CHAPTER 7

Property, Plant, and Equipment

I. Characteristics of Fixed Assets
A. Fixed Assets are acquired for use in operations and not for resale.
B. Long term in nature and subject to depreciation.
C. Possess physical substance.

II. Classification of Fixed Assets

A. The following assets are shown separately on the balance sheet at original
(historical) cost.
i. Land (Property)
ii. Buildings (Plant)
iii. Equipment – may include machinery, tools, furniture, & fixtures.
1. Net Book Value- net of Accumulated Depreciation.
iv. Accumulated Depreciation (Contra-Asset)
1. May be combined for two or more asset categories:
a. Accumulated Depreciation – Building
b. Accumulated Depreciation – Machine
B. Fixed Assets are Nonmonetary Assets
i. Monetary Assets (Liabilities) – fixed in dollars regardless of changes in
specific prices or changes in the general price levels.
1. Cash, Accounts and Notes Receivable, etc.
ii. Nonmonetary Assets (Liabilities) – not fixed in dollars and instead
fluctuates with changes in the price level.
1. Inventory, Property, Plant, Equipment, etc.

III. Valuation of Fixed Assets – U.S. GAAP

A. Purchased
i. Historical Cost is the basis for valuation.
ii. Cash or cash equivalent price of obtaining the asset and bringing it
to the location and condition necessary for its intended use.
B. Donated Fixed Assets
i. Record at FMV along with incidental costs incurred.
ii. Journal Entry:
1. Fixed Asset (FMV)
Gain on nonreciprocal transfer.

IV. Valuation of Fixed Assets – PFRS- Fixed Assets are initially recognized
at cost to acquire the asset. Subsequent to acquisition, fixed assets can
be valued using the cost model or the revaluation model.
 A. Cost Model – FA are reported at historical cost adjusted for accumulated
depreciation and impairment.
B. Revaluation Model - a class of FA is revalued to FV and then reported at
FV less subsequent accumulated depreciation and impairment.
Revaluations must be made frequently enough to ensure that carrying
amount does not differ materially from FV at the end of the reporting
period. When FV differs materially from CV, a further revaluation is
required. Revaluation must be applied to all items in a class of FA, not to
individual FA. Land and buildings, machinery, furniture, and fixtures, and
office equipment are examples of FA classes. When FA are reported at
FV, the historical cost equivalent must be disclosed.
i. Revaluation Losses – FV<CV; report on the income statement.
ii. Revaluation Gains – FV>CV; report in other comprehensive income
and accumulated in equity as revaluation surplus.
iii. Impairment – if revalued FA subsequently become impaired, the
impairment is recorded by first reducing any revaluation surplus to
zero with further impairment losses reported on the income
statement.

V. Cost of Equipment
A. Include:
i. All expenditures related directly to their acquisition or construction
1. Invoice Price
a. LESS Cash Discounts and other discounts.
b. PLUS Freight-in, Installation harges (Testing and
Preparing for Use), Sales and Federal Excise Taxes,
and Interest during Construction.
B. Capital vs. Expense – Proper Accounting is determined based upon the
purpose of the disbursement.
1. Additions – Improve the quantity of Fixed Asset and are
charged to “cost of fixed asset”.
a. Journal Entry:
Asset (machinery, etc.)
Cash/ Accounts Payable
2. Improvements (bettements) – improve the quality of fixed
assets and are charge to “Cost of fixed assets” account.
3. Replacements – involves a determination of what the unit
of depreciation is.
A. Composite – if the entire unit is the unit of
depreciation, expense the replacement as a repair.
B. Component – If units of the fixed asset are separated,
remove original cost and related accumulated
 depreciation of the component from the account and
capitalize this replacement.
4. Repairs
a. Ordinary repairs should be expensed as repair and
maintenance.
b. Extraordinary repairs should be capitalized
i. Charge the cost account if fixed asset
efficiency is improved
ii. Charge the A/D account if fixed assets life is
extended.
VI. Cost of Land – When land has been purchased for the purpose of
constructing a building, all costs incurred up to excavation for the new
building are considered land costs.
A. Land Cost Includes:
i. Purchase Price, Broker’s Commissions, Title and
Recording Fees, Legal Fees, Draining of Swamps,
Cleaning of Brush and Trees, Site Development,
Existing obligations assumed by buyer (including
mortgages and back taxes), demolition of existing
building,
ii. LESS: Proceeds from sale of existing buildings,
standing timber. Etc.
B. Land Improvements (Depreciable)
i. Fences, Water Systems, Sidewalks, Paving,
Landscaping, Lighting
C. Interest Cost – Interest Cost during construction period may be
added to cost of land improvement based on weighted average
of accumulated expenditures.
VII. Cost of Buildings
A. Cost Includes:
i. Purchase Price, All repair charges neglected by the previous
owner (deferred maintenance), alternations and
improvements, and Architect Fees.
VIII. “Basket Purchase” of land and Building – allocate the purchase price
based on the ratio of appraised values of individual items.
IX. Investment Property – PFRS Only
A. Under PFRS, land or building held by an entity or by a lessee under a
finance (capital) lease to earn rentals or for capital appreciation are
classified and reported as investment property. The investment
property designation includes property under construction or
development for future use as investment property. U.S GAAP does
not include a specific definition or set of accounting rules for
investment property. Investment property does not include owner-
occupied property, property held for sale in the ordinary course of
business, or property being constructed or developed, unless the
 property is under construction or development for future use as an
investment property.
B. Cost of Investment Property
i. Purchase Price
ii. Expenses directly related to purchase, including legal services,
professional fees, property transfer taxes and other taxes.
C. Capitalize vs. Expense – Capitalize the Following:
i. Cost incurred to subsequently add to the property
ii. Cost to replace part of the property
iii. Cost to service the property; does not include cost of day to day
servicing, repairs, and maintenance costs, labor or minor parts.
D. Investment Property Measurement Models – after initial recognition,
investment property can be reported under two different models:
i. Cost Model: Investment property is reported on the B/S at cost
less accumulated depreciation (if appropriate). When the cost
model is used, the FV of the investment property must be
disclosed.
ii. FV Model: investment property is reported on th B/S at FV and
is not depreciated. The best evidence for FV is current prices in
an active market for similar property in the same location and
condition. FV reflects market conditions at the end of the
accounting period. Once adopted, FV measurement must be
applied consistently until the asset is disposed of or can no
longer be classified as investment property b/c it is owner-
occupied or will be developed for sale in the ordinary course of
business.
1. Gains and Losses: the investment property should be
revalued with regularity so that the CV does not differ
materially from FV.A g/l arising from a change in the FV of
investment property is recognized in earnings in the period in
which it arises.
X. Fixed Assets Constructed by a Company
A. Direct Material and Direct Labor
B. Repairs and Maintenance expenses which add value to the fixed asset.
C. Overhead, including direct items of overhead
D. Do not include profit.

XI. Capitalization of Interest Costs

A. Construction Period Interest – should be capitalized (based on weighted
average of accumulated expenditures) as part of the historical cost of
acquiring assets such as:
i. Buildings, machinery, or land improvements
ii. Fixed Assets intended for sale or lease and constructed as discrete
projects
 iii. Land improvements - if a structure is in place on the land, charge
the interest cost to the structure (not in the land)
B. Interest Cost – Interest cost is based on interest obligations having:
i. Stated (Explicit) interest rate, or if not stated, use imputed interest
rates per APBO #21 (interest on receivables and payables) or
Imputed interest rate per FASB #13 (leases)
C. Do not Capitalized Interest Cost
i. On inventory routinely manufactured
ii. On assets held before or after construction period4
iii. During intentional delays in construction
D. ONLY Capitalized Interest on Borrowing Necessary for that project
i. Computing Capitalized Cost
1. Weighted Average Amount of Accumulated Expenditures –
capitalized interest costs for a particular period are determined
by applying an interest rate to the average amount of
accumulated expenditures for the qualifying asset during the
period.
2. Interest Rate on Borrowing – The interest rate paid on
borrowings (used for asset construction) during a particular
period should be used to determine the amount of interest
costs, which should be capitalized for the period.
3. Interest Rate on Excess Expenditures (Weighted Average) – if
the average accumulated expenditure outstanding exceeds the
amount of the related specific new borrowing, interest cost
should be computed on the excess. The interest rate that should
be used on the excess is the weighted average interest rate for
other borrowings of the company.
ii. Not to Exceed Actual Interest Cost – total capitalized interest costs
for any particular period may not exceed the total interest costs
actually incurred by an entity during that period.
iii. Do NOT reduce Capitalized Interest – Do not reduce capitalizable
interest by income received on the unexpended portion of the loan.
E. Capitalization of Interest Period
i. Begins when three conditions are present:
1. Expenditures for the asset have been made
2. Activities that are necessary to get the asset ready for its
intended use are in progress.
3. Interest Cost is being incurred.
ii. Continues as long as the three conditions are present
iii. Ends when the asset is substantially Complete and ready for the
intended use.
F. Disclose in Financial Statements
i. Total interest cost incurred during the period
ii. Capitalized interest cost for the period
SUMMARY BEFORE DURING AFTER
CONSTRUCTION CONSTRUCTION CONSTRUCTION
BORROWED funds Expense Expense Expense
(not use)
Borrowed funds N/A Capitalized Expense
(weighted average
of accumulated
expense)
Excess (about N/A Capitalized Expense
amount borrowed)
expenditures
(Weighted Average
Interest Rate)

XII. Depreciable Assets and Depreciation – The basic principle of matching

revenue and expenses is applied to long-lived assets that are not held for
sale in the ordinary course of business. The systematic and rational allocation
used to achieve “matching” is usually accomplished by depreciation,
amortization, or depletion, according to the type of long-lived assets involved.
a. Kinds of Depreciation
i. Physical Depreciation – related to an assets deterioration and
wear over a period of time.
ii. Functional Depreciation – arises from obsolescence or
inadequacy of the asset to perform efficiently. Obsolescence
may result from diminished demand for the product that the
depreciable asset produces or from the availability of a new
depreciable asset that can perform the same function for
substantially less cost.
b. Terms
i. Salvage Value – salvage or residual value is an estimate of the
amount that will be realized at the end of the useful life of a
depreciable asset. Frequently, depreciable assets have little or
no scrap value at the end of their estimated useful life and, if
immaterial, the amounts may be ignored in calculating
depreciation.
ii. Estimated Useful Life – period of time over which an asset’s
cost will be depreciated. It may be revised at any time but any
revision must be accounted for prospectively, in current and
future periods only.
XIII. Depreciation Methods – The goal of a depreciation method should be to
provide for reasonable, consistent matching of revenue and expense by
systematically allocating the cost of the depreciable asset over its estimated
useful life. The actual accumulation of depreciation in the books is
accomplished by using a contra-account, such as accumulated depreciation
or allowance for depreciation. The amount subject to depreciation is the
difference between the cost and residual or salvage value and is called the
depreciable base.

XIV. Composite (Entire Unit) vs. Component Depreciation

a. Advantages of Component Depreciation Over Composite Depreciation

i. Depreciation Expense for the year would be more accurate
because each component item would be depreciated over its
useful life.
ii. Repair and maintenance expense would be more accurate
because replacements of components would be excluded from
expense and capitalized.
b. Component Depreciation – is not available for MACRS recovery
property for tax purposes because depreciation expense under the
component method is generally higher and MACRS is already high.
However, it does appear to be available when straight-line depreciation
is elected.
c. Composite (Dissimilar Assets) or Group (Similar Assets) Depreciation
– the process of averaging the economic lives of a number of property
units and depreciating the entire class of assets over a single life, thus
simplifying record keeping of assets and depreciation calculations.
i. No gain or loss is recognized when one asset in the group is
retired – when a group or composite asset is sold or retired the
accumulated depreciation is treated differently than the
accumulated depreciation of a single asset. If the average
service life of the group of assets has not been reached when
an asset is retired, the gain or loss that results is absorbed in
the accumulated depreciation account. The accumulated
depreciation account is debited (credited) for the difference
between the original cost and the cash received.
d. The method can use Straight-line, Sum-Of-The-Years Digits, or
declining Balance Methods of depreciation for GAAP purposes.
EX: Composite (Group) Depreciation

ANNUAL ESTIMATE DEPRECIABL ESTIMATE

D E D LIFE
TOTAL SALVAGE COST IN YEARS DEPRECIATIO
COST N
MACHIN P550,00 P50,000 P500,000 20 P25,000
EA 0
MACHIN P200,00 P20,000 P180,000 15 P12,000
EB 0
MACHIN P40,000 P0 P40,000 5 P8,000
EC
TOTALS P790,00 P70,000 P720,000 P45,000
0

Average Composite Life = P720,000/P45,000=16 years

Average Composite Rate = P45,000/P790,000= 5.7%
Disposal: Machine A is sold in 10 years for P260,000 (loss is not recognized, however,
accumulated depreciation must be reduced)

Cash P260,000
Accumulated Depreciation P290,000
Machine A P550,000

XV. Basic Depreciation Methods

a. Straight-Line
i. Depreciation Per Period = (Cost – Salvage)/Estimated Useful Life
ii. Advantages: Simple to compute, applies to virtually all assets,
consistent from year to year, and wide acceptability
iii. Disadvantages: does not reflect difference in usage of asset from
year to year and does not always match costs with revenue.
b. Sum-Of-The-Year Digits – one of the accelerated methods of depreciation
that provides higher depreciation expense in the early years and lower
charges in the later years.
i. Formula: (Remaining Life/Sum of the Years Digits)* Depreciable
Base
ii. S=(N*(N+1))/2= Denominator
iii. The numerator is the remaining life of the asset at the beginning of
the current year.
 iv. EX: An asset cost P11,000 with a P1,000 salvage value and
estimated life of four years
1. First Year: 4/10*P10,000=P4,000
2. Second Year: 3/10*P10,000=P3,000
3. Third Year: 2/10*P10,000=P2,000
4. Fourth Year: 1/10*P10,000=P1,000

c. Declining Balance – most common accelerated method is the double

declining balance method.
i. Calculation – the first years, depreciation is double the straight-line
rate. In succeeding years, the same percentage is applied to the
remaining book value.
ii. Salvage Value – no allowance is made for salvage value because
the method always leaves a remaining balance, which is treated as
salvage value. However, the asset should not be depreciated below
the estimated salvage value.
iii. Advantages: matches costs to revenues since greater utility is
reflected in greater depreciation during earlier years; as the amount
of depreciation decreases, repairs and maintenance charges
increase thereby tending to balance out one another.
iv. Disadvantages: does not reflect changes in the activity of the
asset, computation can be complex, greater disparity in the amount
of depreciation between earlier years and later years which is
inconsistent, and there is a possibility that with decreasing
depreciation and increasing repairs and maintenance that income is
artificially smoothed over the years.
d. Units of Production (Productive Output) – the unit-of-production method
relate depreciation to the estimated production capability of an asset and
are expressed in a rate per unit or hour.
i. (Cost – Salvage Value)/ Estimated Unit or Hours = rate per unit or
hour.
ii. Rate per Unit or Hour * Unit or Hours = Depreciation
iii. Advantages: Matches costs with revenues and reflects activity of
the enterprise.
iv. Disadvantages: if no activity, no depreciation expensed, cannot be
used for all assets, and can be complex because it requires clerical
work and records.
e. Partial Year Depreciation – when an asset is placed in service during the
year, the depreciation expense is taken only for the portion of the year that
the asset is used.
f. Disposals
i. Sale of an Asset during its useful life – Debit Cash and
Accumulated Depreciation; Credit Asset at Cost AND difference is
Gain or Loss
 ii. Write Off Fully Depreciated Asset – Debit Accumulated
Depreciation and Credit asset at full cost
iii. Total and Permanent Impairment – Debit Accumulated
Depreciation and Loss Due to Impairment ; Credit Asset at full cost
iv. Partial Impairment – Debit Loss Due to Impairment and Credit
Accumulated Depreciation

g. Disclosure - Allowances for Depreciation and depletion should be

deducted from the assets to which they relate. The following disclosures of
depreciable assets and depreciation should be made in the financial
statements or notes:

I. Depreciation expense for the period

II. Balance of Major Classes of Depreciable assets by nature or
function
III. Accumulated Depreciation allowances by classes or in total
IV. The methods uses, by major classes, in computing depreciation.

XVI. Depletion – Allocation of the cost of wasting assets such as oil, gas, and
minerals to production.
a. Terms
I. Purchase Cost – includes any expenditure necessary to purchase
and then prepare the land for the removal of resources.
II. Residual Value – similar to salvage value; monetary worth of a
depleted asset after the resources have been removed.
III. Depletion Base (Cost – Residual Value)
IV. Methods
1. Cost Depletion (Unit Depletion Rate)
2. Percentage Depletion (Not GAAP – Tax Only)
A. Based on a percentage of sales; allowed by Congress as a
tax deduction to encourage exploration in a very risky
business; usually exceeds cost depletion; Limited to 50% of
Net Income from the depletion property computed before the
percentage depletion allowance.
b. Unit Depletion Rate (Depletion per Unit) – Unit depletion is the amount
of depletion recognized per unit extracted.
I. Calculation
1. Depletion Base: Cost to Purchase Property PLUS Development
costs to prepare the land for extraction PLUS any estimated
 restoration costs LESS Residual Value of land after the
resources are extracted.
2. Depletion per Unit = Depletion Base/Estimated Removable
Units
II. Total Depletion is calculated by multiplying the unit depletion rate
times the number of units extracted. If all units extracted are not
sold, then depletion must be allocated between COGS and
Inventory. The amount of depletion to be included in COGS is
calculated by multiplying the unit depletion rate by the number of
units sold. Depletion applicable to units extracted but not sold is
allocated to inventory as direct materials.
Additional Notes to PPE
Characteristics:

 Tangible Assets
 Used in Business (production/supply of goods and services, for rental and for
admin purposes)
 Expected to be used for more than on year.
Bio Assets and Mineral Rights and Reserve are not PPE.
 Apply PAS 16 for PPE used to develop or maintain bio assets and mineral rights &
reserved.
Recognition

 Probable future economic benefits

 Cost of the asset can be measured reliably
Cost of PPE
 Cost incurred to acquire/construct PPE
 Cost incurred subsequently to add to, replace part of, or service it
-----Spare Parts and Servicing Equipments
 Normally carried as inventory and expensed as consumed
 If major spare parts and stand-by equipment, qualify as PPE if used for more
than one year
----- > Depreciated over a time period not exceeding the useful life of related
asset

-----Safety and Environmental Equipment

 Not directly increasing the future economic benefit of any existing PPE
 Necessary to obtain the future economic benefit of any existing PPE
 Necessary to obtain the future economic benefit from the asset in EXCESS of
what it could obtain if such equipment had not been acquired
 Recognize as PPE
Measurement @Recognition
 Initially measured at COST
 Purchase price including import duties and non reffundable purchase taxes net of
trade discount & rebates whether taken or not
 Cost directly attributable to bringing the assets to the location and condition for it
to be capable of operating
----- > cost of employee benefits from construction/acquisition of PPE
----- > cost of site preparation
----- > initial delivery & handling costs
----- > installation and assembly cost
----- > professional fees
----- > cost of testing whether asset is functioning properly net of proceeds from
selling any items produced during the testing (samples)
 Initial estimate of cost of dismantling & removing the item & restoring the site on
which it is located
----- > the obligation for which the entity incurs when the item is acquired or as a
consequence of having used the item.

Modes of Acquisition

MODE Cost of Equipment

Acquisition on Cash Basis Cash price equivalent @ recognition
 Lump sum price date plus directly attributable costs.

Allocate based on relative fair value of

Acquisition on Account
Acquisition on Installment Basis
 If there is cash price given
 No available cash price
Issuance of Share Capital
Issuance of Bonds Payable
Exchange
 Acquisition in exchange of
nonmonetary asset or
assets acquired.
Invoice price minus discount (whether
taken or not)
Cash price equivalent
@Cash price (if instalment price > cash
price, recognize as an interest to be
amortized over credit period.
Present value of all payments using
implied interest rate
a. Fair Value of asset received
b. Fair Value of the shared capital
c. Par Value/Stated Value of the
share capital
a. Fair Value of Bonds Payable
b. Fair Value of Asset Received
c. Face Value of Bonds
Payable
 combination of monetary and
nonmonetary
 Commercial Substance – if
expected cash flows after the
exchange differ significantly a. Fair Value of Asset given
from the expected cash flow b. Fair Value of Asset received
before the exchange c. Carrying amount of Asset given
With commercial substance:
(gains/loss fully recognized)
 No cash involved

 Cash is involved a. Fair Value of asset given plus

cash payment (payor)
Carrying amount of Asset given up +/-
cash received/paid
No commercial substance (no
gain/loss)
 Trade-in – Non dealer
acquiring asset from a dealer;
usually involves significant
amount of cash; exchanging Fair value of asset given plus cash
property as part of payment payment
and the balance payable in
cash
a. Fair Value Approach Trade in value of asset given plus cash
payment
b. Trade in value approach (If
FV of asset given can’t be
determined)
Donation
 From Shareholders Fair Value of items received (credited
to donated capital)
 Expenses related to the
donation (registration fees and
legal fees) are added to donated
 From non shareholders capital
 If subsidy  Expense directly attributable to
the asset is added to asset
 If not subsidy (with restriction) account.

Fair Value of asset/item

 received (credit to income
account)
Fair Value of asset/item
received (credit to liability
account until restrictions are met
where it is transferred to
income)

Construction Includes:
1. Direct cost of materials
2. Direct cost of labor
3. Indirect cost traceable to
production
 If not specifically identifiable,
allocate overhead based on
direct labor cost/hours

*Income/loss from operations during

construction NOT necessary to bring
the item to location/condition for its
intended use is not capitalized but is
recognized in profit or loss.

Derecognition
 Removal of cost of PPE with related accumulated depreciation
 Upon disposal or when it is fully depreciated
 Gain/Loss on disposal shall be included in profit or loss
 Gain/Loss on disposal = Net disposal proceeds – Carrying amount of asset

Fully Depreciated Property

 When carrying amount is equal to zero or equal to residual value
 Do not remove accounts of fully depreciated PPE still used in service
Property classified as held for sale

 Asset is available for immediate sale within one year from date of classification
as held for sale
 Exclude from PPE but present as current asset
 Measured at lower of carrying amount or fair value less cost to sell
 Not depreciated

Idle or abandoned Property

 Do not classify as held for sale

 Carrying amount would be recovered through continuing use
  Does not preclude depreciating the asset as future benefits are consumed not
only through usage but also through wear and tear and obsolescence
 To be included in PPE until the end of its economic life

Optional Disclosures

 CA of temporarily idle PPE

 Gross CA of any fully depreciated PPE still in use
 CA of PPE retired from active use and classified as held for sale
 When cost model is used, the FV of PPE when this is materially fifferent from the
CA

------------*----------------*----------------*-------------*---------------*--------------*--------------*--------
Government Grant
 Assistance by gov’t in form of transfer of resources to an entity in return of past
or future compliance with certain conditions relating to the operating activities of
the entity
 Sometimes called as subsidy, subvention, premium.
Requisites

 Given by the government

 In return for past or future compliance with conditions

Recognition and Measurement

 Measured at FAIR VALUE including nonmonetary grants

 Recognized if there is reasonable assurance that:
 The entity will comply with the conditions
 The grant will be received
 Receipt of the Grant does not of itself provide conclusive evidence that the
conditions have been or will be fulfilled
 Shall NOT be recognized on a cash basis
Classifications
a. Grant related to asset
 Condition is that the entity shall purchase, construct or acquire long-term asset
b. Grant related to income
 Grant other than related to asset
Accounting for Government Grants

Reason for Grant Pattern for Recognition of Income

Recognition of specific expense Over the period of the related expense
(safety and environmental expense) (prorate)
Related to depreciable asset
Over the periods and in proportion to
(Acquisition or construction of
the depreciation of related asset (divide
buildings) by the useful life of related asset if
using straight-line method)
Related to nondepreciable asset (land) Over the periods which bear the cost of
meeting the conditions
As compensation for expenses or Income on the period which it became
losses already incurred or for the receivable
purpose of giving immediate financial
support with no further related costs

Presentation of Government Grant

If related to asset:
a. As deferred income
b. Deducting the grant in arriving at the carrying amount of the asset (lower
depreciation expense)
If related to income:
a. As other income in I/S
b. Deducted from the related expense
Repayment of Government Grant
 Due to noncompliance with conditions
 Change in accounting estimate (prospectively)
If related to income:
a. Repayment shall be applied first against an unamortized deferred income
b. Any excess shall be recognized immediately as an expense