Ambay, Fenladen C.

AEC 12 – ACD
TASK 1 July 1, 2021

1. According to PAS 16 – “An item of property, plant, and equipment is initially measured at
its cost.” What are the items considered that will form part as cost of the property, plant, and
equipment?
The three items that form part of the PPE’s cost are purchase price, direct costs, and
initial estimate of dismantlement, removal and site restoration costs. First, the purchase price,
which includes import duties or the tax or tariff collected on imports, non-refundable purchase
taxes, is deducted by trade discounts and rebates. Second, the direct costs, which are the
costs directly attributable of bringing the asset to the location and condition for it to be
appropriately used as intended by the management. According to PAS 16, these costs do not
need to be incremental. Examples of direct costs include delivery costs, site inspection and
preparation, installation, etc. The third is the initial estimate of dismantlement, removal, and
site restoration costs, wherein an entity incurs an obligation due to the acquisition or utilization
of the asset other than inventory production.
2. When does the cessation of capitalizing cost of property, plant, and equipment occurs?
The cessation of the capitalization of costs of property, plant, and equipment occurs
when an asset is already in the location and condition where it becomes available for operating
use or other uses intended by the management. Accordingly, the costs that are incurred in
utilizing and redeploying PPEs are not subjected to capitalization.
3. Explain the accounting treatment on the following modes of acquisitions:
a.) Acquisition through exchange – In this mode of acquisition, an item of property,
plant, and equipment is acquired in exchange for either a non-monetary asset or a
combination of monetary and non-monetary assets. In determining the measurement
of the acquired PPE, it depends on whether the exchange transaction has commercial
or non-commercial substance. If with commercial substance, due to the exchange, the
subsequent cash flows of the entity are expected to change. Consequently, when the
PPE is received, it is measured using the order of priority: (1) FV of the asset Given
up, (2) FV of the asset Received, and (3) Carrying amount of the asset given up. If
without commercial substance, the Carrying amount of the asset Given up is used as
measurement.
b.) Acquisition through issuance of own stocks or debt instrument – The acquisition of
assets through the issuance of own stocks are recorded under PFRS 2 Share-based
Payments. According to the said standard, in measuring the asset received, an order
of priority must be followed: (1) FV of the asset received and (2) FV of the equity
instrument issued. On the other hand, an acquisition of asset through the issuance of
a debt instrument also follows an order of priority on its initial measurement – (1) FV
of the asset received and (2) FV of the debt instrument issued.
c.) Acquisition by donation – In this mode of acquisition, a PPE, which is received from
donation, is measured at fair value. Accordingly, if the PPE is accounted for as donated
capital, where its donor is an honor/shareholder, it is presented under share premium
or addition paid-in capital; if accounted for as income, where its donor is an unrelated
party, the cost incurred attributable to the receipt of donation and transfer of ownership
is offset to the income recognized; and if accounted for as government grant, where
the donor is the government, it is recorded in accordance with PAS 20.