Summary for PAS 16 Reporting

PAS 16
- The standard that governs PPE.
- Addresses principal issues of recognition as assets, measurement of carrying amount &
recognition of depreciation charges.

PAS 16 does not apply to:

- classified as held for sale (accounted under pfrs 5 non-current assets held for sale and
discounted operations)
- biological assets, other than bearer plants (accounted under pas 41 agriculture)
- the recognition and measurement of exploration and evaluation assets
(Accounted under pfrs 6 exploration for and evaluation of mineral resources)
- mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative
resources

PAS 16 definition of PPE

a. TANGIBLE ASSETS
-have physical substance
b. USED IN NORMAL OPERATIONS / IN BUSINESS
- used in the production of goods or services, for rental, or for administrative purposes.
Ex. Factory, Machineries for rent, offices
c. LONG- TERM IN NATURE
-expected to be used for more than one period

CLASSES of PPE
a. Land
b. Land and Buildings
c. Machinery
d. Ships
e. Aircraft
f. Motor Vehicles
g. Furniture and Fixtures
h. Office Equipment
i. Bearer Plants

Examples. Of PPE
a. Land used in business
b. Land for future plant site
c. Buildings used in business
d. Equipment used in the production of goods (e.g. Machineries)
e. Equipment held for Environmental and Safety Reasons (does not directly increase future
economic benefits but are necessary in obtaining the future economic benefits from other
assets. e.g. factory may be required to install safety and environmental equipment, non-
compliance may result to being shut down)
f. Equipment held for rentals (e.g. ships, aircraft, motor vehicles, etc.)
g. Major spare parts and long-lives stand by equipment
h. Furniture and fixtures
 i. Bearer Plants

NOT PPE’s:
A. Land held for speculation
B. Land held for un undetermined for future use
C. Land and/or Building classified as investment property under PAS 40 Investment Property
D. Property held for sale in the ordinary course of business
E. Assets classified as held for sale under PFRS 5
F. Biological Assets related to Agricultural activity, other than bearer plants
G. Intangible Assets
H. Minor spare parts & short-lived stand-by equipment.

MEASUREMENT OF PPE:
1. Initial Measurement
-Measured at Cost
2. Subsequent Measurement
-using cost or revaluation model

What comprised the initial cost of PPE:

1.) Purchase Price
*Invoice Price *non-refundable purchase taxes (VAT is refundable)
*Import Duties * Minus/Less trade discounts & rebates
2.) Directly Attributable Costs
- Cost to bring the asset to the location & condition necessary for it to be used in the manner
intended by management. (e.g. freight, shipping cost, insurance during shipping, cost of testing,
etc.)
3.) Cost of dismantling
- Initial estimate of dismantlement, removal & site restoration cost on which it is located.
-dismantling cost is capitalized on the initial cost of PPE.
-corresponding liability is credited for this cost
Examples of directly attributable costs:
 Cost of employee benefits arising directly from the construction or acquisition of PPE
 Cost of site preparation
 Initial delivery and handling cost (e.g. freight cost)
 Testing costs, net of disposal proceeds of samples generated during testing; and
 Professional fees

Examples of cost that are expensed outright:

 Cost of opening a new facility
 Cost of introducing a new product or service (including costs of advertising and promotional
activities)
 Cost of conducting business in a new location or with a new class of customers (including costs
of staff training)
 Administration and the general overhead costs
Special cases of Acquisition
-not a normal purchase of PPE item

1.) Deferred Settlement

Cost is measured at:
 Cash price equivalent (or present value of deferred payments)
 Difference between cash price equivalent and total payment is recognized as interest expense
 If short term, invoice price less discount, whether taken or not.
2.) Exchange of non-monetary assets
Cost is measured: if with commercial substance:
 Fair value of asset given up
 Fair value of asset received
 Carrying amount of asset given up lacks commercial substance
 Carrying amount of asset given up

3.) Incidental Operations

-are considered to be nay revenue-generating activities conducted during the development
period of property.
-may occur before or during the construction or development activities of a PPE

4.) Self-Constructed Assets

-the cost of a self-constructed asset is determined using the same principles as for an acquired
asset.
-excludes internal profits (e.g. savings on self-construction)
-cost of abnormal amounts of wasted material, labour, or other resources incurred in self-
constructing asset.
TO BE CAPITALIZED:
 Direct cost of materials
 Direct cost of labour
 Indirect costs (i.e. overheads, indirect materials, indirect labour)
 Normal wastes and capitalized borrowings costs shall be included as part of the cost of the
asset.

5.) Bearer Plants

-accounted for similar to self- constructed assets.
Is a living plant that:
a.) Is used in the production or supply of agricultural produce
b.) Is expected to bear produce for more than one period.
c.) Has a remote likelihood of being sold as agricultural produce, except for incidental scrap
sales.
Subsequent expenditures on recognized PPE
- Capitalization costs ceases when the PPE is in the location and condition necessary for it to be
capable of operating in the manner intended by the management. Costs in redeploying the PPE
or not capitalized.
Subsequent expenditures on PPE that are recognized as expenses are the following:
 Cost of day to day servicing of the PPE
  Cost incurred while an item capable of operating in the manner intended by the
management has yet to be brought into use or is operated less than it's full capacity
(PAS 16.20)
 Initial operating losses
 Cost of relocating or reorganizing part or all of the entity’s operation (PAS 16.20)
PAS 16 specifically addresses the capitalization of the following subsequent expenditures:
a. Replacement costs – some PPE have parts that needed to be replaced, e.g., seats in
an aircraft. The cost of replacing a part of an item of PPE is capitalized if the
recognition criteria are met.
b. Major inspections - some PPE require regular major inspections a condition for their
continued operation, e.g., a cruise ship may not be permitted to continue sailing
without the inspection.

SUBSEQUENT MEASUREMENT
- After initial recognition, an entity chooses either of the following two models as it's accounting
policy and applies that policy to an entire class of PPE:

A. Cost Model - under this model, a PPE is carried at its cost less any accumulated depreciation and any
accumulated impairment losses.

COST
- is “the amount of cash or cash equivalents paid or the fair value of the other consideration given
to acquire an asset at the time of its acquisition or construction or, where applicable, the
amount attributed to that asset when initially recognized in accordance with the specific
requirements of other PFRSs (PAS 16.6).

DEPRECIATION
- Depreciation is the systemic allocation of the depreciable amount of an asset over its useful life.
- Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual
value.
- Residual value is the estimated amount that an entity would currently obtain from the disposal
of the asset, after deducting the estimated costs of disposal, if the asset were already of the age
and in the condition expected at the end of its useful life.
- Useful life is:
a. The period over which an asset is available for use by an entity; or
b. The number of production or similar units expected to be obtained from the asset by an
entity.
- Each significant part of an item of PPE is depreciated separately, e.g., engines of an aircraft
- Depreciation is recognized as expense unless its included in the cost of producing another asset,
e.g., factory building depreciation is included in the cost of producing inventories.
- Depreciation starts:
 When the asset is available for use, in the manner intended by the management.
- Depreciation stops:
 When the asset is derecognized, e.g., sold or disposed of
 When the asset is held for sale under PFRS 5
 Or when it is full of depreciated;
 - Carrying amount is the amount which an asset is recognized after deducting any accumulated
depreciation and accumulated impairment losses.
- Depreciation does not cease when an asset is idle or retired from active use.
- Land and building are accounted for separately even when they are acquired together
- Land is not depreciated because it has an unlimited useful life, with certain exemptions such as
landfills and quarry sites.
- Buildings are depreciated because they have a limited useful life

DEPRECIATION METHODS
- there are a variety of depreciation methods and PAS 16 mentions three examples:
i. Straight line method
ii. Diminishing balance method
iii. Units of production method
- PAS 16 does not prescribe any specific method and the choice of deficiency method depends on
the management’s judgement.
- PAS 16 requires the management to choose the method is that best reflects the expected
pattern of consumption of the future economic benefits.
- PAS 16 prohibits the used of a depreciation method that is bases on revenue.

B. Revaluation Model - Under the revaluation model, a PPE is carried at its fair value less any
subsequent accumulated depreciation and subsequent accumulated impairment losses.
- Fair value is the price that would be received to sell and asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.
- Frequency of revaluations depends on the significance of changes in fair values: assets whose
fair values fluctuates significantly may be revaluated annually; or assets whose fair values do not
fluctuate significantly may be revaluated every 3 or 5 years.
- Revelations are applied to an entire class of PPE. A class of PPE is a grouping of assets with
similar nature. The following are examples of separate classes:
 Land
 Land and buildings
 Machinery
 Ships
 Aircraft
 Motor vehicles
 Furniture and fixtures
 Office equipment
 Bearer plants

ACCOUNTING FOR REVALUATIONS

- An increase or decrease in the carrying amount of a PPE resulting from revaluation is recognized
in other comprehensive income and accumulated in equity under ‘Revaluation Surplus' account
except for the following:
a. An increase that represents a reversal of a previous impairment loss is recognized as profit
or loss as impairment gain.
b. A decrease in excess of the credit balance in the ‘Revaluation Surplus' of the asset is
recognized in profit or loss as impairment loss.
 - Revaluation increase or decrease is computed as: fair value (determined using an appropriate
valuation technique in accordance with PFRS 13 Fair Value Measurement) less carrying amount
which result is regarded as Revaluation Surplus.

DEPRECIATION
- After evaluation, a revalued asset it's depreciated based on its fair value.

SUBSEQUENT ACCOUNTING FOR REVALUATION SURPLUS

a. If the revalued asset is non-depreciable, e.g., land, the whole of the revaluation surplus is
transferred directly to retained earnings when the asset is derecognized.
b. Is the revalued asset is depreciable, a portion of the revaluation surplus a portion may be
transferred directly to retained earnings as the asset is used in which the portion transferred
each year is equal to the difference between the depreciation based on the revalued
carrying amount and the depreciation based on the original cost.
- Transfers from revaluation surplus to retained earnings are not made through profit or loss.

DERECOGNITION
- Removal of the previously recognized asset or liability from the entity’s statement of financial
position.
- The carrying amount of PPE is derecognized when:
a. It is disposed, e.g., sold; or
b. no future economic benefits are expected from the assets use or disposal.
- On derecognition, the difference between the carrying amount of the derecognized PPE and the
net disposal of proceeds, if any, is recognized as gain or loss in profit or loss.

SPECIAL CASE:
- Some entities, in the ordinary course of their activities, routinely manufacture or acquire items
of PPE to be held for rental to others and subsequently transfer these assets to inventories
when they cease to be rented and become held for sale. For these entities, The proceeds from
the sale of such assets are recognized as revenue.

DISCLOSURE
General disclosures for each class of PPE:
a. The measurement bases used
b. The depreciation methods used
c. They useful lives or depreciation rates used
d. The gross carrying amount and the accumulated depreciation at the beginning and end of
the period
e. A reconciliation of the caring amount at the beginning and end of the period showing:
additions, disposals, and other changes

Additional disclosures:
a. Restrictions on title and PPE pledged as security for liabilities
b. Expenditures to construct PPE during the period
c. Contractual commitments for the acquisition of PPE
d. Compensation for impairment losses
e. Changes in estimates relating to PPE
Disclosures for revalued PPE:
a. Date of the revaluation
b. Whether an independent valuer was involved
c. The carrying amount of the revalued class of PPE if they had been measured under
cost model
d. Revaluation surplus, including changes during the period and any restrictions on its
distribution to shareholders

Encouraged disclosures:
a. Carrying amount of temporarily idle PPE
b. Gross carrying amount of any fully depreciated PPE that is still in use
c. Carrying amount of PPE retired from active use and not classified as held for sale in
accordance with PFRS 5
d. When the cost model is used, the fair value of PPE when this is materially different
from the carrying amount