Pamantasan ng Lungsod ng Pasig

College of Business and Accountancy

12-B Alkade Jose St., Kapasigan, Pasig City

PROPERTY, PLANT
AND EQUIPMENT

Group 8
Leader:
Cambe, Angella Luz F.
Members:
Lazo, Mark Lester L.
Leccio, Angela V.
Pagkalinawan, Mary Joy S.
Sanchez, Jaleah Mae N.
Sumulong, Andrea Marie B.

BSA – 3A

Submitted to:
Prof. Amor B. Sande

May 2021
 PROPERTY, PLANT AND EQUIPMENT
Objectives:
1. State the initial and subsequent measurements of items of PPE of government
entities.
2. Describe the following and state their peculiar accounting requirements:
Heritage Assets, and Reforestation Projects.
3. Account for Borrowing Costs by a government entity.

INTRODUCTION _____

Property, Plant and Equipment are:

a. Tangible Assets;
b. Held for use in the production or supply of goods, services or program outputs,
for rental to others, or for administrative purposes, and not intended for resale
in the ordinary course of operations; and
c. Expected to be used for more than one reporting period.

RECOGNITION _____

An item of PPE is recognized if it meets the definition of a PPE and the recognition
criteria for assets, as well as the capitalization threshold of P15,000. Any items below
the capitalization threshold are recognized as inventories.
The P15,000 capitalization threshold is the minimum cost an item should have
before it is capitalized as PPE. This threshold is applied on a per item basis, except as
follows:
a. Individual items with values below the threshold but work together as a group
of assets are recognized as PPE if the total cost of the assets as a group is
P15,000 or more
b. Bulk acquisitions of small items of PPE are recognized as PPE if their
aggregate cost is P15,000 or more.

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INITIAL MEASUREMENT _____

PPE are initially measured at cost. The initial cost comprises the following:
a. Purchase price, including import duties and non-refundable purchase taxes,
after deducting trade discounts and rebates;
b. Direct costs of bringing the asset to the location and condition necessary for it
to be capable of operating in the manner intended by management; and
c. Present value of Decommissioning and Restoration costs – Decommissioning
costs refer to the costs of dismantling or uninstalling a PPE at the end of its
useful life. Restoration costs refer to the cost of restoring the site where the
PPE is previously installed. The present value of these estimated costs are
capitalized as cost of the PPE, with a corresponding credit to a liability account
(i.e., ‘Other Provisions’).

Examples of directly attributable costs:

a. Costs of employee benefits arising directly from the construction or acquisition
of PPE;
b. Costs of site preparation;
c. Initial delivery and handling costs (e.g., freight costs);
d. Installation and assembly costs;
e. Testing costs, net of disposal proceeds of samples generated during testing;
and
f. Professional fees.

Examples of costs that are expensed outright:

a. Costs of opening a new facility.
b. Costs of introducing a new product or service (including costs of advertising
and promotional activities).
c. Costs of conducting business in a new location or with a new class of customers
(including costs of staff training).
d. Administration and other general overhead costs.

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Illustration:
Entity A acquires a scientific equipment on January 1, 20x1. Information on costs
is as follows:

Purchase Price, net of trade discounts 1,000,000

Freight Costs 20,000
Testing Costs 30,000
Net disposal proceeds of samples generated during testing 5,000
Estimated costs of dismantling the equipment at the end of its 5-yr useful 10,000

The current market rate of interest on acquisition date is 10%.

The initial cost of the equipment is computed as follows:

Purchase Price, net of trade discounts 1,000,000
Freight Costs 20,000
Testing Costs 30,000
Net disposal proceeds of samples generated during testing (5,000)
PV of dismantling costs (10,000 x PV of 1 @10%, n=5) 6,209
Initial Measurement 1,051,209

1/1/x1 Technical and Scientific Equipment 1,051,209

Cash-Modified Disbursement System (MDS),
Regular 1,045,000
Other Provisions 6,209

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 The provision for dismantling costs is subsequently measured at amortized cost.
The amortization table is provided below:
Date Interest Expense Present Value
1/1/x1 6,209
12/31/x1 621 6,830
12/31/x2 683 7,513
12/31/x3 751 8,264
12/31/x4 826 9,090
12/31/x5 909 10,000

12/31/x1 Interest Expense 621

Other Provisions 621
Assume the equipment has a 5% residual value. The depreciation expense in 20x1
under the straight-line method would be: P199,730 [(1,051,209 x 95%) / 5].

MODES OF ACQUISITION __________

a. Acquisition by Purchase – acquisitions of PPE through purchase are classified as

Capital Outlays (CO) in the budget registries.
• Cash discounts, whether taken or not, are excluded from the initial
measurement of an item of PPE. A cash discount not taken is recognized as
“Other Losses.”
• A PPE purchased under installment basis is initially measured at the cash
price equivalent. The difference between the cash price and the installment
price is amortized as interest expense over the credit term.
• Promotional items acquired in conjunction with the purchase of PPE are
accounted for as follows:
i. If the promotional item is the same as those purchased, the total
acquisition cost is allocated to all the items acquired including the
promotional item.
ii. If the promotional item is different from the other items acquired, the
initial cost of the promotional item is its fair value. The purchase price,
net of the fair value of the promotional item, is allocated to the other
assets acquired.

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Example:
Entity A acquires 10 pick-up trucks for a total price of P15M.

Case 1: The supplier provides Entity A one (1) additional pick-up truck, which is the same
as the other pick-up truck purchased, as a promotional item.
For individual costing purposes, the P15M acquisition cost will be allocated to the
11 pick-up trucks, i.e., P1,363,636 per pick-up truck (P15M / 11).

Case 2: The supplier provides Entity A one car as promotional item. The car has a fair
value of P500,000.
The initial cost of the car is its fair value of P500,000. The remainder of the
purchase price is allocated to the 10 pick-up trucks, i.e., [(P15M – 500K) / 10] =
P1,450,000 per pick-up truck.
• The individual costs of items of PPE acquired at a “lump sum price” are
determined by allocating the “lump sum price” based on the relative fair values
of the items acquired.

Example:
Entity A acquires land and building for a lump sum price of P15M. The land has a
fair value of P4M while the building has a fair value of P12M. The allocation is as follows:

Fair values Allocation Initial measurements

Land 4,000,000 (15M x 4/16) 3,750,000
Building 12,000,000 (15m x 12/16) 11,250,000
16,000,000 15,000,000

• If the individual costs of items of PPE acquired at a “lump sum price” are
indicated in the invoice, the items shall be recognized at their individual costs
as indicated in the invoice.

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Example:
Entity A acquires a laptop computer and a printer for P100,000. The invoice
indicates the following individual costs: P70,000 for the laptop and P30,000 for the printer.
In this case, the laptop and the printer are initially recognized at their individual costs of
P70,000 and P30,000 respectively.

b. Acquisition by Construction - acquisitions of PPE through construction are also

classified as capital outlays in the budget registries.
The construction costs incurred are initially recorded in the Construction
in Progress account pending the completion of the asset. If the construction is
completed the construction costs are reclassified to the appropriate PPE account.

i. Acquisition through Construction Contracts awarded in Contractors – the

cost of PPE acquired through construction contract is the contract price.

ii. Acquisition by Administration (Self construction) – the cost of a self-

constructed PPE includes the cost of direct materials, direct labor and
other construction overheads. The cost of wasted materials labor or other
resources incurred in constructing the property are recognized as expense.

Illustration 1: Acquisition through Construction Contract

January 1,20x1, Entity A awards a contract for the construction of a building to

Contractor Z. The contract price is 40,000,000

Upon awarding the contract, Entity A requires a 4,000,000 performance bond from
the contractor.

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Journal entries:

1/1/x1 Cash-Collecting Officers 4,000,000

Guaranty/Security Deposits Payable 4,000,000
To recognize receipt a
performance bond from the contractor
1/1/x1 Cash-Treasury/Agency Deposit, Trust 4,000,000
Cash-Collecting Officers 4,000,000
To recognize the deposit of
performance bond to Bureau of Treasury

On February 1, 20x1, Entity A makes a 15% advance payment to the contractor.

2/1/x1 Advances to Contractor 6,000,000

Cash-Modified Disbursement System 6,000,000
(MDS), Regular
To recognize payment of 15% of
contract amount as advances to contractors
(40M*15%)

On July 31, 20x1, Entity A receives the first progress billing from the contractor.
The progress that reflects a 50% stage of completion. Entity A records the progress billing
after recoupment for the advances, based on the stage of completion.

7/31/x1 Construction in Progress-Buildings and 20,000,000

Other Structures (40M*50%)
Advances to Contractor (6M*50%) 3,000,000
Accounts Payable 17,000,000
To recognize progress billing

On August 8, 20x1, Entity A pays the progress billing after deductions from the
following:

a. 10% retention computed on the billing, net of the recoupment for the advances.
This is credited to the “Guaranty/Security Deposit Payable” account.
b. 1,200,000 representing withholding tax.

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The net payment is computed as follows:
Net billing (Accounts payable) 17,000,000
Retention (10% *17M) 1,700,000
Withholding tax 1,200,000
Net payment 14,100,000

8/8/x1 Accounts Payable 17,000,000

Guaranty/Security Deposits Payable 1,700,000
Due to BIR 1,200,000
Cash-Modified Disbursement System
(MDS), Regular 14,100,000
To recognize payment of first
progress billing

On December 1, 20x1, Entity A receives final billing from the contractor.

12/1/x1 Construction in Progress-Buildings and 20,000,000

Other Structures (40M*50%)
Advances to Contractor (6M*50%) 3,000,000
Accounts Payable 17,000,000
To recognize progress billing

Entity A charges the contractor 40,000 pesos representing liquidated damages for
the delayed completion.

12/1/x1 Cash-Collecting Officers 40,000

Miscellaneous Income 40,000
To recognize collection of
liquidated damages

On December 8, 20x1, Entity A pays the final billing after 10% retention and
1,200,000 withholding tax.

12/8/x1 Accounts Payable 17,000,000

Guaranty/Security Deposits Payable 1,700,000
Due to BIR 1,200,000
Cash-Modified Disbursement System
(MDS), Regular 14,100,000
To recognize payment of final
progress billing

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 Entity A new classifies the construction costs to the “Buildings” account and settles
the performance bond and retention after inspection and acceptance of the complete
asset.

12/31/x1 Buildings 40,000,000

Construction in Progress-Buildings 40,000,000
and Other Structures
To recognize turn over and
acceptance of building
12/31/x1 Cash-Treasury/Agency Deposit, Trust 7,400,000
Guaranty/Security Deposits Payable 7,400,000
To recognize the return of the
4M performance bond and the release of
3.4M (1.7M*2) retentions

The tax withheld or remitted to the BIR through Tax Remittance Advice (TRA)

Illustration 2: Acquisition by Administration

Entity A purchases construction materials worth 17,000,000 to be used in the cell

construction of a building.

Date Construction Materials Inventory 17,000,000

Accounts Payable 17,000,000
To recognize purchase of
construction materials

Entity A issues the construction materials.

Date Construction in Progress-Buildings and

Other Structures 17,000,000
Construction Materials Inventory 17,000,000
To recognize construction
materials issued

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 Entity A increased labor costs and construction overhead amounting to
10,000,000.

Date Construction in Progress-Buildings and

Other Structures 10,000,000
Construction Materials Inventory 1,000,000
To recognize labor costs and
construction overheads incurred

Entity A classifies the construction costs after completion of the building.

12/31/x1 Buildings 27,000,000

Construction in Progress-Buildings 27,000,000
and Other Structures
To recognize turn over and
acceptance of building

c. Acquisition through Exchange - the measurement of the asset acquired depends

on whether the exchange transaction has commercial substance or not.
i. With Commercial Substance - an exchange has commercial substance if the
subsequent cash flows of the entity change as a result of the exchange.
The asset received is measured using the following order of priority:
1. Fair value of assets Given up (plus any cash paid or minus any cash
received)
2. Fair value up assets Received; or
3. Carrying amount of asset Given up (plus any cash paid or minus any cash
received)

ii. Lacks Commercial Substance – the asset received is measured at the:

1. Carrying amount of asset Given up (plus any cash paid or minus any cash
received)

No gain or loss shall arise the asset received is measured at the carrying amount
of the asset given up (plus any cash paid or minus any cash received).

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d. Acquisition through Non-Exchange Transaction – The asset acquired in a non-
exchange transaction (e.g., donation, grant), is initially measured at its fair value at
the acquisition date.
i. without condition - recognized immediately as income (i.e., Income from
Grants and Donation in Kind)
ii. with condition - initially recognized as liability (i.e., Other Deferred Credits)and
subsequently recognized as income when the condition is met.

e. Acquisition through Intra-agency or Inter-agency Transfers – The assets

acquired from either into or inter-agency transfer is measured at the carrying amount
of the asset received.
Intra-agency transfers – transfers within the same agency (e.g., Regional office
or Operating unit, vice versa).
Inter-agency transfers – transfers between different agencies (e.g., from BIR to
DPWH)

Illustration:

Entity A – Regional Office (Recipient) Entity A – Central Office

Equipment 6,000 Accumulated Surplus 6,000
Accumulated Surplus (Deficit) 6,000 Accumulated Depreciation 4,000
Equipment 10,000

The Regional office of Entity A receives equipment from the Central office. The
equipment has a historical cost of 10,000 and accumulated depreciation of 4,000 in the
Central office’s books.

If the transfer is made in the year they equipment is purchased the “Subsidy from
Central office” and “Subsidy to Regional offices” accounts are used in lieu of the
“Accumulated Surplus (Deficit)” account.

The same entries are made to Inter-agency transfers.

f. Acquisition through Finance lease – will be discussed in Chapter 13.

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SUBSEQUENT EXPENDITURES ON RECOGNIZED PPE _____

As a rule, subsequent expenditure on recognized PPE is expense. It will only be

capitalized when they meet the recognition criteria for PPE, including the 15,000
thresholds. The following subsequent expenditures on PPE are to be recognized as
expense:

a. Costs 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.
b. Initial operating losses, such as those incurred while demand for the item’s
output build up.
c. Costs of relocating or reorganizing part or all the entity’s operations.

Capitalization of 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.
Therefore, costs incurred in using or redeploying a PPE are not recognized.

Guidelines in accounting for subsequent expenditures on recognized PPE (GAM

for NGAs)

A. Repairs and Maintenance

• Minor Repairs- cost of day-to-day servicing of an item of PPE, necessary to
support its operating capability. These are charged as expense.
• Major Repairs- are considered “betterments” and are capitalized.

Note: If it is not clear that the cost is a major repair, it shall be treated as expense.

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B. Replacement costs

The cost of replacing a part of an item of PPE is capitalized. The carrying amount
of the replaced part is derecognized and recognized as loss on derecognition. If the
carrying amount of the replaced part cannot be figured out, the cost of the replacement
part is used as an indication of what costs the replaced part was at the time it was acquired
or constructed.

C. Spare Parts and Servicing Equipment

• Minor spare parts are recognized as an inventory and recognized as an

expense when consumed.

• Major spare parts and stand-by equipment are recognized as PPE when they
meet the recognition criteria.

• Spare parts and servicing equipment that can only be used in conjunction with
an item of PPE are accounted for as PPE.

D. Betterments

It refers to any enhancement to the future economic benefits or service potential

of PPE, such as:

a) An increase in the previously assessed physical output or service capacity.

b) A reduction in associated operating costs
c) An extension of the estimated useful life
d) An improvement in the quality of output

Cost of betterments are capitalized (if they meet the recognition criteria for PPE)
and are subsequently depreciated as follows:

• Over the remaining useful life, increases the service potential of the asset
without extending its useful life.
• Over the extended useful life, extended period shall not exceed the original
estimate of useful life of the asset.

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E. Additions and Rearrangements

Additions are modification which increase the physical size or function of the PPE.
Rearrangements is the relocation or reinstallation of an asset which proves to be less
efficient in its original location.

An addition can be a) A new unit that is physically distinct from old unit. b) An
expansion, extension, or enlargement of the old unit. The cost of an addition that is a new
unit, is depreciated over its own useful life while an expansion cost is depreciated over
the shorter of its useful life and the remaining life of the PPE of which it is part.

Rearrangement costs are capitalized and depreciated over the remaining life of
the related assets. The carrying amount of the original installation cost is derecognized
and charged as a loss.

SUBSEQUENT MEASUREMENT _______________________________

Cost Model - An item of PPE is measured at its cost less any accumulated depreciation
and any impairment losses.

• Depreciation- is the systematic allocation of 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 amount the entity would currently obtain from disposal
of the asset, after deducting the estimated cost of disposal, if the asset were
already of the age and in the condition expected at the end of its useful life.

Depreciation is recognized as an expense unless it forms part of the carrying

amount of another asset.

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Guidelines in Depreciating Items of PPE

a) The three factors to be considered when computing for depreciation are initial
cost, useful life, and residual value.
b) All items of PPE shall be depreciated except land and heritage asset.
c) Depreciation begins when the asset is available for its intended use.
i. On or before 15th of the month- depreciation is computed at the
beginning of that month.
ii. After the 15th of the month- depreciation is computed at the beginning of
the following month.
d) Depreciation ceases when the asset is derecognized or fully depreciated.
Depreciation does not cease when the asset becomes idle or retired from active
use and held for disposal.
e) The straight-line method of depreciation shall be used unless other method is
more appropriate.
f) The estimation of useful life of an asset is a matter of judgement based on the
entity’s experience with similar assets. As a guideline, the PPE shall be
depreciated over the following life spans:

PPE Estimated Useful Life

Infrastructure Assets 20-50 years
Buildings and other Structures 30-50 years
Machinery and Equipment 5-15 years
Motor Vehicle 5-15 years
Military Vehicles 3-20 years
Trains 10-20 years
Aircrafts and Ground Equipment 10-20 years
Watercrafts 10-25 years
Furniture, Fixture and Books 2-15 years

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 Leased Assets excluding Land
Lease Asset Improvements
Service Concession Assets
Land Improvements
Others
Shorter of the assets’ useful life and lease
term, including extension period if renewal
is expected
Shorter of the assets’ useful life and lease
term, including extension period if renewal
is expected
Shorter of the assets’ useful life and term of
service concession arrangement, including
extension period if renewal is expected
Over the useful life of the asset to which the
improvement was made or the useful life of
the improvement if significantly shorter.
2-15 years

g) Residual value shall be at least 5% of cost, unless an entity decides a more

proper estimate, subject to the approval of COA.
h) The residual value and the useful life of the asset shall be reviewed at least at
each annual reporting date and, if expectations differ from previous estimates,
the changes shall be accounted for as a change in accounting estimate.
i) Depreciation shall be recognized monthly.
j) Each part of an item of PPE with a cost that is significant in relation to the total
cost of the item shall be recorded and depreciated separately.

Illustration:

Entity A acquires a motor vehicle on July 26, 20x1 for P1,500,000. The estimated
useful life is 5 years. The motor vehicle is available for its intended use as at the date of
acquisition.

Analysis: Depreciation starts at August 1, 20x1

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The monthly depreciation is computed as follows:

Cost 1,500,000
Residual value (1,500,000 x 5%) (75,000)
Depreciable amount 1,425,000
Divided by 5
Annual depreciation 285,000
Divided by 12
Monthly Depreciation 23,750

The entry will be:

8/31/x1 Depreciation-Transportation Equipment, Motor

Vehicles 23,750
Accumulated Depreciation-Motor
Vehicles 23,750

IMPAIRMENT _____________________________________________________

A PPE is impaired if its carrying amount exceeds its recoverable service amount
or recoverable amount.

Recoverable service amount – is the higher of a non cash generating assets fair
value less costs to sell and its value in use.

At each reporting date, an entity shall assess whether there is an indication that
an asset may be impaired. If such indication exists, the entity shall estimate the
recoverable amount of the asset.

An entity shall consider the following indications of impairment:

1. External sources of information:

a. Cessation or near cessation, of the demand for services provided by the asset.
b. Significant long-term changes with an adverse effect on the entity have taken
place during the period, or will take place in the near future, in the technological,
legal, or government policy environment in which the entity operates.

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2. Internal sources of information

a. Physical damage of an asset.

b. Significant changes in the expected use of an asset that adversely affect its
recoverable amount.
c. Cessation of the construction of an asset before it is completed.
d. Indications that the service performance of an asset is, or will be, significantly
worse than expected.

COMPUTATION OF VALUE IN USE _______________________________

• Value in use of a cash generating asset – the present value of the estimated
future cash flows expected to be derived from the continuing use of an asset
and from its disposal at the end of its useful life.
• Value in use of a non-cash generating asset – the present value of the asset’s
remaining service potential.

Value in use can be computed using one of the following methods:

a. Depreciated Replacement Cost Approach

Under this approach, value in use is equal to the asset’s replacement cost
adjusted for depreciation to reflect the asset’s used condition.

Replacement cost is the cost of replacing or reproducing the asset, whichever

is lower.

When determining the replacement cost of an asset, any overdesign or

overcapacity of that asset is ignored. Overdesign refers to features that are
unnecessary for the goods or services the asset provides. Overcapacity refers to
excess capacity over what is needed to meet the demand for the goods or services
the asset provides.

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b. Restoration Cost Approach

Under this approach, value in use is equal to the asset’s depreciated

replacement cost depreciated reproduction cost (whichever is lower) minus estimated
restoration cost.

Restoration cost is the cost of restoring the service potential of an asset to its
pre-impaired level.

c. Service Units Approach

Under this approach, value in use is equal to the asset’s depreciated
replacement cost or depreciated reproduction cost (whichever is lower) minus a
proportionate reduction to reflect the reduced number of service units expected from
the asset in its impaired state.

The choice of the most appropriate approach to measuring value in use

depends on the availability of data and the nature of the impairment:

Indication of Impairment Method

a. Significant long-term changes in ➢ Depreciated replacement cost
the technological, legal or approach or Service units
government policy environment. approach, whichever is more
appropriate.
b. Significant long-term change in ➢ Depreciated replacement cost
the extent or manner of use, approach or Service units
including cessation or near approach, whichever is more
cessation of demand. appropriate.
c. Physical damage ➢ Restoration cost approach or
Depreciated replacement cost
approach, whichever is more
appropriate.

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Illustration: (Adapted from illustration in the GAM for NGAs)

On January 1, 20x1, Entity A acquires an equipment for ₱500,000. The equipment

is estimated to have a useful life of 5 years and a 10% residual value.

On December 31, 20x3, Entity A determines an indication that the equipment is

impaired. Entity A then revises the asset’s residual value from 10% to 5% of the initial
cost and determines the following information:

Fair value less costs to sell………………. ₱100,000

Replacement cost…………………………. ₱300,000

Case 1: Depreciated Replacement Cost Approach

The carrying amount of the equipment as of Jan. 1, 20x3, the beginning of the
period of change (in residual value), is computed as follows:

Historical cost 500,000

Accumulated depreciation – 1/1/x3 (500K*90%*2/5) (180,000)
Carrying amount – 1/1/x3 320,000

The depreciation in 20x3, taking into account the change in residual value is
computed as follows:

Carrying amount – 1/1/x3 320,000

Revised Residual value (500K*5%) (25,000)
Revised Depreciable amount 295,000
Divide by: 3
Depreciation – 20x3 98,333

The carrying amount of the equipment on Dec. 31, 20x3 is computed as follows:

Carrying amount – 1/1/x3 320,000

Depreciation – 20x3 (98,333)
Carrying amount – 12/31/x3 221,667

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 The depreciated replacement cost of the equipment will be computed in a similar
fashion as above.

Replacement cost 300,000

Accumulated depreciation – 1/1/x3 (300K*90%*2/5) (108,000)

Carrying amount based on replacement cost – 1/1/x3 192,000

Carrying amount based on replacement cost – 1/1/x3 192,000

Revised Residual value (300K*5%) (15,000)
Revised Depreciable amount 177,000
Divide by: 3
Depreciation based on replacement cost – 20x3 59,000

Carrying amount based on replacement cost – 1/1/x3 192,000

Depreciation based on replacement cost – 20x3 (59,000)
Depreciated Replacement Cost – 12/31/x3 133,000

The recoverable service amount is determined as follows:

Value in use (Depreciation replacement cost) 133,000

Fair value less costs to sell (100,000)

Recoverable service amount (higher) 133,000

The impairment loss is computed as follows:

Recoverable service amount (higher) 133,000

Carrying amount – 12/31/x1 (221,667)
Impairment loss - 20x3 (88,667)

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Case 2: Restoration Cost Approach

Assume the indication of impairment is physical damage to the equipment. Entity

A estimates that it would cost ₱15,000 to restore the equipment’s service potential to the
level before the physical damage.

The value in use is computed as follows:

Depreciated replacement cost (see Case 1 above) 133,000

Less: Restoration cost (15,000)
Value in use 118,000

The recoverable service amount is determined as follows:

Value in use 118,000

Fair value less costs to sell 100,000
Recoverable service amount (higher) 118,000

The impairment loss is computed as follows:

Recoverable service amount (higher) 118,000

Carrying amount – 12/31/x1 (221,667)
Impairment loss – 20x3 (103,667)

Case 3: Service Units Approach

Assume the indication of impairment is a significant decline in the expected output

of the equipment, which Entity A estimates to be 15%.

The value in use is computed as follows:

Depreciated replacement cost (see Case 1 above) 133,000

Multiply by: (100%-15% reduction) 85%
Value in use 113,050

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The recoverable service amount is determined as follows:

Value in use 113,050

Fair value less costs to sell 100,000
Recoverable service amount (higher) 113,050

The impairment loss is computed as follows:

Recoverable service amount (higher) 113,050

Carrying amount – 12/31/x1 (221,667)
Impairment loss – 20x3 (108,617)

After impairment, depreciation charges on an asset will be based on its

recoverable amount.

REVERSAL OF IMPAIRMENT _____________________________________

The principles used in recognizing reversals of impairment loss on items of PPE

are the same as those used for investment property.

HERITAGE ASSETS ________________________________________________

Heritage assets are those which have historical, cultural and environmental
significance, and are intended to be preserved for future generations.

Characteristics of Heritage Assets:

➢ Their value in cultural, environmental, educational and historical terms is

unlikely to be fully reflected in a financial value based purely on market price.
➢ The law may impose restrictions on their disposal by sale
➢ They are often irreplaceable and their value may increase over time, even if
their physical condition deteriorates and;
➢ It may be difficult to estimate their useful lives, which is some cases could be
several hundred years.

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 Heritage assets are measured at cost. If acquired through non-exchange
transactions, the cost is the fair value at the acquisition date.

Heritage assets are not depreciated, but subject to impairment. If determinable,

a heritage asset’s fair value is disclosed.

However, heritage assets that have future economic benefits or service potential
other than their heritage value are depreciated similar to the other items of PPE.

Heritage assets not recognized in the books of accounts are recorded in the
Registry of Heritage Assets.

INFRASTRUCTURE ASSETS _____________________________________

Infrastructure assets include road network, flood control, sewer, water and power
supply systems, communication networks, railways, seaports, airports and etc.

Additional Characteristics:

➢ Part of a system or network

➢ Specialized in nature and do not have alternative uses
➢ Immovable
➢ May be subject to constraints on disposal

Infrastructure assets are accounted for similar to the other items of PPE, i.e.,
they are initially measured at cost and subsequently depreciated.

However, generally infrastructure assets have no residual value. In case where

a part of an infrastructure asset has a residual value, it shall be at least 5% of the cost of
that part.

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REFORESTATION PROJECTS ____________________________________

Reforestation refers to the renewal of a forest cover by planting seeds or young

trees.

Reforestation project are recorded as land improvements in the book of

accounts of the Department of Environment and Natural Resources (DENR) or other
entity concerned.

Initial cost includes the:

➢ Survey, mapping and planning

➢ Nursery operation and seedling production or procurement
➢ Plantation establishment

Initial costs are recorded in the “Construction in Progress-Land Improvements”

account pending the completion of the project, which normally taker 3 years. Upon
completion and turnover of the project, the costs are reclassified to the “Land
Improvements, Reforestation Projects” account.

Subsequent costs are accounted for as follows:

➢ Maintenance and protection costs incurred within the duration of the

project are capitalized
➢ Maintenance and protection costs incurred after the turnover of the project
are charged as repairs and maintenance expense.
➢ The cost of replacing the trees is expensed where small numbers of trees
are being replaced in any one particular area.

Reforestation projects are not depreciated but subject to impairment. Impairment

loss is recognized when a reforestation project is destroyed by a force majeure or
fortuitous event beyond the control of the man.

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DERECOGNITION_________________________________________

The carrying amount of PPE is derecognized when it is disposed or when no future

economic benefits or service potential is expected from the asset.

On derecognition, the difference between the carrying amount of the derecognized

PPE and the net disposal proceeds, if any, is recognized as gain or loss in surplus or
deficit.

Disposal of PPE shall be in accordance with the Supply and Property Management
Manual and Sec. 79 of P.D. No. 1445.

Illustration:

Entity A this poses an old motor vehicle with historical cost of 1,000,000 thank you
and accumulated depreciation of 900,000.

Case 1: Disposal by Sale

Entity A cells the equipment at a net disposal proceeds of 80,000.

Date Cash-Collecting Officers 80,000

Accumulated Depreciation-Equipment, Vehicles 900,000
Loss on Sale of Property, Plant and Equipment 20,000
Motor Vehicles
1,000,000

Case 2: Disposal by Donation

Entity A donates the equipment.

Date Donations 80,000

Accumulated Depreciation-Equipment, Vehicles 900,000
Motor Vehicles 1,000,000

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IDLE, FULLY DEPRECIATED, UNSERVICEABLE AND LOST PPE ______

➢ Idle PPE refers to the assets that are temporarily taken out of active use or
temporarily abandoned. Idle PPE are not derecognized but continued to be
depreciated because future benefits are consumed not only through usage but also
through obsolescence and wear and tear.
➢ PPEs are fully depreciated when its carrying amount is equal to zero or its
residual value. Fully depreciated PPE are not derecognized, meaning the
historical cost and accumulated depreciation are not removed from the books of
accounts.
➢ Unserviceable properties are those which do not have future economic benefits
or service potential. Unserviceable property is derecognized. The carrying
amount is recognized as impairment loss. Unserviceable properties are reported
in the Inventory and Inspection Report of Unserviceable Property.
➢ When a PPE is lost, either through theft, fire or other force majeure, the officer
having custody of the PPE shall immediately notify the COA within 30days and
shall submit an application for relief, together with supporting evidence. If
warranted by evidence, a credit for loss shall be allowed. Failure to do the
requirements will not relieve the officer of liability.
The carrying amount of the lost PPE is derecognized and charged as loss,
upon receipt of the Report of Lost, Stolen, Damaged, or Destroyed Property
together with the Notice of Loss by the Accountant Officer.
Pending the result of the investigation, the accountability of the officer shall
be established, equal to the depreciated replacement cost of the lost PPE. If a
credit for loss is subsequently allowed to the officer, the entry to establish the
accountability is simply reversed. If not, the officer shall pay cash to settle his
accountability.
➢ In case of partial loss of PPE, the loss recognized is equal to the asset’s carrying
amount less the fair value of the remaining serviceable portion.

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Illustration:

Entity A has an equipment with historical cost of 1,000,000 and accumulated

depreciation of 800,000.

Case 1: Idle or abandonment

The equipment becomes idle.

➢ No entry. the equipment is not the recognized, but continue to be

depreciated.

Case 2: Fully Depreciated

The equipment has a residual value of 200,000.

➢ No entry. the equipment is not the recognized, but depreciation ceases.

Case 3: Unserviceable property

The equipment is found to be unserviceable.

Date Impairment loss 200,000

Accumulated Depreciation 800,000
Equipment 1,000,000

Case 4: Lost property

The equipment is lost from theft. The equipment has a depreciated replacement
cost of 250,000.

Date Loss of Assets 200,000

Accumulated Depreciation 800,000
Equipment 1,000,000
To recognize loss of assets

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 Date Due to Officers and Employees 250,000
Other Deferred Credits 250,000
To establish the accountability of the
accountable officer

Variation 1

The officer is granted a relief for the loss.

Date Other Deferred Credits 250,000

Due to Officers and Employees 250,000
To adjust the officer's accountability
for the granting of relief

Variation 2

The officer is not granted a relief for the loss.

Date Cash-Collecting Officers 250,000

Due to Officers and Employees 250,000
To recognize receipt of payment
from accountable officer for the loss asset.
Date Other Deferred Credits 250,000
Miscellaneous Income 250,000
To recognized income realized from
loss as it due to payment by accountable officer

In addition to either variation 1 or 2, the government collect 50,000 from insurance

taken on the loss PPE.

Date Cash-Collecting Officers 50,000

Proceeds from Insurance/ Indemnities 50,000
To find me to recognize proceeds
from insurance claim

Case 5: Partial Loss

The asset is partially damaged. The fair value of the undamaged portion is 70,000.

The loss is 130,000 (200,000 carrying amount less 70,000 fair value of undamaged
portion).

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RECEIPTS AND DISPOSITION OF PPE________________________________

A. Property Card
➢ It is used by the Supply/Property Division to record all movement in items in
PPE.
➢ This is equivalent of the Stock Card used for inventories.
B. Property, Plant and Equipment ledger Card
➢ It is used by the Accounting Division to record all movement in items of PPE,
both in quantity and monetary amount. It also shows the estimated life,
depreciation, impairment and other information on the PPE. The PC and
PPELC are periodically reconciled.
➢ This is equivalent of the Stock Ledger Card used in inventories.
C. Property Acknowledgement Receipt
➢ It is used by the Supply/property Division to record the issuance of PPE to the
end user. This is based on the approved Requisition and Issue Slip (RIS)
submitted by the requesting individual. This is renewed every after 3 years or
whether there is change in custodianship.
➢ This is the equivalent of the Report of Supplies and Materials issued used for
inventories.
D. Report on the Physical Count of Property, Plant and Equipment
➢ At the end of each year, the entity shall perform a physical count on the PPE
and prepare this report. This report shall be submitted to the COA not later than
January 31 of the following year.
E. Inventory and Inspection Report for Unserviceable Property
➢ It is used to account for all unserviceable property subject to disposal. It is the
basis for derecognizing the unserviceable properties in the books of account
F. Report of Lost, Stolen, Damaged or Destroyed Property
➢ It is used by the accountable officer to notify the concerned officials of the lost,
stolen, damaged or destroyed property.
G. Property Transfer Report
➢ It is used to record transfers of property from one accountable officer to
another.

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BORROWING COSTS ________________________________________________

➢ Are interest and other expenses incurred by an entity in connection with the
borrowing of funds.

Examples:

a. Interests on notes, loans, bonds, and finance lease payables,

b. Amortization of discount, premium, issue costs and other ancillary costs
relating to payables,
c. Exchange differences arising from foreign currency borrowings, to the extent
that they are regarded as an adjustment to interest costs.

RECOGNITION OF BORROWING COSTS _________________________

1. Benchmark Treatment – expensed in the period incurred.

2. Allowed Alternative Treatment – capitalized if the borrowing costs are directly
attributable to the acquisition of a qualifying asset.
• Qualifying asset – is an asset that necessarily takes a substantial period of
time to get ready for its intended use or sale.

Applications:

The borrowing costs on loans borrowed by:

1. National Government (recorded by BTr) are expensed

2. Government agencies are capitalized, if they relate to the acquisition of a
qualifying asset

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COMMENCEMENT, SUSPENSION & CESSATION OF CAPITALIZATION

The capitalization of borrowing costs as part of the cost of a qualifying asset shall (be):

a. Commence when outlays for the asset are being incurred, borrowing costs are
being incurred, and activities that are necessary to prepare the asset for its
intended use or sale are in progress.
b. Suspended during extended periods in which active development is
interrupted, and expensed.
c. Cease when the qualifying asset is substantially complete. If completed in
parts, capitalization of borrowing costs ceases as each part is completed;
capitalization continues for the uncompleted parts.

SPECIFIC BORROWINGS __________________________________________

For specific borrowings, the borrowings costs eligible for capitalization are
computed using the following formula:

Capitalizable BC= Actual borrowing costs- Investment income

Illustration:

On January 1, 20x1, Entity A obtained a 10%, 1 million loan, specifically to finance

the construction of a building. The proceeds of the loan were temporarily invested and
earned interest income of 20,000. The construction was completed on December 31,
20x1.

Computation:

Actual borrowing costs- Investment income= Capitalizable BC

(1,000,000*10%) - 20,000= 80,000

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Recording:

12/31/x1 Construction in Progress- buildings and Other Structures 80,000

Interest Payable
To capitalize borrowing costs are part of the 80,000
cost of building

GENERAL BORROWINGS___________________________________________

For general borrowings, the borrowing costs eligible for capitalization are
computed using the following formula:

Capitalizable BC= Average Expenditure x Capitalization Rate

Note: The borrowing costs capitalized shall not exceed the actual borrowing costs
incurred.

Illustration:

On January 1, 20x1, Entity A had the following general borrowings. A part of the
proceeds was used to finance the construction of the qualifying asset:

Principal
12% short-term note 10,000,000
14% bank loan (3 year) 18,000,000
16% notes payable (5 year) 22,000,000

Expenditures made on the qualifying asset were as follows:

Jan. 1 4,800,000
Mar. 31 2,200,00
July 31 3,500,000
October 1 5,400,000
December 31 300,000

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Computation:

Average Expenditure

Date Expenditure Months outstanding Average

over 12 Months Expenditure
Jan. 1 4,800,000 12/12 4,800,000
Mar. 31 2,200,00 9/12 1,650,000
July 31 3,500,000 5/12 1,458,333
October 1 5,400,000 3/12 1,350,000
December 31 300,000 0/12 -
9,258,333

Capitalization Rate

Total interest expense on general borrowings

Capitalization rate =
Total general borrowings

(10,000,000∗12%) +(18,000,000∗14%) +(22,000,000∗16%)

Capitalization rate =
10M+18M+22M

7,240,000
Capitalization rate =
50,000,000

Capitalization rate = 𝟏𝟒. 𝟒𝟖%

Capitalized BC

Average Expenditure x Capitalization Rate = Capitalizable BC

9,258,333*14.48% = 1,340,607

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