Module 2.

2 (Land, Building, and Machinery)

I.A. Land Account
The classification of the land in the statement of financial position depends on the nature
and purpose of the land.
1.) Land shall be treated as Property, Plant, and Equipment if it is:
a.) used as a plant site; or
b.) held definitely as a future plant site (classified as owner-occupied property and
not an investment property)
2.) Land shall be treated as an Investment Property if it is held by the entity for:
a.) a currently undetermined use; or
b.) long-term capital appreciation
3.) Land shall be treated as an Inventory (current asset) if it is held for current sale in the
ordinary course of business of the entity.

I.B. Cost Chargeable to Land

1.) Purchase price, including nonrefundable purchase taxes
2.) Directly attributable costs to bring the asset to the location and working condition
necessary for it to be capable of operating as intended by management:
a.) Legal fees and other expenditure for establishing clean title
b.) Broker or agent commission
c.) Escrow fees
d.) Fees for registration and transfer of title
e.) Cost of relocation or reconstruction of property belonging to others in order to
acquire possession
f.) Mortgages, encumbrances, and interest on such mortgages assumed by buyer
g.) Unpaid taxes up to the date of acquisition assumed by buyer
* An example would be any unpaid real property taxes assumed by the buyer in
acquiring the land.
* However, real property taxes paid after the acquisition of the land are treated as
outright expense.
h.) Cost of survey
i.) Payments to tenants to induce them to vacate the land in order to prepare the land
for the intended use.
j.) Cost of permanent improvements
* These are land improvements which are not subject to depreciation. Examples are
cost of clearing, cost of grading, leveling and landfill, cost of subdividing and other
cost of permanent improvement.
* However, if the land improvements are depreciable, then these are not charged to
the land account. Such expenditures are charged to a special account called “land
improvements” and they are depreciated over their useful life. Examples are fences
 constructed after the completion of the building, water systems, drainage system,
sidewalks, pavements and cost of trees, shrubs and other landscaping.
k.) Cost of option to buy the acquired land
* If the land is not acquired, the cost of option is expensed outright.
l.) Demolition cost of the old building to prepare the land for its intended use
3.) Revenue items which may impact the cost
*An example would be the proceeds from the salvage of the demolished old building (the
old building was demolished to prepare the land for the intended use)
4.) Special Assessments
* These are taxes paid by the landowners as a contribution to the cost of public
improvements as it increases the value of the land.

II.B. Cost Chargeable to Building When Purchased

1.) Purchase price, and nonrefundable purchase taxes
2.) Directly attributable costs to bring the asset to the location and working condition
necessary for it to be capable of operating as intended by management:
a.) Legal fees and other expenditure incurred in connection with the purchase
b.) Unpaid taxes up to the date of acquisition
c.) Interest, mortgage, liens and other encumbrances on the building assumed by
the buyer
d.) Payments to tenants to induce them to vacate the building
e.) Any renovating or remodeling costs incurred to put a building purchased in a
condition suitable for the intended use.
* Examples are the lighting installations, partitions and repairs.
II.C. Cost Chargeable to Building When Constructed
1.) Direct cost of materials, direct cost of labor, and indirect costs and incremental overhead
specifically identifiable or traceable to the construction
a.) Materials used, labor employed, and overhead incurred during the construction
b.) Architect fee
c.) Expenditures for service equipment and fixtures made a permanent part of the
structure
d.) Sidewalks, pavements, parking lot, and driveways which are part of the
blueprint for the construction of a new building
* However, if the sidewalks, pavements, parking lot, and driveways are
occasionally made or incurred not in connection with the construction of a new
building, then these are charged to a special account called “land improvements.”
e.) Building fixtures classified as immovable properties
*Article 415 of the New Civil Code enumerates, among others, immovable
properties which provides that:
 (3) Everything attached to an immovable in a fixed manner, in such a way
that it cannot be separated therefrom without breaking the material or
deterioration of the object;
(4) Statues, reliefs, paintings or other objects for use or ornamentation,
placed in buildings or on lands by the owner of the immovable in such a
manner that it reveals the intention to attach them permanently to the
tenements;
* However, building fixtures classified as movable properties are charged to
furniture and fixtures and they are depreciated over their useful life.
f.) Ventilating system, lighting system, and elevator installed during construction
* However, if these are installed after the construction and it is not part of the
blueprint of the new building, then these are charged to a special account called
“building improvements” and they are depreciated over their useful life or the
remaining life of the building, whichever is shorter.
2.) Directly attributable cost to bring the asset to the location and working condition
necessary for it to be capable of operating as intended by management
a.) Building permit or license
b.) Cost of excavation
c.) Cost of temporary buildings used as construction offices and tools or materials
shed
d.) Expenditures incurred during the construction period
* An example would be interests on construction loans and insurance
* Where the insurance is not taken and when the entity is obligated to pay claims
for damages for injuries sustained during the construction, the payment should be
expensed outright.
Reason: (1) it represents management failure or negligence in procuring insurance;
and (2) it is not a necessary cost of construction
e.) Cost of temporary safety fences around construction site and cost of subsequent
removal thereof
f.) Safety inspection fee
g.) Superintendent fee
h.) The demolition cost to make room for the construction of the new building
* However, if the demolition of the old building is to prepare the land for the
intended use, then the demolition cost is capitalized to the land account.
* Incremental overhead which are not specifically identifiable may be based on the direct
labor cost or direct labor hours.
3.) Revenue items which may impact the cost
*An example would be the proceeds from the salvage of the demolished old building (the
old building was demolished to make room for the construction of the new building)
* However, revenues and expenses incidental to construction or development, but not
necessary to bring the asset to its required location or working condition, would be
separately recognized in net profit or loss (such as the operation of a car park on a building
site).
II.D. Treatment of the Difference Between the Actual Cost of Construction and the
Price at Which the Constructed Asset Can Be Purchased.
When the actual cost of construction is less than the price at which the constructed
asset can be purchased from other parties, the difference is treated as savings and not
income. As a result, future depreciation charges on the asset would be lower.
When the actual cost of construction is more than the price at which the constructed
asset can be purchased from other parties, the difference has no effect in recording the asset
at actual cost.
Paragraph 22 of PAS 16 provides that “the cost of abnormal amount of wasted
material, labor, or overhead incurred in the production of self-constructed asset is not
included in the cost of the asset.” When actual cost which turns to be materially excessive
due to construction inefficiencies or failures whether due to temporary, idle capacity or
industrial disputes, it is believed that the excess shall be treated as loss.

III.A. Land and Building Purchased at a Single Cost

If land and an old building are purchased at a single cost and the old building is still
usable, the single cost is allocated to land and building based on their relative fair value.
If land and an old building are purchased at a single cost and the old building is
unusable, the single cost is allocated to land only.

III.B. Old Building is Demolished Immediately to Make Room for Construction of a

New Building
Any allocated carrying amount of the usable old building is recognized as a loss, if
it is classified as an item of Property, Plant, and Equipment or Investment Property.
Any allocated carrying amount of the usable old building is capitalized as cost of
the new building if the new building is classified as an inventory.

III.C. A Building is Acquired and Used In a Prior Period But Subsequently

Demolished In the Current Period to Make Room For the Construction of a New
Building
The carrying amount of the old building is recognized as a loss, regardless of its
classification.

IV.A. Cost Chargeable to Machinery

1.) Purchase price, including import duties and nonrefundable purchase taxes, after
deducting trade discounts and rebates
* The Value-added Tax or VAT on the purchase of machinery should not be capitalized
but charged to input tax to be offset against output tax.
2.) Directly attributable costs to bring the asset to the location and working condition
necessary for it to be capable of operating as intended by management:
a.) Freight, handling, storage and other cost related to the acquisition
b.) Insurance while in transit
 c.) Installation cost, including site preparation and assembling
* If a machinery is removed and retired to make room for the installation of a new
one, the removal cost not previously recognized as a provision and charged to
expense.
d.) Cost of testing and trial run, and other cost necessary in preparing the machinery
for its intended use
e.) Fee paid to consultant for advice on the acquisition of the machinery
f.) Cost of safety rail and platform surrounding machine
g.) Cost of water device to keep machine cool
3.) the initial estimate of the costs of dismantling and removing the asset and restoring the
site on which it is located, the obligation for which an entity incurs either when the asset is
acquired or as a consequence of having used the asset during a particular period for
purposes other than to produce inventories during that period.

IV.B. Tools
Tools are classified as “machine tools” and “hand tools” which should be
segregated from the machinery account.
Example of “hand tools”: hammer and saws
Example of “machine tools”: drills and punches

IV.C. Patterns and Dies

Patterns and dies are used in designing or forging out a particular product. Patterns
and dies used for the regular product are recorded as assets which are depreciated over
their useful life. However, patterns and dies used for specifically ordered products form
part of the cost of the ordered special product.

IV.D. Equipment
The term “equipment” includes:
1.) Delivery Equipment (includes cars, trucks, and other vehicles used in the business
operations)
* Motor vehicle registration fees should be expensed and not be included as part of the cost
of the delivery equipment.
2.) Store and Office Equipment (includes computers, typewriters, adding machine, cash
register, and calculator)
* If the computers, typewriters, adding machine, cash register, and calculator are
designated with the selling function of the entity, then these equipment are classified as
store equipment. Otherwise, these equipment are classified are classified as office
equipment.
3.) Store and Office Furnitures and Fixtures (includes showcase, counters, shelves, display
fixtures, cabinets, partitions, safes, desks, tables and building fixtures classified as movable
properties)
IV.E. Returnable Containers
Returnable containers are those which are returned to the seller by the buyer when
the contents are consumed or used and these containers may be classified as property, plant
and equipment or other noncurrent assets depending on their containing capacity. However,
containers which are not returnable are expensed outright.
Containers in big units or of great bulk are classified as property, plant, and
equipment. Examples are tanks, drums, and barrels.
However, small containers are classified as other noncurrent assets. Examples are
bottles and boxes.

IV.F. Subsequent Expenditures

The cost of replacing part of an item of property, plant, and equipment when
incurred is recognized in the carrying amount of that item if: (1) the recognition criteria for
an asset are met and (2) it will increase the future service potential of the asset.
It is said that a subsequent cost will increase the future service potential if: (1) it
will extend the life of the property; (2) it increases the capacity of the property and quality
of output; or (3) it improves the efficiency and safety of the property.
However, if the subsequent expenditures merely maintain the existing level of
standard performance, then it should be recognized as an outright expense.
The carrying amount of those parts that are replaced is derecognized in accordance
with the derecognition provisions of PAS 16.
A.I.R3. (Addition, Improvements/Betterments, Replacement, Repairs and
Rearrangement) are subsequent costs that may be incurred during the lifetime of an
existing property, plant, and equipment.
1.) Additions are modifications or alterations which increases the physical size or capacity
of the asset. It may result to (a) an entirely new unit which is depreciated over its current
useful life or (b) an expansion or extension of the old asset which is depreciated over their
useful life or the useful life of the related asset, whichever is shorter. In either case, such
cost is capitalized.
2.) Improvements/Betterments are modifications or alterations which increases the service
life or capacity of the asset. It may be a replacement of an asset, or part thereof with one of
better or superior quality.
3.) Replacement involves substitution of an asset, or part thereof, not with one of better
quality but with one having the same or lesser quality.
4.) Repairs are those expenditures incurred to restore assets to good operating condition.
Repairs of major parts or what we call “extraordinary repairs” should be capitalized. On
the other hand, repairs of minor parts or what we call “ordinary repairs” should be expensed
outright.
Repairs vs Maintenance
As to the nature of the expenditure, repairs are curative in nature (restore the asset
in good condition) while maintenance are preventive in nature (keeps the asset in good
condition.
5.) Rearrangement costs are those incurred to relocate an existing property, plant, and
equipment. IFRS expressly mandates that these costs be expensed outright.