ACCOUNTING for

PROPERTY, PLANT
& EQUIPMENT (PPE)
PAS 16
 Definition of Property,
Plant & Equipment
• “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.”
• Excludes those held for sale, biological
assets, and mineral rights/reserves per se
• Accounts used for disclosure: land,
machinery, motor vehicles, office equipment,
etc.
 Characteristics of Property,
Plant & Equipment (CUTE)
• Tangible assets (with physical substance)
• Used in business (for production, supply of
goods or services, for rental to others, for
administrative purposes)
• Expected use of over one year.
• Cost is material or significant.
 Initial recognition of property,
plant & equipment
• Cost recognised if:
- Associated economic benefits
will probably flow to the entity,
and
- Cost of the item can be reliably
measured and material in amount
• Asset versus expense
• Component parts separately
accounted for
 Initial measurement of
property, plant & equipment
‘Cost generally covers the following:
• Purchase price
• Incidental costs (SPI2CEs)
• Estimated cost to dismantle or restore

Key issue: which amounts should be

capitalised into the cost?
 Costs Incurred
Subsequent to Acquisition
As a rule, costs incurred to achieve
greater future benefits should be
capitalized and expenditures that simply
maintain a given level of services should
be expensed.

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 Requisites for Capitalization
In order for costs to be capitalized one of
the following conditions must be met:
 Enhanced quality of products
 Quantity of outputs increased
 Increase in useful life
 Major types of expenditures
Generally, the following types of
expenditures are incurred relative to
existing assets:
 Additions;
 Improvements and replacements;
 Rearrangement and reinstallation;
 Repairs
 Additions
As a rule, additions to plant assets is
capitalized because a new asset has
been created. The following rules apply
 If additions were anticipated by
management, then related costs are
capitalized;
 If additions are not anticipated, then
related costs shall be expensed.
 Improvements and Replacements
Improvements and replacements are
substitutions of one asset for another.
 Improvement is the substitution of a
better asset for the one currently used;
 Replacement is the substitution of a
similar asset.
 Capitalization depends on whether the
expenditures increase the future
service potential of the asset or not.
 Accounting Approaches
If it is determined that the expenditure
increases the future service potential of the
assets and should be capitalized, the following
approaches are used:
 Substitution approach;
 Capitalizing the new cost;
 Charging to accumulated depreciation;

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 Substitution Approach
In this method, accounting depends on
whether cost of the old can be identified or
not.
 If the cost and related depreciation can be
determined, the cost of the old asset is
removed and the cost of the new is
recorded; any of the following is adopted:
 Capitalizing new cost
 Charging to accumulated depreciation
 Capitalizing the new cost
Improvements are usually handled in this
manner. This is the approach used when:
 The quantity of the units produced by the
asset increase; or
 The quality of the units produced by the
asset is enhanced.

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 Charged to Accumulated Depreciation
Improvements are handled in this manner :
 When the quantity or quality of the asset
itself has not been improved, but its useful
life has been extended.
 In these instances, the cost of replacements
are charged to accumulated depreciation.

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 Rearrangement and Reinstallation
 These are expenditures intended to benefit
future periods, are different from additions,
replacements and improvements.
 If the original installation cost and the
accumulated depreciation taken to date can
be determined or estimated, the
rearrangement and installation cost is
handled as a replacement. If not, it should be
capitalized and amortized over those future
periods expected to benefit.
 Examples of Directly
Attributable costs (SPI2CE)
In general, the following are directly
attributable costs:
• Site preparation;
• Professional fees
• Initial delivery and handling costs;
• Installation and assembly cost;
• Cost of testing
• Employee benefits costs directly related to
acquisition/construction
 Examples of Items which are
expensed as incurred (OASISIR)
• Opening cost of new facility;
• Administration and general OH
• Selling, advertising and promotion costs;
• Introducing new product or service costs;
• Staff training and other costs of conducting
business in a new location
• Initial operating losses,
• Relocation & reorganizing costs
 Mode of Acquiring PPE
(CODE-DIGS)
• Cash basis;
• On account subject to discount
• Deferred payment
• Exchange of noncash assets
• Donation
• Issuance of debt or equity securities
• Government grant
• Self construction
 Cash Basis Acquisition
• Cost include the usual items:
- Purchase price;
- Incidental costs (SPI2CEs)
- Dismantling or restoration costs.
• Incidental costs usual include:
- Freight, installation, and other
- Costs necessary to bring the
asset to its intended location
ready for desired use.
 Open Account Acquisition
• Cost is equivalent to:
- Purchase price net of discount
- Incidental costs (SPI2CEs)
- Estimated cost to remove or restore
- If discount is not taken, charged to
purchase discount lost.
• Incidental costs usual include:
- Freight, installation, and other
- Costs necessary to bring the asset to
its intended location ready for desired
use.
 Deferred Payment Plan
Acquisition of PPE
• Cost is equal to:
- Cash equivalent price;
- If cash price is not available; initial
cost is equal to the present value of
all expected payments using an
implied interest rate.
- Plus the previously enumerated
incidental costs (SPI2CEs).
 Exchange with other Noncash
Assets
• Cost is equal to the given priority:
If no cash is involved:
- Fair value of asset given up
- Fair value of asset received
- Cost or book value of property
given up.
- Plus incidental costs (SPI2CEs).
 Exchange with other Noncash
Assets
• Cost is equal to the given priority:
If cash is involved:
- Fair value of asset given up plus
cash paid or
- Fair value of asset received less
cash received
- Cost or book value of property
given up.
- Plus incidental costs (SPI2CEs).
 Donated Property
• Recorded at fair value on the date
of donation, plus incidental costs.
Self-constructed Asset
• Direct cost of materials
• Direct cost of labor
• Indirect cost and incremental
overhead specifically identifiable or
traceable to the construction.
 Issuance of Equity Security
• Cost is equal to the given priority:
- Fair value of asset received;
- Fair value of the share capital;
- Par value or stated value of the
share capital
- Plus incidental costs (SPI2CEs).
 Issuance of Debt Security
• Cost is equal to the given priority:
- Fair value of bonds payable;
- Fair value of asset received;
- Face value of bonds payable;
- Plus incidental costs (SPI2CEs).

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 Measurement subsequent to
initial recognition
• Two possible measurement models:
• Cost
• Revaluation
• Decide
• as accounting policy
• for classes, not individual assets
• May change policy, but only if for more
relevant/reliable information
 The cost model (1)
• Cost less any accumulated
– depreciation
– impairment losses
• Repair and maintenance costs are
expensed as incurred, not capitalised
• Capitalisation requires (at time of
expenditure) increased probable future
economic benefit
 The cost model: depreciation (1)
Depreciation = systematic allocation of the
depreciable amount of an asset over its
useful life
FRSC:
• specifically describes depreciation as the
allocation process – not as a change in
the value of an asset
• does not specify any depreciation method
 The cost model: depreciation (2)
• The depreciation method chosen should be
the one that most closely reflects the
expected pattern of consumption of the
future economic benefits embodied in
the asset
• ‘Useful life’ is affected by expected usage,
physical wear and tear, technical or
commercial obsolescence, legal or similar
limits on use
 The cost model: depreciation (3)
• Residual value estimates what the entity
would currently (at the time of the estimate)
obtain from disposal
• Why deduct residual value from cost?
– Precision: to reflect the item’s net cost
– Economics: to stop depreciation if asset
is expected to increase more than
diminish.
 The revaluation model
In this alternative to the cost model:
• Measurement basis is fair value
– Market value of plant & equipment
– Professionally qualified valuer’s
appraisal of land & buildings
• Frequency is not specified
• Revaluation to be done on a class basis
 The revaluation model: increments
Revaluation is done by classes, but the
accounting is done for individual items
Increases (increments):
• Are credited directly to equity as
revaluation surplus (not through income
statement)
• Create a temporary difference leading to a
deferred tax liability
• Are shown on an after-tax basis
 The revaluation model: decrements
Decreases (decrements):
• Immediate recognition of an
expense
• No extra tax-effect entries beyond
the tax-effect worksheet
• A decrement reversing a previous
decrement eliminates the surplus
before recognising the expense
 The revaluation model:
effects & applications
1. Different accounting for increments
and decrements:
• Takes gains to surpluses and
losses to the income statement
• Could cause ‘gaming’ in defining
an individual asset for revaluation
2. Asset revaluation surplus may be
transferred to retained earnings
3. Depreciation of revalued assets
 Choosing between the cost model
and the revaluation model
• There is a cost disincentive to adopt
the revaluation model.
• Cost model harmonises with US
GAAP
• Revaluation model provides
increased relevance & reliability
 Derecognition
• Occurs (PAS 16 para 76)
– On disposal (sale)
– When no future economic benefits
expected (from use or sale)
• Proceeds are
– recorded in profit or loss, not revenue
– shown as cash flow from investing
activities
 Optional Disclosure
• The carrying amount of temporarily idle
property, plant and equipment;
• The gross carrying amount of any fully
depreciated property, plant, and
equipment still in use;
• The carrying amount of property, plant and
equipment retired from active use and
classified as held for sale;
• When the cost model is used, the fair
value of property, plant and equipment
when this is materially different from the
carrying amount.
 Other Issues
• Fully depreciated property
– Removed from the books when not to be used
anymore;
– Cost and related accumulated depreciation must
be retained if property will be continuously used.
• Property classified as held for sale
– Classified as current assets when available for
sale within one year from classification as HFS
– Carried at lower of carrying amount or fair value
less cost to sell.
– Should not be depreciated.
 Other Issues
• Idle or abandoned property
– Should not be classified as held for sale a
noncurrent asset that is to be abandoned;
– Its carrying amount is to be recovered principally
through continuing use.
• Temporary idle activity
– Does not preclude depreciating the asset as
future benefits are consumed not only through
usage but also through wear and tear and
obsolescence.

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Weekend Review classes for the Oct. 2011 CPA Exam. in Olivarez BIÑAN.
 ANSWERS TO MCQ
41.C
1. A 9. B 17. C 25. B 33.D 42.C
2. D 10.D 18.A 26.A 34.D 43.D
3. D 11.D 19.C 27.C 35.A 44.D
4. D 12.A 20.A 28.D 36.C 45.A
5. D 13.D 21.A 29.B 37.A 46.D
6. A 14.D 22.A 30.C 38.D 47.D
7. C 15.D 23.C 31.D 39.A 48.C
8. D 16.D 24.B 32.C 40.D 49.D
50.D
 ANSWERS DIY DRILL
1. D 9. A 17.B
2. B 10.C 18.B
3. A 11.C 19.D
4. A 12.D 20.B
5. A 13.C
6. D 14.D
7. D 15.D
8. C 16.B
BIOLOGICAL ASSETS
& AGRICULTURAL
PRODUCE
That’s all
folks!!