ACCOUNTING FOR PROPERTY, PLANT AND EQUIPMENT

PPE (PAS 16)– are tangible asset 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 period. Accordingly PPE are
classified as noncurrent assets.

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

 Measurement at Recognition (Initial Measurement) – see supporting note 1

An item of PPE that qualifies for recognition as an asset shall be measured at cost. Cost is the amount of cash and cash
equivalent paid and the fair value of the other consideration given to acquire an asset at the time of acquisition or
construction.

Cost components:
1. Purchase price, including import duties and nonrefundable purchase taxes, after deducting trade discounts and
rebates.
2. Directly attributable costs to bring the asset to the location and condition necessary for it to be capable of operating
in the manner intended by manangement.
a. Cost of employee benefits arising directly from the construction or acquisition of PPE
b. Cost of site preparation
c. Initial delivery and assembly cost
d. Intallation and assembly costs
e. Professional fees
f. Costs of testing

3. Initial estimate of the cost of dismantling and removing the item and restoring the site on which on which it is located
, the obligation for which an entity incurs.
Note: Any other costs that are not directly attributable costs are expensed immediately.

 Measurement after Recognition (Subsequent Measurement)

Either Cost Model or Revaluation Model as the accounting policy for PPE.
Cost Model: Cost xx
Accumulated Depreciation (xx)
Accumulated Impairment loss (xx)
PPE carried at cost xx

Revaluation Model: PPE are carried at Revalued Carrying Amount.

Fair value at the date of revaluation xx
Subsequent Accumulated Depreciation (xx)
Subsequent Accumulated Impairment losses (xx)
PPE Revalued Carrying Amount xx

 Means of Acquiring PPE – see supporting note

Means of Acquiring of PPE Cost Measurement

1. Cash basis Cash price equivalent or Cash paid + directly attributable costs
2. Acquisition on Account Invoice Price – discount (regardless taken or not)

3. Installment basis Cash Price Equivalent

4. Issuance of Share Capital in order of priority:

a. Fair value of the property received
b. Fair value of share capital
c. Par value or stated value of the share capital

5. Issuance of Bonds Payable In order of priority:

a. Fair Value of Bonds Payable
b. Fair Value of Asset Received
c. Face amount of Bonds Payable

6. Exchange If with commercial substance and no cash involved: in order

of priority:
a. Fair value of property given
b. Fair value of property received
c. Carrying amount of Property given

If with commercial substance and there is cash involved:

a. PAYOR = Fair Value of Asset GIVEN + Cash payment
b. RECIPIENT = Fair Value of Asset GIVEN – Cash Received

If there is TRADE IN VALUE (automatically it has

commercial substance):
In order of priority:
a. FAIR VALUE of Asset GIVEN + Cash Payment
 b. TRADE IN VALUE of Asset GIVEN(FV of asset received)
+ Cash Payment

If lacks commercial substance and there is cash involved:

Carrying amount of Property given + Cash paid

7. Donation Under Philippine GAAP:

a. Donation by shareholders = fair value of asset donated
+ directly attributable cost
b. Donation by non-shareholders = fair value when
received or receivable

8. Construction The cost of self-constructed PPE shall include:

a. Direct cost of materials
b. Direct cost of Labor
c. Indirect cost and incremental overhead specifically
identifiable or traceable to the construction.

 Measurement after Recognition (Subsequent Measurement)

Either Cost Model or Revaluation Model as the accounting policy for PPE.
Cost Model: Cost xx
Accumulated Depreciation* (xx)
Accumulated Impairment loss** (xx)
PPE carried at cost xx

Revaluation Model: PPE are carried at Revalued Carrying Amount.

Fair value at the date of revaluation xx
Subsequent Accumulated Depreciation* (xx)
Subsequent Accumulated Impairment losses** (xx)
PPE Revalued Carrying Amount xx

* Accumulated Depreciation = Cost – salvage value = Depreciable Amount / useful life x life used
** Impairment loss (PAS 36) = Carrying Amount > Recoverable Amount
Recoverable amount = higher between value in use or FV less cost to sell

 Derecognition.
Means that the cost PPE together with the related accumulated depreciation shall be removed from the
accounts. PAS 16, p 67 provides that the carrying amount of PPE shall be derecognized on (1) disposal or (2)
when no future economic benefits are expected from the use or disposal.

The gain or loss arising from the derecognition of PPE shall be determined as the difference between the net
disposal proceeds and the carrying amount of the item.

Fully depreciated property. When the carrying amount of PPE is equal to zero or salvage value. The cost of fully
depreciated asset remaining in service and the related accumulated depreciation ordinarily shall not be removed from
the accounts.

 Presentation

Property, Plant and Equipment is classified as noncurrent asset. It is presented in the statement of financial position as
one separate line item under noncurrent assets.

 Disclosure
For each class of Property, Plant and Equipment, disclose:
a. Basis for measuring carrying amount
b. Depreciation method(s) used
c. Useful lives or depreciation rates
d. Gross carrying amount and accumulated depreciation and impairment losses
e. Reconciliations of the carrying amount at the beginning and the end of the period, showing: (1) Additions,
(2) Disposals, (3) Acquisitions through business combinations, (4) revaluation increases or decreases, (5) impairment
losses, (6) reversal of impairment losses, (7) depreciation, (8) Net foreign exchange differences on translation and (9)
Other movements.

Additional disclosures:
a. Restrictions on title and items pledged as security for liabilities
b. Expenditures to construct property, plant and equipment during the period
c. Contractual commitments to acquire PPE.
SUPPORTING NOTE:

1. Cash Basis – cost of PPE is the cash price equivalent at the recognition date.
Cost = cash paid + directly attributable costs (ex. freight, installation)
When several assets are acquired at a “basket price” or “lump sum price”, it is necessary to apportion the single price
to the assets acquired on the basis of relative fair value.

2. Acquisition on Account. Cost = Invoice price – discount (regardless taken or not)

If the discount is not taken, the same is charged to purchase discount lost as part of other expenses.

3. Installment basis. Cost = Cash Price Equivalent

If an asset is offered at a cash price and at an installment price and is purchased at the installment price, the asset shall
be recorded at the cash price. The excess of installment price over the cash price is treated as an interest to be amortized
over the credit period. If there is no available cash price, asset is recorded at present value of all payments using implied
interest rate.

4. Issuance of Share Capital. PPE shall be measured to the following in order of priority:
a. Fair value of the property received
b. Fair value of share capital
c. Par value or stated value of the share capital

5. Issuance of Bonds Payable. PPE acquired by issuing bonds payable is measured in the following order:
a. Fair Value of Bonds Payable
b. Fair Value of Asset Received
c. Face amount of Bonds Payable

6. Exchange. PAS 16, p24, cost of PPE acquired in exchange for a nonmonetary asset or a combination of monetary and
nonmonetary asset is measured at fair value. There is gain or loss on exchange which recorded directly in
profit/loss.
Fair value of asset given xx
Carrying amount of asset given (xx)
Gain(loss) on exchange xx(xx)
Journal Entry:
PPE –new xx PPE, new xx
Accumulated Dep. – old xx Accumulated Dep. – old xx
PPE, old xx Loss on exchange xx
Cash xx PPE – old xx
Gain on Exchange xx Cash xx

If with commercial substance and no cash involved, the cost is measured at the following in order of priority:
a. Fair value of property given
b. Fair value of property received
c. Carrying amount of Property given
If with commercial substance and there is cash involved, the cost is equal to the following:
a. PAYOR = Fair Value of Asset GIVEN + Cash payment
b. RECIPIENT = Fair Value of Asset GIVEN – Cash Received

If there is TRADE IN VALUE (automatically it has commercial substance), the cost is equal to the following in
order of priority:
a. FAIR VALUE of Asset GIVEN + Cash Payment
b. TRADE IN VALUE of Asset GIVEN(FV of asset received) + Cash Payment

However, the exchange is recognized at carrying amount under the following circumstances:
a. The exchange transaction lacks commercial substance. NO gain or loss is recognized when the
exchange lacks commercial substance.
b. The FV of the asset given or the FV of asset received is not reliably measurable.

* Commercial Substance is defined as the event or transaction causing the cash flows of the entity to change significantly
by reason of the exchange. It has commercial substance when the cash flows of the asset received differ significantly
from the cash flows of the asset transferred.

7. Donation. IFRS does not address donation or contribution. In this regard, GAAP is made reference in relation to
accounting for donation. Philippine GAAP provides that contributions received from shareholders shall be recorded
at the fair value with the credit going to donated capital. Expenses incurred in connection with the donation shall be
charged to the donated capital account. However, directly attributable costs incurred subsequently to bring the
donated asset to the location and condition for the intended use shall be capitalized. Philippine GAAP further provides
that entities sometimes receive from non-shareholders gifts or grants of funds or other assets that are restricted for
property and equipment additions. This capital gift or grant shall be recorded at fair value when received or
receivable.

8. Construction. The cost of self-constructed PPE shall include:

a. Direct cost of materials
b. Direct cost of Labor
c. Indirect cost and incremental overhead specifically identifiable or traceable to the construction.