I.

Definition
Property, Plant and equipment Are tangible items that are
I. Held for use in production or supply to others, for rental to others and for
administrative purposes
II. Are expected to be used during more than one period
 
I. Recognition
A PPE must be recognized as an asset when
o It is probable that future economic benefits associated with the asset will
flow to the entity
o Cost of the asset can be measured reliably
 
o Initial Measurement
o A PPE must be measured at cost.
 
Cost is the amount of cash or cash equivalent paid and the fair value of the other
considerations given to acquire an asset at the time of acquisition or construction.
 
What comprises cost?
 Purchase price, including import duties and nonrefundable purchase
taxes and deducting trade discounts and rebates
 Cost directly attributable to the bringing of the asset to the location
and condition necessary for it to be capable of operating in a manner
intended by the management
 Cost of employee benefits arising directly from
acquisition of PPE
 Cost of site preparation
 Initial delivery and handling cost
 Installation and assembly cost
 Professional fees
 Cost of testing whether the asset is functioning properly
 Initial estimate of the cost of dismantling and removing the item and
restoring the site on which it is located, the obligation for which the
entity incurs
 
Cost not qualified for recognition:
 Cost of opening new facility
 Cos of advertising and promoting new product
 Cost of conducting business in new location or customer
 Administration and general overhead costs
 Cost incurred while an item capable of operating in the manner
intended by management has yet to be brought into use or is operated
at less than full capacity
 Initial operating los
 Cost of relocating or reorganizing entity’s operations
 
Cost of property based on its acquisition:
 Cash basis
 Cash paid plus directly attributable costs
 
  Lump sum purchase / basket purchase
 Apportion single price to the asset acquired on the basis of relative
fair value
 
 Acquisition on account
 Invoice price less discount, regardless whether it is take or not
 If not take, charge to purchase discount lost reported as other expense
 
 Acquisition on instalment basis
 Cash price, difference with instalment price shall be amortized over
the credit period
 
 No available cash price
 Present value of all payments using an implied interest rate
 
 Issuance of share capital
 Fair value of the property received
 Fair value of the share capital
 Par value or stated value of the share capital
 
 Issuance of bonds payable
 Fair value of the bonds payable
 Fair value of the asset received
 Face amount of the bonds payable
 
 Exchange
A. With commercial substance
A. Causes significant change in the entity specific value
(present value of the cash flows an entity expects to
arise from the continuing use of the asset and from the
disposal at the end of the useful life or expects to incur
when settling liability)
B. Fair value of asset given (plus cash payment if payor,
minus cash received if recipient)
C. Fair value of asset received
 
 No commercial substance
 Carrying amount of the asset given up
 
 Self-constructed
 Shall includes:
A. Direct cost of materials
B. Direct cost of labor
C. Indirect cost and incremental overhead specifically
identifiable or traceable to the construction
 
Note: Cost of abnormal amount of wasted material, labor or overhead
incurred are expensed while income and expense from incidental operations
are recognized in profit or loss.
 
 Capitalizable costs for major classification of PPE
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Note: There are different cases for land and building:
 Land and old building are purchased at single cost
A. Old building is usable - allocate cost based on relative fair
value
B. Old building is unusable - allocate cost to land only
 Old building is demolished immediately
A. Carrying amount is either recognized as:
 Loss - for PPE and investment property
 Capitalized as cost - for inventory
B. Net demolition cost is either capitalized to
 Building - if new building will be constructed
 Land - if it is for preparation to use the land
 Old building is used in a prior period
A. Carrying amount is recognised as loss
B. Net demolition cost is either capitalized to
 Building - if new building will be constructed
 Land - if it is for preparation to use the land
 
Subsequent expenditures for PPE that may either be expensed or capitalized:
 Additions
 Improvements
 Replacements
 Repairs
 Rearrangement cost
 
Capitalized subsequent expenditures if:
 It is probable that future economic benefits associated with the
subsequent cost will flow to the entity
A. Extends life
B. Increase capacity
C. Increase efficiency and safety
 Subsequent cost can be measured reliably
 
Note:
 Derecognize replaced part at its carrying value or discounted
replacement cost
 
The following must be depreciated over their useful life
 Land improvements
A. Fences, water systems, drainage systems, sidewalks,
pavements, landscaping, parking lot, driveways not part of
the blueprint
 Movable building fixture
 Building improvements
A. Ventilating system, lighting system elevator installed after
construction of the building
 Tools
 Patterns and dies that are not for specially order product
 Equipment
 A. Delivery equipment, store equipment, office equipment and
furniture and fixtures
 
 Subsequent measurement
An entity shall choose either the cost model or the revaluation model as its accounting
policy and shall apply it to an entire class of PPE
 
Cost model
 PPE must be carried at its cost less any accumulated depreciation and any
accumulated impairment losses
 
Depreciation
 Systematic allocation of the depreciable amount of an asset over the useful
life
 Begins when asset is available for use
 Ceases at earlier date in which it is classified as held for sale or date in
which it is derecognized
 
Factors of depreciation
 Depreciable amount
 Residual value - estimated net amount currently obtainable at the end of the
useful life
 Useful life - period over which an asset is expected to be available for use
by the entity
 
Factors affecting useful life / service life
 Expected usage of the asset
 Expected physical wear and tear
 Technical or commercial obsolescence
 Legal limits
 
 
Methods of depreciation
 must reflect the pattern in which economic benefits from the asset are
expected to be consumed by the entity. A depreciation method based on
revenue that is generated through the use of an asset is not appropriate.
 
 Straight line depreciation
 Allocate depreciable amount equally over the useful life
 Considers depreciation as a function of time
 
Annual depreciation = (Cost - residual value) / useful life in years
 
Straight line rate = 100% / useful life
 
 Variable charge or activity method
 Considers depreciation as function of use
 
 Service hours method
 
Depreciation rate per hour = Depreciable amount / useful life in years
 Annual depreciation = Depreciation rate x actual hours worked in a year
 
 Productive output
 
Depreciation rate per unit = Depreciable amount / useful life in terms of
output
Annual depreciation = Depreciation rate x yearly output
 
1. Accelerated methods
 Assumed that new assets are generally capable of producing more revenue
in the earlier years than the later years
 Used to have uniform charge as repairs tend to increase with age of the asset
 
 Sum of years digits
 
SYD = Life x ((Life + 1) / 2)
Annual depreciation = (Remaining useful life / SYD) x depreciable amount
 
 Declining method
 
Depreciable rate = Straight line rate x declining rate
Annual depreciation = Carrying amount x depreciable rate
 
Change in useful life / residual value / depreciable method
 Treated as accounting estimate
 Allocate the remaining revised carrying amount of the asset over the
revised useful life
 
Correcting depreciation errors
Dr. / Cr. Retained earnings
Dr. / Cr. Accumulated depreciation
 
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.
 Shall be made with sufficient regularity and applied to entire class of PPE
 
Revalued amount
 Fair value at the date of the revaluation less any subsequent
accumulated depreciation and subsequent accumulated impairment
loss
 
2 Methods of Revaluation
 Elimination method
Steps:
 Recognize depreciation.
 Derecognize accumulated depreciation to the PPE.
 Recognize the difference between carrying value and the fair value as
revaluation surplus or revaluation loss.
 
 Gross CA is adjusted
 Steps:
1. Recognize depreciation
2. Construct table.
  Book value FMV Adjustment
Gross Amount      
Accumulated Depreciation      
Net amount      
 
If increase,
Dr. Building
Cr. Accumulated depreciation
Cr. Revaluation surplus / reversal of revaluation loss
 
If decrease,
Dr. Revaluation loss / revaluation surplus
Dr. Accumulated depreciation
Cr. Building
 
If piecemeal is applied, revaluation surplus must be allocated over the remaining
period.
 
1. Government grant / subsidy / subvention / premium
 Assistance by the government in form of transfer of resources to an entity in
return for part or future compliance with certain conditions relating to the
operating activities of the entity
 
Government assistance
 Action of government designed to provide an economic benefit specific to
an entity but has no value that can reasonably be placed upon it
 
Examples:
 Free technical or marketing advice
 Provision of guarantee
 Government procurement policy that is responsible for a portion of
the entity’s sales
 
It does not include:
 Infrastructure in development areas such as improvement on general
transportation and communication network
 Imposition of trading constraints on competitors
 Improved facilities such as irrigation for the benefit of an entire local
community
 
Recognition
It shall be recognized when there is reasonable assurance that
 Entity will comply with the conditions attaching to the grant
 Grant will be received
 
Classifications and presentation
  Grant related to asset
 Has a primary condition that an entity must purchase, construct or acquire
long term asset
 
 Deferred income approach
Upon receipt
Dr. Cash
Cr. Deferred grant income
 
Upon recognition of income
Dr. Deferred grant income
Cr. Grant income
 
 Deduction from asset approach
Upon receipt
Dr. Cash
Cr. PPE
 
Upon recognition
Dr. Depreciation expense
Cr. Accumulated depreciation
 
A. Grant related to income
 Grant other than grant related to asset
 
 Other income
Upon receipt
Dr. Cash
Cr. Deferred income
 
Upon recognition of income
Dr. Deferred income
Cr. Other income
 
 Deducted from related expense
Upon receipt
Dr. Cash
Cr. Deferred income
 
Upon recognition of income
Dr. Deferred income
Cr. Expense
 
1. Forgivable loan
 Recognized as government grant when there is reasonable assurance that the
entity will meet the terms for forgiveness of the loan
 
The benefit of a government loan with a NIL or below market rate of interest is
treated as government grant.
 
Upon receipt
 Dr. Cash
Dr. Discount on notes payable
Cr. Notes payable
Cr. Deferred income (Face amount - PV of the loan)
 
Upon recognition of income
Dr. Interest expense
Cr. Cash
 
Dr. Interest expense
Cr. Discount on notes payable
 
Dr. Deferred income
Cr. Interest expense
 
Accounting for government grant
Grant is taken to income over one or more periods in which the related cost is incurred.
 
 For specific expenses
 Recognized as income over the period of related expenses
 
 Related to depreciable assets
 Recognised as income over the periods and in proportion to the depreciation
of the related asset
 
 Related to non-depreciable asset with requirement of fulfilment of certain
conditions
 Recognized as income over the periods which bear the cost of meeting the
obligation
 
 Compensation for expenses or losses already incurred or for the purpose of
giving immediate financial support with no further related cost
 Recognized as income of the period in which it becomes receivable
 
Repayment of government grant
 May happen because of noncompliance with conditions
 Must be accounted as change in accounting estimate
 
 Grant related to asset
1. Deferred income approach
Dr. Deferred grant income
Dr. Loss from breach of government grant
Cr. Cash
 
 Deduction from asset approach
Dr. Building
Cr. Cash
 
Dr. Depreciation expense
Cr. Accumulated depreciation
 
 A. Grant related to income
1. Other income approach
Dr. Deferred grant income
Dr. Loss from breach of government grant
Cr. Cash
 
A. Deduction to expense approach
Dr. Deferred grant income
Dr. Loss from breach of government grant
Cr. Cash
 
I. Borrowing cost
 Interest and other cost that an entity incurs in connection with the borrowing of
funds
 
Composition of borrowing cost
 Interest expense calculated using effective interest method
 Finance charge with respect to a finance lease
 Exchange difference arising from foreign currency borrowing that is
regarded as an adjustment to interest cost
 
Qualifying asset
 Asset that necessarily takes a substantial period of time to get ready for the
intended use or sale
 
Example:
 Manufacturing plant
 Power generation facility
 Intangible asst investment property
 
Capitalization of borrowing cost
 The borrowing cost that are directly attributable to the acquisition,
construction or production of a qualifying asset is required to be capitalised.
 
When does capitalization begins?
It begins at the commencement date in which all of the ff. conditions are met:
 Incurs expenditure for the asset
 Only those that have resulted in payment of cash,
transfer of asset or assumption of interest bearing
liabilities net of any progress payment and grant
received
 Incurs borrowing cost
 Undertakes activities necessary to prepare asset for its intended use or
sale
 Include technical and administrative works prior to the
commencement of physical construction
 
When should capitalization be temporarily suspended?
During extended periods in which it suspends active development of a qualifying
asset
 
 When should capitalization end?
When substantially all the activities necessary to prepare the qualifying asset for its
intended use or sale are complete.
 
Types of borrowing
 Specific borrowing
 Funds that are borrowed specifically for the purpose of acquiring a
qualifying asset
 Amount of capitalizable borrowing cost is the actual borrowing cost
incurred during the period less any investment income from
temporary investment of those borrowings
 
 General borrowing
 Funds that are borrowed generally and used used for acquiring a
qualifying asset
 Amount of capitalizable borrowing cost is equal to the average
carrying amount of the asset during the period multiplied by a
capitalization rate
 Capitalization rate is total annual borrowing cost divided by total
general borrowing outstanding during the period
 
Note: If more than one year, the borrowing cost previously capitalized must
be included (actual expenditure in previous year + capitalized borrowing cost)
 
Steps in solving:
 Get the average expenditures for the period.
 Allocate expenditure between specific and general borrowing.
 To get capitalizable costs,
 For specific borrowing, multiply interest rate to
expenditure
 For general borrowing, multiply capitalizable rate
to expenditure
 Carry over actual expenditures and borrowing cost previously
capitalized next period.
 
 Derecognition
It shall be derecognized on disposal or when no future economic benefits are expected
from the use or disposal.