PROPERTY, PLANT & EQUIPMENT

Definition. Valuation &

Measurement. Classification and
Presentation

PROPERTY, PLANT AND

EQUIPMENT
PAS 16 defines PPE as TANGIBLE
ASSETS that are held by an
enterprise for use in the production
or supply of goods or services, for
rental to others, or for administrative
purposes.
These assets are expected to be
used for a period of more than 12
months.

PROPERTY, PLANT AND

EQUIPMENT
Property not subject to depreciation
Property subject to depreciation or
amortization and
Property subject to depletion

PROPERTY, PLANT AND

EQUIPMENT
Major spare parts and stand by equipment qualify
as PPE when the entity expects to use them for a
period of more than 12 months.
Land held that is intended to be sold in the
normal course of business- INVENTORY
Land held for future plant site- PPE
Land that is acquired for long term capital
appreciation- IP
Building that is owner-occupied (use by the entity
in its operations)-PPE
Building that is being leased out to others under
operating lease- IP

INITIAL MEASUREMENT
An item of PPE that qualifies for recognition as an
asset shall be measured INITIALLY AT COST.
Purchase Price, including import duties and
non refundable purchase taxes after deducting
trade discounts and rebates.
Costs directly attributable to bring the asset to
the location and condition necessary for it.
The initial estimate of the costs of dismantling
and removing the item and restoring the site
on which it is located.
The purchase price of an item PPE is the
CASH PRICE EQUIVALENT at the recognition
date.

Directly attributable costs are:

Cost of employee benefits arising directly
from the construction or acquisition of the
item of PPE
Costs of site preparation
Initial delivery and handling costs
Installation and assembly costs
Cost of testing whether the asset is
functioning properly
Professional fees

LAND
Purchase price
Brokers commission
Cost of closing and obtaining the title
Title insurance
Escrow fees
Surveying costs
Local government special assessment taxes
Any liens
Mortgages or encumbrances on the property
assumed from the previous owner
Cost of clearing, grading, filling or leveling, costs
of demolition, and all other costs that permanently
improve the land.

LAND IMPROVEMENTS
Are depreciable site enhancements that
are not permanent such as fences, water
systems, sidewalks driveways, parking
lots and landscaping.

BUILDING
Purchase price, legal fees, title and
escrow
fees,
reconditioning
costs,
alteration and improvement costs, building
permit, architects fees, and any other
costs incurred to put the building in a
condition suitable for its intended use.

LEASEHOLD IMPROVEMENTS
Improvement made by the lessee to
leased property, unless specifically
exempted in the agreement, revert to the
lessor at the termination of the lease
contract. Leasehold improvements are
depreciated over the shorter or their
USEFUL LIFE and the LEASE TERM.

EQUIPMENT
Includes machinery, office and store
equipment, vehicles, furniture and fixtures.
Cost includes purchase price, taxes and
duties on purchase, freight charges,
insurance while in transit, installation
charges, cost of trial runs and other costs
of bringing and preparing the asset for
use.

SUBSEQUENT MEASUREMENT
An entity shall choose either the
COST MODEL or REVALUATION
MODEL.

ACQUISITION
1.
2.
3.
4.
5.
6.
7.
8.
9.

Cash basis
On account subject to cash discount
Installment basis
Issuance of share capital
Issuance of bonds payable
Exchange
Donation
Government grant
Construction

CASH BASIS
The cost of an item of PPE is the CASH
PRICE EQUIVALENT at the recognition
date.
Entry:
PPE

XXX
CASH

XXX

ON ACCOUNT
The cost of the asset is equal to the
INVOICE
PRICE
minus
the
DISCOUNT, regardless of whether
the discount is taken or not.
Methods:
Gross Method
Net Method

INSTALLMENT BASIS
The purchase price of an asset acquired
on deferred payment plan is based on the
CASH PRICE EQUIVALENT. No cash
price available- PRESENT VALUE OF ALL
PAYMENTS using an implied interest rate.
ENTRY:
PPE
CASH (down payment)
PAYABLE

ISSUANCE OF SHARE CAPITAL

ORDER OF PRIORITY
Fair value of the property received
Fai value of the share capital
Par value or stated value of the share capital
ENTRY
PPE
SHARE CAPITAL
SHARE PREMIUM

ISSUANCE OF BONDS PAYABLE

ORDER OF PRIORITY
Fair value of bonds payable
Fair value of the asset received
Face value of the bonds
ENTRY
PPE
BONDS PAYABLE
- PREMIUM OR DISCOUNT ON BP

EXCHANGE
PAS 16 provides that the cost of an item
of PPE acquired in exchange for nonmonetary asset is measured at FAIR
VALUE, unless the exchange transaction
lacks commercial substance of the fair
value of neither the asset received nor the
asset given up is reliably measurable.

NO CASH INVOLVED
Order of Priority
Fair value of the property given
Fair value of the property received
Carrying amount of property given
Example:
An investment in equity security with carrying
amount of 500,000 is exchanged for an equipment
with a fair value of 550,000. At the time of
exchange, the investment has a fair value of
530,000.

CASH IS INVOLVED
If a property is acquired in an exchange
and there is a cash involved, the cost of
the property is equal to the following:
a. Fair value of asset given plus cash
payment- on the part of the payor
b. Fair value of asset given minus the
cash received- on the part of the
recipient.

Illustration
Aye and Bee exchanged equipment.
Aye
Bee
Equipment
1,600,000
2,000,000
Accu. Dep.
900,000
1,350,000
Carrying Amount 700,000
650,000
Fair Value
600,000
800,000
Cash Paid
Aye to Bee
200,000
200,000

DONATION
Donation received from
SHAREHOLDERS shall be recorded at
the FAIR VALUE of the items received,
with the credit going to DONATED
CAPITAL.
Expenses incurred in connection with the
donation shall be charged to the
DONATED CAPITAL ACCOUNT.

CONSTRUCTION
The cost of self-constructed PPE 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.

EXERCISE 1
Susan Company experienced the following
transactions during the current year:
1. Purchased machinery for P 500,000 cash
2. Purchase land and building for P 5,500,000
cash, including an appraisers fee of P 100,000.
An appraisal indicated fair value as follows:
Land 2,000,000 and Building 3,000,000.
3. Invested in 5,000 shares of another entity at P
100 per share. Subsequently, Susan Company
exchanged the 5,000 shares for a delivery
equipment. At the time of exchange the share is
quoted at 120 and the equipment has a list price
of P 680,000.