PROPERTY, PLANT AND EQUIPMENT

Definition and Scope (PAS 16 par. 3, 6) Property, plant and equipment are tangible items that:
a. are held for use in the production or supply of goods or services, for rental to others, or
for administrative purposes; and
b. are expected to be used during more than one period.

The following are not included in the scope of PAS 16:

1. Property, plant and equipment (PPE) classified as held for sale (PFRS 5 Non-current
Assets Held for Sale and Discontinued Operations)
2. Biological assets related to agricultural activity other than bearer plants (PAS 41
Agriculture)
3. Recognition and measurement of exploration and evaluation assets

Recognition and Initial Measurement (PAS 16 par. 7-28)

An item of property, plant and equipment shall be recognized as an asset, if and only if:
a. it is probable that future economic benefits associated with the item will flow to the
entity;
b. the cost of the item can be measured reliably.

Spare parts, stand-by equipment and servicing equipment are recognized as PPE when they
meet the definition in PAS 16, otherwise, such items are classified as inventory.
An item of property, plant and equipment that qualifies for recognition as an asset shall be
measured at its cost (cash price equivalent at recognition date).

Modes of acquisition:

 Acquired on a cash basis – cost is equal to cash paid plus any directly attributable costs.
For assets acquired at a lump sum price, the price is allocated to the assets based on fair
value.
 Acquired through issuance of share capital – cost is determined in the following order of
priority: 1)
a. Fair value of the asset received
b. Fair value of the share capital issued
c. Par value or stated value of the share capital
  Acquired through issuance of bonds payable – cost is determined in the following order
of priority:
a. Fair value of bonds issued
b. Fair value of asset received
c. Face amount of bonds payable
 Acquired through exchange for nonfinancial asset (or combination of financial and non-
financial assets)– cost of asset acquired is measured at fair value except when:
a. the exchange lacks commercial substance; or
b. the fair value of neither the asset received nor the asset given up is reliably
measurable.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.
The fair value of an asset is reliably measurable if:
a. the variability in the range of reasonable fair value measurements is not significant for
that asset; or
b. the probabilities of the various estimates within the range can be reasonably assessed
and used when measuring fair value.
If an entity is able to measure reliably the fair value of either the asset received or the asset
given up, then the fair value of the asset given up is used as reference to measure the cost of
the asset received unless the fair value of the asset received is more clearly evident.

Summary:

 Without commercial substance – measure at carrying amount of the asset given up; no
gain or loss
 With commercial substance – measure at fair value of asset given up plus(minus) any
cash paid(received)
 Trade-in (form of exchange with commercial substance) – measure at the following
order of priority:
1. At fair value of the asset given plus cash payment
2. Trade-in value of asset given plus cash payment

Acquired through donation

1. Donated by shareholders – measured at fair value. Expenses incurred are accounted
for as follows:
  if incurred in connection with the donation, charged against donated capital
(e.g., legal and registration fees)
 if directly attributable costs incurred subsequent to the donation, capitalized
(e.g., installation and testing costs)
2. Donated by no shareholders – recorded at fair value when received/becomes
receivable. If the donation is in the form of a subsidy, an income is recognized. If not, a
liability account is set up until such time when restrictions to the donation are met, then
the liability is transferred to income.

Self-constructed asset – cost includes:

1. direct cost of materials
2. direct cost of labor
3. indirect costs and incremental overhead specifically identifiable or traceable to the
construction (if not specifically identifiable, allocation may be done based on direct
labor cost or direct labor hours).
Observe the following guidelines:
1. Where cost of construction < cash price = savings, not income
2. Where cost of construction > cash price = account as follows:
a. If the difference is material and it is due to inefficiencies during construction, the
excess is treated as a loss
b. If not, no loss is recognized
3. Income/loss during construction as a result of intervening operations are recognized in
profit or loss.

Land, Building and Machinery

ACCOUNTING FOR LAND
Classification:
1. PPE – if used as a plant site
2. Investment Property – if held for an undetermined use or for long-term appreciation
3. Inventory – if held for current sale as part of regular operations

Capitalizable costs of land:

 Purchase price 
 Legal fees 
 Broker’s commission 
 Escrow fees 
 Registration/transfer fees 
 Relocation/reconstruction costs 
 Mortgages, encumbrances and interest on such assumed by the buyer 
 Unpaid taxes up to date of acquisition assumed by the buyer 
 Cost of survey 
 Payments to tenants to prepare the land for intended use (but not to make room for
the construction of new building) 
 Cost of permanent improvements (clearing, grading, leveling, and landfill)
 Option price for land acquired 
 Special assessment fees 
 Non-depreciable land improvements