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Notes On PPE-GG-BC-WA-IA
Notes On PPE-GG-BC-WA-IA
Notes On PPE-GG-BC-WA-IA
a. Grant related to an asset – this means that the grant entails acquisition or
construction of a long-term asset (e.g., PPE, intangibles, etc.)
i. Deducted from asset – this means that the related grant is deducted
from the capitalized cost of the asset. Note: What is the effect of this?
The grant is recognized as income in such a way that future
depreciation charges are lessened.
ii. A liability is set up – in this way, a “deferred grant income” is
recognized initially. As the asset is being realized through
depreciation/amortization, the “deferred grant income” account is
being realized as well in the same manner.
Example: On January 1, 200x, a condominium corporation received 15,000,000
from the Philippine Government to construct a 5-storey building to house the
increasing number of homeless families. Assuming that the cost of construction of
the building was 25,000,000 and it’s useful life was estimated to be 20 years.
Deduction from asset approach:
Building 25,000,000
Cash 25,000,000
To recognize the cost of the building
Cash 15,000,000
Building 15,000,000
To recognize receipt of the grant
Cash 15,000,000
Deferred grant income 15,000,000
To recognize receipt of the grant
b. Grant related to income – this means that the grant could be directly related
to the operation of the entity, the grant entails incurrence of expenses, or any
other activities other than the recognition of a long-term asset.
Example: On January 1, 200x, a condominium corporation received 15,000,000
from the Philippine Government in the condition that it should let 100 homeless
families to live in one of its buildings for 5 years starting June 30, 200x.
Cash 15,000,000
Deferred grant income 15,000,000
To recognize receipt of the grant
Dec. 31, 200x when the entity prepares it FS, it should recognize grant income in its
Statement of Comprehensive income as other income.
Deferred grant income 1,500,000 ([15M /5 years] x one-half)
Grant income 1,500,000
Grant becomes repayable – a grant can become repayable when the beneficiary
entity fails to fulfill the conditions relating to the grant.
Assuming that the grant becomes repayable during the second year:
Building 500,000
Cash 500,000
Repayment of the grant
Depreciation 2,000,000
Accum. Dep’n – Bldg. 2,000,000
To record depreciation
Computation:
New cost 25M
Should-be AD 2.5M ([25M/20] x 2 years)
CA of AD 500k
Depreciation 2M (2.5M – 500k)
Cash 15,000,000
Deferred grant income 15,000,000
To recognize receipt of the grant
Assuming that the grant becomes repayable during the second year:
Deferred Grant Income 4,250,000 (5M-750k)
Loss on repayment of grant 750,000 (recognized last year)
Cash 5,000,000
2) Grant related to income – the accounting for the repayment of a grant related to
income is the same as the accounting for a grant related to an asset
PIC Interpretation - when land and an old building are acquired at a single cost
1) Acquisition cost
a. Old building is usable – allocate the cost based on fair value
b. Old building is unusable – allocate the cost only to land
2) Usable old building is demolished immediately after acquisition or
during the same reporting period to make room for the construction of a
new building:
a. Allocated cost to the usable old building shall be treated as follows:
i. New building will be inventory – capitalize
ii. New building will be PPE or IP – recognize as loss
b. Net demolition cost - capitalize as cost of the new building
3) Usable old building was demolished during the period subsequent to the
period of acquisition to make room for the construction of a new building:
a. Allocated cost to the usable old building shall be treated as follows:
i. New building will be inventory/PPE/IP – recognize as loss
ii. Net demolition cost – capitalize as cost of the new building
For more detailed reference: http://www.picpa.com.ph/attachment/630201616634522.pdf
Machinery
1) Capitalizable costs
a. Purchase price
b. Directly attributable costs (freight, installation, testing and trial costs, etc.)
c. Initial estimate of cost of dismantling – the entity has present obligation
d. Irrecoverable taxes
2) Removal cost
a. When a machinery is moved to another location, undepreciated cost of the
old installation cost shall be expensed and the new installation cost shall
be capitalized
b. When a machinery is retired to make room for a new one, removal cost not
previously capitalized should be expensed and not be capitalized as cost of
the new machine.
Types of borrowings
General borrowing – borrowings that are used to finance the qualifying
asset and other purposes.
Specific borrowing – borrowing solely devoted to finance the qualifying
asset.
Accounting for borrowing cost
1. Compute the average expenditures
2. Capitalize total interest cost incurred pertaining to specific borrowing less
any investment income.
3. Deduct the principal pertaining to the specific borrowing from the average
expenditures.
4. Compute the average interest rate
5. Multiply the remaining average expenditures by the average interest rate.
Ignore any investment income earned from general borrowings and make
sure the product is not higher than the actual interest incurred.
6. In the event of completion of the qualifying asset, make sure to limit the
computation of the interest only up to the completion of the asset. For
example, the asset is completed by June 30, capitalize interest using a period
of 6/12.
Average expenditures is computed just like computing the average capital. Remember
our partnership topics during our first year?
Average interest rate involves only general borrowings. It is computed by getting the
total interest expense and dividing it by the total principal.
Impairment of Assets
Impairment – occurs when recoverable amount is less than the carrying
amount. Impairment loss is recognized in P/L.
Recoverable amount – the higher between fair value less cost of disposal
and value in use
Fair value less cost of disposal – this is the economic benefit of
disposing/selling the asset.
Value in use – this is the economic benefit of continuing to use the asset.
Hence, the higher between the two is the recoverable amount.
As a rule, impairment should be assessed per individual asset, but when it
cannot be determined, the smallest identifiable group of assets can be
assessed collectively.
That smallest identifiable group of assets is called the “Cash Generating
Unit”
The procedure is to get the carrying amount of the CGU, excluding any
liability within the CGU, and then compare it to the recoverable amount of
the CGU.
Allocate any impairment first to the goodwill and then to the other assets
within the CGU based on their carrying amount.
However, if the recoverable amount of a specific asset is given, the
carrying amount of that specific asset (after allocation of the remaining
impairment) should not be lower than the given recoverable amount. The
amount in excess of the recoverable amount should be allocated again to
the other assets based on their original carrying amount.
Procedure of depletion
First is to compute for the depletion rate. This is the formula of computing the
depletion rate:
DR = Cost of wasting asset – Land RV / Expected units to be extracted
Multiply the depletion rate to the actual units extracted during the year to get
the depletion for the year.
Total Depletion = DR x units extracted
Depletion charged to COS = DR x units sold
Depletion in ending inventory = DR x units in ending inventory
Any revision of depletion rate shall be accounted for prospectively.