Chapter 16 PPE (Part 2)

Learning Objectives

• State the subsequent measurement of items of

PPE.
• Define depreciation and state when
depreciation commences and when it ceases.
• Account for the revaluation of items of PPE.
Subsequent measurement

• Subsequent to initial recognition, an entity shall choose

either:
(a) the cost model or
(b) the revaluation model
as its accounting policy and shall apply that policy to an
entire class of PPE.
Cost Model
• After recognition, an item of PPE is measured at its cost
less any accumulated depreciation and any
accumulated impairment losses.
Depreciation
• Depreciation is the systematic allocation of the
depreciable amount of an asset over its estimated useful
life.
• When computing for depreciation, each part of an item
of PPE with a cost that is significant in relation to the
total cost of the item shall be depreciated separately.
Depreciation - continuation
• Depreciation begins when the asset is available for
use, i.e., when it is in the location and condition
necessary for it to be capable of operating in the manner
intended by management.
• Depreciation ceases when the asset is derecognized
or when it is classified as “held for sale” under PFRS 5,
whichever comes earlier.
Selection of depreciation method
• There are various methods of depreciation. The entity
shall select the method that most closely reflects the
expected pattern of consumption of the future
economic benefits embodied in the asset.
• However, a depreciation method that is based on
revenue that is generated by an activity that includes
the use of an asset is not appropriate.
Common types of depreciation methods
1. Straight line method – depreciation is recognized
evenly over the life of the asset by dividing the depreciable
amount by the estimated useful life.

Depreciation = (Historical cost – Residual value) ÷

Estimated useful life
Common types of depreciation methods
2. Sum-of-the-years’ digits (SYD) depreciation –
depreciation is computed by applying a series of fractions
to the depreciable amount of the asset.

Depreciation = (Historical cost – Residual value) x

Fraction

SYD Life + 1
= Life x
denominator 2
Common types of depreciation methods
3. Double declining balance method – depreciation is
computed by applying a fixed rate on the carrying amount
of the asset at the end of each period. Unlike for other
depreciation methods, the residual value is initially
ignored when computing depreciation under the double
declining method.
Depreciation = Carrying amount x Rate

2
Double declining rate =
Life
Common types of depreciation methods

Units of production method (Activity method or

Variable-charge method)
• The units-of-production method relates depreciation to
the estimated production capability of an asset and is
expressed in a rate per unit of output or per hour of
input.

Depreciation = (Historical cost – Residual value) x

Rate
Leasehold improvements
• Leasehold improvements are depreciated over the useful
life of the improvements or the remaining lease term,
whichever is shorter.

• An option to renew the lease is considered when

determining the shorter between the useful life and the
remaining lease term if it is probable that the renewal
option will be exercised.
Changes in depreciation method, useful life, and
residual value

• A change in depreciation method, useful life, or residual

value is a change in accounting estimate accounted for
prospectively.

• Prospective accounting means the change affects only the

current period and/or future periods. The change does
not affect past periods.
Accounting for replacements of major parts

• The cost of the replacement part is recognized while the carrying

amount of the replaced part is derecognized.
• If the carrying amount of the replaced part is indeterminable, the
entity may use the cost of the replacement as an indication of what
the cost of the replaced part was at the time it was acquired or
constructed.
Revaluation Model

• After recognition as an asset, an item of PPE whose fair

value can be measured reliably shall be carried at a
revalued amount, being its fair value at the date of
the revaluation less any subsequent accumulated
depreciation and subsequent accumulated impairment
losses.
Revaluation surplus

Fair value* xx
Less: Carrying amount (xx)
Revaluation surplus – gross of tax xx

*The fair value is determined using an appropriate valuation technique,

taking into account the principles set forth under PFRS 13.
The Cost Approach of fair value measurement

• Total economic life = Effective life + Remaining eco. life

• Percentage depreciation = Effective life ÷ Total eco. life

• Depreciation = Percentage dep’n. x Replacement cost

• Fair value = Replacement cost - Depreciation

Methods of recording revaluation

1. Proportional method - The gross carrying

amount is adjusted proportionately to the
change in the carrying amount.

2. Elimination method - The accumulated

depreciation is eliminated against the gross
carrying amount of the asset.
Frequency of revaluation

• For items with significant and volatile changes in fair

value, annual revaluation is necessary. For items
with insignificant changes in fair value, revaluation may
be made every 3 or 5 years.
Revaluation applied to all assets in a class

• If an item of PPE is revalued, the entire class of PPE to

which that asset belongs shall be revalued.
• The items within a class of PPE are revalued
simultaneously to avoid selective revaluation of assets and
the reporting of amounts in the financial statements that are a
mixture of costs and values as at different dates.
Subsequent accounting for revaluation surplus
• Revaluation is initially recognized in other comprehensive income
unless the revaluation represents impairment loss or reversal of impairment
loss, in which case it is recognized in profit or loss.

• Subsequently, the revaluation surplus is accounted for as follows:

1. If the revalued asset is non-depreciable, the revaluation surplus
accumulated in equity is transferred directly to retained
earnings when the asset is derecognized.
2. If the revalued asset is depreciable, a portion of the revaluation
surplus may be transferred periodically to retained earnings as the asset
is being used.
Derecognition

• The carrying amount of an item or PPE shall be derecognized:

a. on disposal; or
b. when no future economic benefits are expected from its use
or disposal