expenditures for service equipment and fixtures made permanent part of
the structure; The entity acquired the property in the current reporting period, with the intention of
7. Expenditures incurred during the construction period such as interest on demolishing the old building and replacing it with a new building. The entity will not use
construction and insurance; the old building prior to its demolition. New building will be used as:
8. Cost of security fences and other temporary buildings to house PPE INVENTORY INVESTMENT
PROPERTY
construction materials and tools;
Cost of new Construction cost Allocated carrying Construction cost
9. Cost of demolishing old building, less proceeds from salvage. building. plus demolition value of the old plus demolition
cost. building plus cost.
*Acquisition of Land and Old building: construction cost
 Old building is to be demolished to make room for the construction of the plus demolition
new building during the same period. cost.
- part of new building Carrying value of Charged to loss on Capitalized as Charged to loss on
 Old building is to be demolished but the construction of new building is to the old building retirement. inventory. retirement.
be made next accounting period.
- part of land or new building using a clearing account The entity acquired the property in a prior reporting period and used as owner-occupied
property. In the current reporting period, the entity decides to demolish old building and
NOTES: replacing it with a new building. New building will be used as:
1. Insurance PPE INVENTORY INVESTMENT
 Taken during construction- part of the cost of building PROPERTY
 Not taken and there is a claim for damages- claims for damages is Cost of new Construction cost Construction cost Construction cost
EXPENED. building. plus demolition plus demolition plus demolition
2. Building Fixtures cost. cost. cost.
 Movable- charged a furniture and fixtures and depreciated over their useful
Carrying value of Re-compute the related depreciation charges on the building to
life.
the old building at depreciate the remaining carrying value of the building over the
 Immovable- part of the cost of building
the time it makes remainder of its life. Hence, old building will have a NIL value at
3. Savings or loss on construction
a decision to the date of planned demolition.
 not recognized as an addition or deduction to the cost of self-constructed
demolish the old
asset.
building at a
specific date in the
ACQUISITION OF LAND AND BUILDING future.
 allocated based on their relative Fair Values. If for some reason Charged to loss on retirement.
there is a
SCENARIO TREATMENT OF TREATMENT NET remaining carrying
PURCHASE PRICE OF COMMON DEMOLITION value of the old
COST ON COSTS building at the
ACQUISITION time of demolition.
1. Old building is unusable Purchase price is Charged to New Building
and likely to be allocated entirely to land *Other items and their Treatment:
demolished. land. 1. Patterns and Dies
2. Old building is usable in a. used for regular products of the company - PPE, depreciated over their useful life
the meantime and the old b. used for specially ordered products - included as part of the special product cost
building will be classified 2. Containers
as: a. returnable(big in units or great bulk) - PPE or other noncurrent asset
a. PPE Allocate the Allocate to New Building b. returnable( small and involve small amounts)- other noncurrent asssets
purchase price to land and c. not returnable- EXPENSED outright
land and building building based
based on their on their
relative fair values. relative fair
ACQUISITION OF PROPERTY
values.  Acquisition on Cash Basis – equal to cash price or cash
b. Inventories Land and building are Added to the Added to the equivalents paid at the acquisition date plus incidental costs
classified as one item cost inventory. cost (freight, installation costs and other cost in bringing the asset to
under inventories. Inventory. working conditions)
c. Investment Property:  Acquisition on Account – equal to invoice price less discount
i. @ cost model The land and building Allocate the to New building whether taken or not.
will be classified as land and as  Acquisition on deferred settlement terms
two separate items building based Investment
1. available cash price- cash price paid at the
under Investment on their property.
property at their relative fair acquisition date and any difference between the cash
allocated cost using values.
 price and the total payment is recognized as interest
expense.
2. no available cash price- PV of all payments using an
imputed interest rate.
 Issuance of Shares of stocks (order of priority)
1. FMV of property received (gain on exchange is
credited to Share Premium while loss is debited to
Share Discount)
2. FMV of capital stock issued (gain on exchange is
credited to Share Premium while loss is debited to
Share Discount)
3. Par value of shares issued (no gain or loss)
 Issuance of Bonds payable (order of priority)
1. FV of the bonds payable issued.
2. FV of the property received
3. Face value of the bonds payable issued.
 Exchange Transaction – measured at Fair Value unless;
a. the exchange lacks commercial substance
b. the fair value of neither the asset received nor the
asset given up is reliably measurable.
Exchange with commercial substance (order of priority)
No cash is involved Cash is involved
1. FMV of property given Payor: Fair value of the asset given
2. FMV of property received plus cash payment (in effect, this is
asset received)
3. Cost or book value of property Recipient: Fair value of the asset
given given minus cash payment (in effect,
this is asset received)
Gain or Loss is fully recognized
Exchange with no commercial substance
 measured at the carrying amount of the asset given up.
Accordingly, no gain or loss is recognized.
1. Payor: Carrying amount of the asset given plus cash
paid.
2. Recipient: Carrying amount of the asset given minus
cash payment
 Trade- in (order of priority)
1. Fair value of the asset given plus cash payment. Gain
or loss on trade-in is computed as follows:
Fair value of the asset given xx
Book value of the asset given (xx)
Gain or loss (fully recognized) xx
2. Trade-in value of the asset given plus cash payment
(in effect, this is the fair value of the asset received).
Gain or loss on trade-in is computed as follows:
Trade-in value of the asset given xx
Book value of the asset given (xx)
Gain or loss (fully recognized) xx
Cash price without trade-in (or list price) xx
Cash price with trade-in (xx)
Trade-in value allowance xx
 Donation- asset is recorded at the fair value when received or
receivable considering the source of the donated asset:
1. Shareholder- fair value should be credited to share
premium or donated capital. Incurrence or payment of
direct expenses shall be deducted from donated
capital.
2. Non-shareholder- either credit to subsidies or
liability account until the restrictions are met.
Incurrence or payment of direct expenses shall be
added to the costs of the assets received.
GOVERNMENT GRANTS
 assistance by the government in the form of transfers of
resources to an entity in return of for past or future compliance
with certain conditions relating to the operating activities of the
entity.
Classification of Government Grants
1. Grants related to assets
2. Grants related to income
Recognition and Measurement of Grants
 government grants, including nonmonetary grants at fair value,
shall not be recognized until there is reasonable assurance that:
a. the entity will comply with the conditions attaching
to them; and
b. the grants will be received.
*receipt of grant does not provide a conclusive evidence that the conditions attaching to
the grant have been or will be fulfilled.
Accounting for Government Grants
1. Grants in recognition of specific expenses should be recognized as income
over the period of the related expense.
2. A government grant that becomes receivable as compensation for
expenses or losses already incurred or for the purpose of giving immediate
financial support to the entity with no future related costs shall be recognized
in profit or loss when it becomes a receivable.
3. Grants related to depreciable assets are usually recognized in profit or loss
over the periods and in the proportions in which depreciation expense on
those assets is recognized.
4. Grants related to non-depreciable assets should be recognized in profit or
loss over the periods that bear the cost of meeting the obligations.
Presentation of Grants related to the Asset (SFP)
1. By setting up the grant as deferred income (liability) or gross method
Cash xx
Deferred Income- government grant xx
* depreciation of the related asset shall be provided normally.
2. By deducting the grant in arriving at the carrying amount of the asset or
net method
Cash xx
Equipment xx
* depreciation shall be based on the amount net of government grant.
Presentation of Grants related to the Income (SCI)
1. Separately or under a general heading such as “other income”
2. Deducted in reporting the related expenses.
Repayment of Government Grants
 accounted as change in accounting estimate
Repayment of Grant related to Income
1. applied first to the unamortized deferred credit recognized in respect of the grant.
2. then, charged to loss on repayment of government grant to the extent that the
repayment exceeds any such deferred credit, or when no deferred credit exists, the
repayment shall be recognized immediately to profit or loss.
*Deferred Income- government grant (unamortized balance) xx
Loss on government grant xx
Cash xx
Repayment of Grant related to Asset
 recognized by increasing the carrying amount of the asset or reducing the
deferred income balance by the amount repayable.
Deferred Income approach or Gross Method
*Deferred Income- government grant (unamortized balance) xx
Loss on government grant xx
Cash xx
* loss on repayment= accumulated amortization of government grant OR Government grant/original
life x age of asset)
Deduction from asset approach or Net Method
*Asset (unamortized balance of deferred income) xx
Loss on government grant xx
Cash xx
Accumulated depreciation xx
* loss on repayment= accumulated amortization of government grant OR Government grant/original
life x age of asset)
FORGIVABLE LOANS
3. Compute for the average borrowing cost or avoidable borrowing cost.
 loans which the lender undertakes to waive repayment of under
certain prescribed conditions.
Average borrowing cost or avoidable borrowing cost= Capitalization rate
x weighted average expenditures
GOVERNMENT ASSISTANCE
 no value can reasonably be placed upon it 4. Compare the average borrowing costs with the actual borrowing cost and get the
lower figure as the capitalizable borrowing costs.

Asset financed by both Specific Borrowing and General Borrowing

BORROWING COST
Specific borrowing:
 interest and other costs that an entity incurs in connection with
Actual borrowing cost xx
the borrowing of funds.
Investment income (xx)
 Includes:
1. Interest expense calculated using the effective
interest method (PFRS 9) General borrowing:
2. Interest in respect of lease liability (PFRS 16) Weighted average carrying amount or expenditures xx
3. Exchange difference arising from foreign currency Principal amount related to Specific borrowing (xx)
Weighted average related to General borrowings xx
borrowing to the extent that it is regarded as an
Capitalization rate %
adjustment to interest cost. Weighted average borrowing cost xx
Qualifying Asset
 assets that necessarily takes a substantial period of time to get * Capitalizable Borrowing costs:
Actual borrowing cost or average borrowing cost whichever is lower.
ready for its intended use or sale.
1. Bearer plants 4. Power generation facilities QUERY: What if the total amount of the specific borrowing exceeded the total weighted average
2. Inventories 5. Intangible assets carrying amount, at what rate will the company use in computing the capitalized borrowing cost?
3. Manufacturing Plants 6. Investment properties
Answer: it depends on the company policy. If the company uses specific method then use the specific
* financial assets and inventories that are produced over a short period of time or those interest rate. Otherwise use the weighted average capitalization rate.
that are ready for intended use or sale when acquired are not qualifying assets.
QUERY: What if the problem is silent?
*excluded from capitalization:
 qualifying asset measured at fair value Answer: use the rate of the specific borrowings if the total expenditures do not exceed the principal
 inventories that are produced, in large quantities, repetitive basis such as amount of the specific borrowings, otherwise use the weighted average capitalization rate.
whisky even if they take substantial period of time to get ready for sale.
 Non-qualifying asset Conditions Rate to be used Computation of the
average or avoidable cost
Commencement, Suspension and Cessation of capitalization Total expenditures is equal Use the specific rate Specific rate x weighted
Commencement When it meets all the following: or less than the specific average expenditures
 Incurs expenditures for the asset; borrowing
 Incurs borrowing cost; Total expenditures is Use the weighted average weighted average rate x
 Undertakes activities that are necessary to prepare greater than the specific rate weighted average
the asset for its intended use or sale. borrowing expenditures
Suspension During extended period in which it suspends active
development of a qualifying asset.
Substantially all the activities necessary to prepare the EXPENDITURES INCURRED EVENLY
Cessation
qualifying asset for its intended use or sale are complete. Weighted average expenditures = Total Expenditures / 2

*Additional guidelines on cessation of borrowing cost (earlier between) Specific borrowing that was used for General borrowing
a. when substantially all the activities necessary to prepare the qualifying  Treated as general borrowing. Average interest rate is use as
asset for its intended use or sale are complete or capitalization rate. Investment income is not deducted.
b. when the entity shall no longer incurs borrowing costs such as when the
borrowings are already been paid by the entity.
SUBSEQUENT EXPENDITURES
TYPES DEFINITION TREATMENT
Accounting for Borrowing Cost
Revenue Expenditure Cost that provides Expense
 Borrowing cost that are directly attributable to the acquisition,
benefit only for the
construction or production of a qualifying asset should be
current reporting
capitalized. Other borrowing cost are recognized as expensed.
period.
Capital Expenditure Cost that provides Asset (capitalized)
Asset financed by Specific Borrowing
 Actual borrowing costs incurred less any investment income. benefit over more than
an accounting period.
Asset financed by General Borrowing
RECOGNITION OF SUBSEQUENT COSTS
*the amount of borrowing costs capitalized during a period shall not exceed the amount
 Probable that future economic benefits associated with
of borrowing costs incurred during that period.
subsequent cost will flow to the entity.
 Subsequent costs can be measured reliably.
STEPS IN COMPUTING FOR BORROWING COSTS
1. Compute for the capitalization rate. Future Economic benefits
Capitalization rate= Total borrowing cost 1. Bigger
Total general borrowings 2. Better
2. Compute for the weighted average carrying amount or expenditures. 3.Longer
* if completed beyond one year:
1. amount will be averaged from the start of the year up to the date of completion.
2. all expenditures incurred during the year are average from the date of incurrence up *Examples of Subsequent Cost:
to the end of the construction period.  Additions - capitalized in usual manner
NOTE: a. entirely new unit is depreciated over its useful life.
The denominator to be used when computing for the weighted average expenditures
would be the date from the beginning of the year up to the end of construction period.
 b. Expansion, enlargement or extension of the old asset value divided by life in years
is depreciated over its useful life or remaining life of Or Accumulated depreciation: (Cost minus
the asset of which it is part, whichever is shorter. Depreciation rate x Depreciable amount residual value divided by life in years) x
* depreciation rate =1/ useful life age of the asset
Working hours method
 Improvements or Betterments – if the improvements do not
Depreciation rate/hour = depreciable Cost less accumulated depreciation
involve replacement of parts, they are simply added to the cost of amount divided by the estimated life in
existing assets. terms of service hours Accumulated depreciation: (Cost minus
residual value divided by life in terms of
 Rearrangement cost – capitalized and amortized over the Annual depreciation = Depreciation service hours) x total working hours used
remaining life of the asset to which it pertains. The undepreciated rate/hour x actual hours work this year
cost of the original installation cost should be expensed and the Output method
relevant accumulated depreciation must be cancelled. Depreciation rate/hour = depreciable Cost less accumulated depreciation
amount divided by the estimated life in
terms of units of output Accumulated depreciation: (Cost minus
 Repairs
residual value divided by life in terms of
a. Extraordinary expenditures- capitalizable Annual depreciation = Depreciation units of output) x total units produced
b. Ordinary expenditures- expense when incurred. rate/hour x yearly output
Sum of years digit
Major Replacements SYD = Life ( Life +1 ) Cost less accumulated depreciation
1. Separate Identification practicable- replacement cost of new asset is 2
debited. The cost of the parts and its related accumulated depreciation is Accumulated depreciation = (add all
removed from the accounts and the remaining book value is treated as loss. Annual depreciation = Depreciable fractions used x depreciable cost)
Loss on retirement xx amount x series of fractions ( SYD is the
Accumulated Depreciation xx denominator )
Building (cost) xx
*the fractions should be used in full one year.
*if the life of the asset is say 2 ½ years, the
Building (replacement cost) xx procedure is multiply the life by 2 in order to get
Cash xx the life of the asset in half years
Declining Balance Method
2. Separate Identification not practicable- an entity may use the replacement Depreciation Expense = rate x diminishing Cost less accumulated depreciation
cost as an indication of what the cost of the replaced part was at the time it book value (initially at cost, subsequently
was acquired or constructed. book value at the beginning of each Accumulated depreciation = (add all
period) depreciation expenses)
Loss on retirement xx
Accumulated Depreciation xx Or if the book value is already lower that
Building (assumed cost) xx residual value at the end of the period,
the depreciation is computed as:
Building (replacement cost) xx Maximum depreciation = beginning book
Cash xx value less residual value

*double declining = 200% / useful life

* the assumed cost is equal to the:
* 150% declining= 150% / useful life
= replacement cost x PV of 1 using the discount rate given over
Inventory Method
number of periods expired (age of the asset)
Depreciation Expense = Balance of the Book value= value of the asset at the end
asset minus the value at the end of the of the year
SUBSEQUENT MEASUREMENT year
a. Cost model or Retirement Method
b. Revaluation model No depreciation is recorded until the asset Book value = Total cost minus cost of the
is retired. asset retired

DEPRECIATION Depreciation Expense when there is a

 Depreciation starts when it is available for use (not when it is first retirement = original cost of the asset
used). retired minus salvage proceeds
 Depreciation does not cease when the asset becomes idle or it is Replacement Method
retired from active use unless the asset is fully depreciated. No depreciation is recorded until the asset Book value = (Total assets replaced
 Depreciation is recognized even if the FV of the asset exceeds its is retired and replaced. minus asset retired) x Replacement cost
CA; as long as the asset’s residual value does not exceed its
Depreciation Expense when there is a
carrying amount. retirement = replacement costs of the
asset retired minus salvage proceeds
Kinds of Depreciation
1. Physical Depreciation- assets normal wear and tear If the asset retired is not replaced:
a. passage of time due to nonuse Depreciation Expense when there is a
b. action of elements (wind, sunshine, rain, dust); retirement = original cost of the asset
retired minus salvage proceeds
c. wear and tear due to infrequent use;
d. accidents (fire, flood, earthquake, and other natural
disasters)
Depreciation based on Revenue
e. diseases for animals and wooden buildings  not appropriate
*wear and tear is damage that naturally and inevitably occurs as a result of normal wear or aging

2. Functional or Economic Deprecation Change in Estimate

a. Obsolescence  treated as change in accounting estimate treated currently and
b. Inadequacy prospectively.

Fully Depreciated PPE still in use

DEPRECIATION METHODS  should no longer be depreciated
Depreciation expense Book value
Straight line depreciation
Annual depreciation= Cost minus residual Cost less accumulated depreciation
DERECOGNITION
 on disposal
 when no future economic benefits are expected from its use or
disposal
Gain or loss on disposal
 difference between net disposal and proceeds and carrying
amount at the date of derecognition.
 recognized in income statement.

Fixed asset turnover

 sales divided by the average PPE (net)

ADDDITIONAL NOTES FOR SME’S

 PPE
- sme’s shall account or its PPE either at:
a. historical cost-depreciation-impairment model only,
or
b. revaluation model (FV less subsequent depreciation
and impairment).
 Government Grants
- are recognized only when conditions are satisfied.
a. Without future performance conditions- recognized
in P/L when proceeds are receivable.

b. with performance conditions- recognized in P/L

when conditions are met.
 Borrowing Costs
- all borrowing costs are EXPENSED immediately.