Ateneo de Zamboanga University

ACCOUNTANCY ACADEMIC ORGANIZATION

A School of Management and Accountancy Student Government

Property, Plant and Equipment (Part 1)

Property, plant and equipment are:

a. Tangible assets (have physical substance);
b. Used in business (used in the production or supply of goods or services, for rental, or for
administrative purposes); and
c. Long-term in nature (expected to be used for more than one period).

Examples of PPE:
a. Land used in business
b. Land held for future plant site
c. Building used in business
d. Equipment used in the production of goods
e. Equipment held for environmental and safety reasons
f. Equipment held for rentals
g. Major spare parts and long-lived stand-by equipment
h. Furniture and fixture
i. Bearer plants

The following are not PPE:

a. Land held for speculation
b. Land held for an undetermined 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 and short-lived stand-by equipment

RECOGNITION
An item of PPE is recognized if:
a. it is probable that future economic benefits associated with the item will flow to the entity; and
b. the cost of the item can be measured reliably.

INITIAL MEASUREMENT
An item of PPE is initially measured at cost. Cost comprises the following:
a. Purchase price, including import duties, nonrefundable purchase taxes, less trade discounts and
rebates.
b. Direct costs of bring the asset to the location and condition necessary for it to be used in the
manner intended by management.

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ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

c. Initial estimate of dismantlement, removal and site restoration cost for which the entity incurs
an obligation by acquiring or using the asset other than to produce inventories.

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; 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
c. Costs of conducting business in a new location or with a new class of customers
d. Administration and other general overhead costs

CESSATION OF CAPITALIZATION OF COSTS

Capitalization of costs ceases when the PPE is in the location and condition necessary for it be
capable of operating in the manner intended by management. Therefore, costs incurred in using
or redeploying a PPE are not capitalized.

MEASUREMENT OF COST
Cost is measured at the cash price equivalent at the acquisition date. If payment is deferred
beyond normal credit terms, the difference between the cash price equivalent and the total
payment is recognized as interest over the credit period.

Illustration 1: Acquisition on cash basis

ABC Co. acquired a factory equipment overseas on a cash basis for ₱100,000. Additional costs
incurred include the following: commissions paid to brokers for the purchase of the equipment,
₱5,000; import duties of ₱25,000; non-refundable purchase taxes of ₱10,000; freight cost of
transferring the equipment to ABC Co.’s premises, ₱1,000; costs of assembling and installing the
equipment, ₱2,000; costs of testing the equipment, ₱1,500; and administration and other general
overhead costs, ₱4,200; and advertisement and promotion costs of the new product to be
produced by the equipment, ₱3,800. The samples generated from testing the equipment were
sold at ₱500.
Requirement: Compute for the initial cost of the equipment
Solution:
The initial cost of the equipment is computed as follows:
Purchase price (cash price equivalent) 100,000
Commissions to brokers 5,000

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 Ateneo de Zamboanga University
ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

Import duties 25,000

Non-refundable purchase taxes 10,000
Transportation cost 1,000
Assembling and installation costs 2,000
Testing costs 1,500
Net proceeds from samples generated (500)
Initial cost of equipment 144,000

INCIDENTAL OPERATIONS
Income and related expenses of incidental operations are recognized in profit or loss, and hence
do not affect the measurement cost of a PPE.
For example, a vacant lot may be temporarily used as a parking space before or during the
construction of a building. The income and related expenses from the parking space are
recognized in profit or loss.

SELF-CONSTRUCTED ASSETS
“The cost of a self-constructed asset is determined using the same principles as for an acquired
asset.” (PAS 16.22)

CLASSES OF PPE
A class of PPE is a grouping of assets of a similar nature and use in an entity’s operations. The
following are examples of separate classes:
a. land;
b. land and buildings;
c. machinery;
d. ships;
e. aircraft;
f. motor vehicles;
g. furniture and fixtures;
h. office equipment; and
i. bearer plants

LAND (PROPERTY)
Land is classified as PPE if it is used in the entity’s operations as “owner occupied” property,
e.g., land on which the entity’s office building was constructed and land used as plant site. Land
held for future plant site is also classified as PPE.

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ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

The following items of land are not classified as PPE.

1. Land being sold in the ordinary course of business – classified as “Inventory”
2. Land held for sale under PFRS 5 – classified as “Noncurrent asset held for sale”
3. Land held for long-term capital appreciation – classified as “Investment property”
4. Land held for a currently undetermined future use – classified as Investment property”
5. Land held as site for a building being constructed or developed for future use as investment
property - classified as “Investment property”
6. Land leased out under operating lease – classified as “Investment property”

COST OF LAND IMPROVEMENT

Land improvements are enhancements to the land which have definite useful life, such as
private driveways, walks, fences, drainages and water systems, cost of trees and shrubs and other
landscaping.
Land normally has an indefinite useful life, thus, it is not subject to depreciation. Therefore, land
improvements are segregated from the cost of land and depreciated over their estimated useful
lives.

BUILDING (PLANT)
Building is classified as PPE if it is used in the entity’s operations as “owner occupied property”,
e.g., building used to sell goods or services and building used for administrative purposes.
Building being constructed or developed for future use as “owner occupied” property is also
classified as PPE.

COSTS OF BUILDING IMPROVEMENT

Building improvements refer to costs incurred subsequent to occupancy of a purchased building
or subsequent to completion of a self-constructed building that either increase the useful life of
the building of improve its current state.

Building improvements include the following:

1. Cost of elevator, escalator, or similar items that was not originally included in the purchased
building or in the blueprint of a self-constructed building.
2. Ventilation systems, plumbing, and lighting systems installed after occupancy of a purchased
building of after completion of a self-constructed building. However, if they are installed prior to
occupancy or during construction, they are capitalized to the building account.
3. Immovable fixtures attached to the building which, if removed, would necessarily damage the
building, e.g., partitions, compartments and cranes. Movable fixtures are classified as furniture
and fixtures, e.g., signage.

EQUIPMENT
Includes delivery and transportation equipment, office equipment, machinery, furniture and
fixtures, furnishings, factory equipment and similar fixed assets.

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ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

COST OF EQUIPMENT
1. Purchase price including other necessary costs such as broker’s commissions and non-
refundable purchase taxes
2. Freight, handling charges, and insurance on the equipment while in transit
3. Cost of necessary special foundation or platform
4. Assembling and installation costs
5. Costs of testing and conducting trial runs
6. The initial estimate of decommissioning and restoration costs for which the entity has a
present obligation.

Cost of equipment includes the following:

A. Cost of relocating the equipment after it has been put to the location and condition originally
intended by management – this is recognized as expense
B. Cost of training personnel who will be responsible in operating the equipment – recognized as
expense
C. Cost of dismantling and removing an old equipment belonging to the entity prior to the
installation of a new equipment – recognized as expense except when the cost was previously
recognized as liability

BEARER PLANTS
A bearer plant 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; and
c. Has a remote likelihood of being sold as agricultural produce except for incidental scrap
sales.
Bearer plants are accounted for similar to self-constructed assets.

LUMP-SUM PURCHASE OF ITEMS OF PPE

The acquisition cost of a group of items of PPE acquired on a lump-sum price is allocated to the
individual assets based on their relative fair values at the date of purchase.

LAND AND BUILDING ACQUIRED ON A LUMP-SUM PRICE

The acquisition cost of land and building acquired on a lump-sum price is allocated to both the
land and building based on their relative fair values at purchase date.
However, if the building is unusable, from both the perspective of the entity and market
participants, such that it has an insignificant fair value, the total acquisition cost is allocated on
to the land. In this case, the building is not recognized as an asset because the asset recognition
criteria are not met.
The lump-sum acquisition cost is not allocated if both the land and building are classified
as inventory or investment property measured at fair value.

DEMOLITION COSTS

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ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

The accounting treatment for demolition costs depends on the reason for the demolition.

TO CONSTRUCT A NEW BUILDING

Cost of demolishing/razing the old building = cost of site preparation
- Directly attributable to the construction of a new building
- Capitalized as cost of the NEW BUILDING
- May need to be tested for impairment
- Carrying amount of the building demolished is recognized as LOSS
- Any proceeds from the sale of salvaged material are DEDUCTED FROM THE
DEMOLITION COST

TO CLEAR THE LAND FOR A POSSIBLE FUTURE SALE

- Demolition cost is capitalized only if it enhances the future economic benefits of the
LAND. (otherwise charged to EXPENSE)
- If the decision to demolish occurs PRIOR to the classification of the land as “held for
sale” (IFRS 5), the demolition cost is treated as “cost to sell”
- If the demolition cost is a PREREQUISITE to the sale of land classified as inventory—
treated as “COST TO SELL”
- Any proceeds from the sale of salvaged material are DEDUCTED FROM THE
DEMOLITION COST

Illustration 1: Lump-sum acquisition – building not demolished

On April 1, 20x1, ABC Co. purchased a land and building by paying ₱10,000,000 and assuming
a mortgage of ₱2,000,000. The land and building have fair values of ₱5,000,000 and
₱10,000,000, respectively. The building will be used by ABC Co. as its new office.

Additional costs relating to the purchase include the following:

Legal cost of conveying and registering title to land 8,000
Payment to tenants to vacate premises 9,000
Option pain on the land and building 6,000
Option pain on similar land and building not acquired 3,000
Broker’s fee on the land and building 15,000
Unpaid real estate taxes prior to April 1, 20x1 assumed by ABC Co. – assessed
on land 30,000
Real estate taxes after April 1, 20x1 20,000
Repairs and renovation costs before the building is occupied 40,000

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ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

Repair costs after the building is occupied 50,000

Requirement: Compute for the allocated costs of the different classes of PPE.

Solution:
The total acquisition cost is determined as follows:
Cash payment 10,000,000
Mortgage assumed 2,000,000

Total acquisition cost 12,000,000

The fractions to be used in the cost allocation are derived from the relative fair values as follows:
Fair values Fractions

Land 5,000,000 5/15

Building 10,000,000 10/15

15,000,000

Land Building

Purchase price (12M x 5/15); (12M x 10/15) 4,000,000 8,000,000

Legal cost of conveying and registering title to land 8,000
Payment to tenants to vacate premises (9K x 5/15); (9K x 10/15) 3,000 6,000
Option pain on the land and building (6K x 5/15); (6K x 10/15) 2,000 4,000
Broker’s fee on the land and building (15K x 5/15); (15K x
10/15) 5,000 10,000
Unpaid real estate taxes prior to April 1, 20x1 assumed by ABC
Co. – assessed on land 30,000

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ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

Repairs and renovation costs before the building is occupied 40,000

Totals 4,048,000 8,060,000

OTHER NOTES:
- Cash Discounts are DEDUCTED from the cost of PPE WHETHER TAKEN OR NOT.
SPECIAL ITEMS
Acquisition through exchange
A. Non-Monetary Asset or Assets
B. Combination of Monetary and Non-Monetary Assets

WITH COMMERCIAL SUSBTANCE

PPE received is measured using the ff ORDER OF PRIORITY:
i. FV of the asset GIVEN UP (PLUS Cash PAID or MINUS cash RECEIVED)
ii. FV of the asset RECEIVED (PLUS Cash PAID or MINUS cash RECEIVED)

LACKS COMMERCIAL SUBSTANCE

CA of the asset GIVEN UP (PLUS Cash PAID or MINUS cash RECEIVED)
- NO GAIN OR LOSS arises in this substance

Illustration 1: With fair value of asset given up

ABC Co. exchanged equipment with XYZ, Inc. pertinent data are shown below:

ABC Co. XYZ, Inc.

Equipment 1,000,000 2,000,000
Accumulated depreciation 200,000 800,000
Carrying amount 800,000 1,200,000
Fair value 950,000 1,100,000
Cash paid by ABC Co. to XYZ, Inc. 150,000 150,000

Requirements: Provide the journal entries in the books of ABC Co. and XYZ, Inc. to record the
exchange transaction.
Solutions:

ABC Co. (Payor)

The cost of the equipment received by ABC Co. in the exchange is computed as follows:
Fair value of asset given up 950,000

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ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

Add: Cash paid 150,000

Cost of asset received by ABC Co. 1,100,000

Gain or loss on exchange computed as:

Fair value of asset given up 950,000
Carrying amount of asset given up (1M – 200,000) (800,000)

Gain on exchange 150,000

XYZ, Inc. (Payee)

The cost of the equipment received by XYZ, Inc. in the exchange is computed as follows:
Fair value of asset given 1,100,000
Less: Cash received (150,000)

Cost of asset received by XYZ 950,000

The entry in the books of XYZ, Inc. to record the exchange is as follows:
Equipment – new 950,000
Cash 150,000
Accumulated depreciation 800,000
Loss on exchange (squeeze) 100,000
Equipment - old 2,000,000

ACQUISITION THROUGH TRADE-IN

- Usually made by an entity with a SELLER—one who usually sells similar assets as the
one being exchanged.
- Accounted for in much the way as an exchange involving a combination of monetary and
non-monetary assets.
Order of Priority
PPE received is measured using the ff ORDER OF PRIORITY:
i. FV of the asset GIVEN UP PLUS Cash PAID
ii. FV of the asset RECEIVED (Cash price without trade-in)

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ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

Illustration 1: Trade-in
ABC Co. traded in an old machine for a new model. Pertinent data are as follows:

Old equipment:
Cost 50,000
Accumulated depreciation 20,000
Average published retail value 6,000

New Equipment:
List price 95,000
Cash price without trade in 70,000
Cash price with trade in 55,000

Requirement: Provide the entry to record the acquisition of the new machine.
Solution:
The entry to record the trade-in is as follows:
Equipment – (cash price w/o trade in) 70,000
Accumulated depreciation 20,000
Loss on trade in (squeeze) 15,000
Equipment – old 50,000
Cash 55,000

ACQUISITION THROUGH ISSUANCE OF OWN EQUITY INSTRUMENTS

- Accounted for under IFRS 2—SHARE-BASED PAYMENTS
Order of Priority
PPE received is measured using the ff. ORDER OF PRIORITY:
i. FV of the asset RECEIVED (PLUS Cash PAID or MINUS cash RECEIVED)
ii. FV of the asset EQUITY INSTRUMENTS ISSUED
iii. PAR VALUE OF THE SHARES ISSUED

ACQUISITION THROUGH ISSUANCE OF BONDS PAYABLE

- PAS 16 and IFRS 9—FINANCIAL INSTRUMENTS

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ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

Order of Priority
PPE received is measured using the ff ORDER OF PRIORITY:
i. FV of the BONDS PAYABLE ISSUED (or present value)
ii. FV of the asset RECEIVED (PLUS Cash PAID or MINUS cash RECEIVED)
iii. Face Value of the BONDS PAYABLE ISSUED

Illustration:
On January 1, 20x1 ABC Co. acquired land with fair value of ₱950,000 by issuing a 3-year,
10%, ₱1,000,000 bonds. Principal is due on January 1, 20x4 but interest is due at each year-end.
The prevailing market rate of interest for a similar instrument on January 1, 20x1 is 12%. The
present value of the future cash flows from the bonds discounted at 12% is ₱951,963.

The entry to record the acquisition is as follows:

Jan 1, 20x1 Land 951,963
Discount on bonds payable 48,037
Bonds payable 1,000,000

ACQUISITION BY DONATION
- Items of PPE received as donation are measured at FV and accounted for as:
Income - The donor is an UNRELATED PARTY.
- Any cost incurred attributable to the receipt of donation and transfer
of ownership is offset to the INCOME RECOGNIZED.

Donated Capital - The donor is an OWNER (SHAREHOLDER)

- “DONATED CAPITAL” is presented in EQUITY under SHARE
PREMIUM
- Any cost incurred attributable to the receipt of donation and transfer
of ownership is offset to the DONATED CAPITAL ACCOUNT.

Government - If the donor is the GOVERNMENT

Grant

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