CHAPTER 10 – PROPERTY, PLANT AND
EQUIPMENT
Property, plant and equipment
 A tangible assets
 Held for use in the production or
supply of goods, service or program
outputs
 Expected to be used for more than
one reporting period.
Recognition
 For government entities, the
capitalization threshold foe PPE is
P15,000
Initial Measurement
PPE are initially measured at cost. Cost
comprises the following:
 Purchase price - including non-
refundable taxes but excluding
trade and cash discounts.
 Direct costs – brining the asset to
the location and condition
necessary for it to be capable of
operating in the manner intended
by management.
 Present value of decommissioning
and restoration costs –
decommissioning costs refer to the
costs of dismantling or uninstalling
a PPE at the end of its useful life.
Examples of directly attributable costs
 Costs of employee benefits arising
directly from the construction or
acquisition of PPE;
 Costs of site preparation;
 Initial delivery and handling costs
(e.g., freight costs);
 Installation and assembly costs;
 Testing costs, net of disposal
proceeds of samples generated
during testing; and
 Professional fees.
Examples of costs that are expensed
outright
 Costs of opening a new facility.
 Costs of introducing a new product
or service (including costs of
advertising and promotional
activities).
 Costs of conducting business in a
new location or with a new class of
customers (including costs of staff
training).
 Administration and other general
overhead costs.
Modes of Acquisition
Acquisition by Purchase – acquisition of
PPE through purchase are classified as
Capital Outlays (CO) int the budget
registries.
 Cash discounts, whether taken or
not, are excluded from the initial
measurement. Cash discounts not
taken are recognized as “Other
Losses.”
 A PPE purchased under installment
basis is initially measured at the
cash price equivalent.
 Promotion items: If the same,
allocate total cost to all items
acquired including the promotional
item.
 If different, assign the promotional
item its fair value, the remainder to
the other items acquired.
Acquisition by Construction
 Though construction contract – cost
is contract price.
 By Administration – cost is sum of
DM, DL & OH
 Construction cost are initially
recorded in the “construction in
progress” account.
Acquisition through Exchange:
 Measurement of the asset acquired
depends on whether the exchange
transaction has commercial
substance or not.
With Commercial Substance (order of
priority):
 Fair value of asset Given up (plus
any cash paid or minus any cash
received);
 Fair value of asset Received; or
 Carrying amount of asset Given up
(plus any cash paid or minus any
cash received)
Lacks Commercial Substance: Carrying
amount of asset Given up (plus any cash
paid or minus any cash received)
Acquisition through Non-Exchange
Transaction – the asset received is
measured at fair value at the acquisition
date.
 without condition, recognized
immediately as income.
 with condition, initially recognized
as liability.
Acquisition through Intra-agency or
Inter-agency Transfers - measured
at the carrying amount of the asset
received.
Subsequent Expenditures on recognized
PPE
 Capitalization of costs ceases when
the PPE is in the location and
condition necessary for it to be
capable of operating in the manner
intended by management.
Therefore, costs incurred in using or
redeploying a PPE are not
capitalized.
The GAM for NGAs provides the
following guidelines when accounting
for subsequent expenditures on
recognition PPE:
A. Repairs and Maintenance
 Minor repairs – costs of day-to-day
servicing of an item of PPE,
necessary to maintain its operating
capability. These are charged as
expenses.
 Major repairs – are considered
‘betterments’ and are capitalized.
If it is not clear whether a repair is minor
or major, it is treated as minor.
B. Replacement costs
 Charge carrying amount of old part
as loss
 Capitalize new part
 If carrying amount of old part is not
determined, use the cost of new
part as basis

C. Spare parts and servicing
equipment
 Minor spare parts are recognized as
inventory and charged as expense
when consumed.
 Major spare parts and stand-by
equipment are recognized as PPE
when they meet the recognition
criteria, e.g., they are expected to
be used over more than one period.
 Those that can only be used in
conjunction with an item of PPE are
accounted for as PPE.
D. Betterments
 Are capitalized (if they meet the
recognition criteria for PPE) and are
subsequently depreciated:
 Over the extended useful life, if
betterment extends useful life
 Over remaining useful life, if
betterment does not extend useful
life.
E. Additions and Rearrangements
 Additions are modifications which
increase the physical size or
function of the PPE. An addition can
be:
 New unit – depreciation over its
own useful life
 Expansion – depreciate over useful
life of original asset.
Rearrangement is the relocation or
reinstallation of an asset which proves to
be less efficient in its original location.
Subsequent Measurement
PPE are subsequently measured using the
cost model. The revaluation model is not
applicable to government entities.
Depreciation – is the systematic allocation
of the depreciable amount of an asset over
its useful life.
Depreciation Amount – is the cost of an
asset, or other amount substituted for
cost, less its residual value.
Residual value – is the amount of the
entity would currently obtain from
disposal of asset, after deducting the
estimated costs of disposal.
 On or before the 15th of the month
– depreciation is computed at the
beginning of that month.
 After the 15th of the month –
depreciation is computed at the
beginning of the following month.
 The straight line method of
depreciation shall be used unless
another method is more
appropriate.
 Residual value shall be at least 5%
of cost
 Depreciation shall be recognized on
a monthly basis.
Impairment
 A PPE is impaired if its carrying
amount exceeds its recoverable
service amount or recoverable
amount.
Computation of Value in Use (VIU)
 Value in use of a cash generating
asset – the present value of the
 estimated future cash flows
expected to be deprived from the
continuing use of an asset and from
its disposal at the end of its useful
life.
 Value in use of non-cash generating
asset – the present value of the
asset’s remaining service potential.
Computation of VIU:
a. Depreciation Replacement cost
approach:
 VIU (depreciation
replacement cost) =
Replacement cost less
Accumulated depreciation
based on the replacement
cost
b. Restoration cost approach:
 VIU = Dep. Replacement
cost minus Estimated
restoration cost
c. Service units approach:
VIU = Dep. Replacement cost x
(100% less % of reduction in service
potential)
Reversal of Impairment
- The principles used in recognizing
reversals of impairment loss on
items of PPE are the same as those
used for investment property.
Heritage assets
- Not depreciated but subject to
impairment.
Infrastructure assets
- Generally, no residual value
Reforestation projects
- Land improvement; not depreciated
but subject to impairment.
Idle, Fully Depreciated, & Unserviceable
PPE
Idle PPE
- Not derecognized; continued to be
depreciated
Fully depreciated
- Not derecognized
Unserviceable property
- Derecognized
Lost PPE
- Derecognized (if total loss)
Borrowing Costs
 are interest and other
expenses incurred by an
entity in connection with the
borrowing of funds. (PPSAS
5.5)
Recognition of Borrowing costs
 Benchmark Treatment –
expensed in the period
incurred.
 Allowed Alternative
Treatment – capitalized if
the borrowing costs are
directly attributable to the
acquisition of a qualifying
asset.
Qualifying asset – is an asset that
necessarily takes a substantial period of
time to get ready for its intended use or
sale. (PPSAS 5.5)
Applications:
The borrowing costs on loans borrowed by:
 National Government (recorded by
BTr) are expensed (i.e., Benchmark
Treatment).
 Government agencies are
capitalized, if they relate to the
acquisition of a qualifying asset
(i.e., Allowed Alternative
Treatment).
Specific Borrowings – the borrowing cost
eligible for capitalization are computed
using the following formula:
 Capitalizable BC = Actual borrowing
– Investment income
General Borrowings
 Capital BC = Ave. Expenditure x
Capitalization Rate
The capitalization rate is computed as
follows:
Capitalization rate = Total Interest
expenses on general borrowings / Total
general borrowings
CHAPTER 11
INTANGIBLE ASSETS
Intangible assets – are identifiable non-
monetary assets w/o physical substance.
Essential elements of an intangible asset
 Identifiability: separable or arises
from binding arrangements
Separable – ex. Capable of being
separated and divided from the entity and
sold, transferred, licensed, rented, or
exchanged, either individually or together
with a related contract.
arises from binding arrangements –
including contractual or other legal rights,
regardless of whether those rights are
transferable or separable.
Control - the entity has the ability to
benefit from the intangible asset or
prevent others from benefitting from it.
Future economic benefits or service
potential – the future economic benefits or
service potential flowing from an
intangible assets.
Examples of Intangible assets:
 Computer software
 Patents
 Copyrights
 Franchise
 Motion picture films
 Trademarks or brand names
 Licenses
 Acquired import quotas
 Customer lists
Recognition - is recognized if it meets the
definition of an intangible asset and the
recognition criteria for assets.
Initial Measurement
An intangible asset is initially measured at
cost.
Mode of Acquisition Measurement of
 Initial Cost Expenditures are capitalized only if all of
Purchase Purchase price plus the following are met:
Direct costs
(including non- a. Ability to use or sell
refundable taxes b. Intention to complete
but excluding trade
discounts and c. Technical feasibility
rebates).
d. Availability of adequate resources
If payment is
deferred, the cost is e. probable future Economic benefits
the cash price
equivalent. f. Measured reliably
Non-exchange fair value at the Subsequent Measurement:
transaction acquisition date
Exchange With commercial An intangible asset is subsequently
substance: measured at cost less any accumulated
a. FV of asset amortization and any accumulated
given up (+ impairment losses.
cash paid/-
cash Amortization
received).
Is the systematic allocation of the
b. FV of asset
depreciation amount of an intangible asset
received.
over its useful life.
c. CA of asset
given up (+ Indefinite life – not amortized but tested
cash paid/- for impairment at least annually.
cash
received). Finite life – an intangible assets is
Without commercial considered to have a finite life if it has a
substance: CA of limited period of benefit at least annually.
asset given up (plus
cash paid/minus  Amortized using the straight line
cash received). method over a period of 2 to 10
Entity Combination fair value at the years.
acquisition date  Residual value – is assumed to be
zero except when the entity has the
ability to sell asset at the end of its
Internal Generation:
useful life.
Research cost – recognized as expense
Impairment
Development cost - capitalized only if all of
 An entity is required to test for
the conditions listed n the GMA for NGAs
impairment an intangible asset
are met.
with indefinite useful life or an
 intangible asset not yet available Computer software (1M/5yrs)
for use at least annually or
IMPAIRMENT
whenever there is an indication of
impairment. On Dec. 31, 20x1, Entity A assesses an
 An entity shall test for impairment indication of impairment and estimates a
an intangible asset with definite recoverable amount of 700,000
useful life only when an indication
Impairment Loss Intangible Assets 100K
of impairment exists.
 Indications of impairment shall be Accumulated Impairment Losses –
assessed at each reporting date. 100K
Comp.software (RA700k - CA 800k)
Derecognition
DERECOGNITION
 An intangible asset is derecognized
On Jan. 1, 20x1, Entity A sells the computer
when it is disposed or when no
software for 720k
future economic benefits or service
potential is expected from the Cash-collecting officers 720K
asset.
Accumulated Amortization – CS 200K
 Derecognition the difference
between the carrying amount and Accumulated Impairment Losses – CS 100K
the net disposal proceeds, if any, is
Computer software
recognized as gain or loss in surplus
1M
or deficit.
Gain on sale of intangible Asset
JOURNAL ENTRIES: 20K

INITIAL AND SUBSEQUENT MEASUREMENT

On January 1, 20x1, entity A acquires a CHAPTER 12 – LIABLITIES
computer software for 1M. The software’s Liability – is a present obligation arising
useful life is 5yrs. from past event.
Computer software 1M Present obligation - means that as of the
Cash modified Disbursement reporting date, an obligating event must
1M have already occurred.

System (MDS), Regular obligating event is an event that creates

either:

 Legal Obligation – is an obligation

Amortization Intangible Assets 200k that results from a contract,
Accumulated Amortization 200k
 legislation, or other operation of
law
 Constructive Obligation - create a
valid expectation from others that
the entity will accept and discharge
certain responsibilities.
Liability Recognition Criteria
A liability is recognized only when all of
the following are met:
 The item meets the definition of a
liability
 It is probable that an outflow of
resources embodying economic
benefits will be required to settle
the obligation; and
 The obligation has a cost or value
(e.g., fair value) that can be
measured reliably.
Financial Liabilities
 Are initially measured at fair value
minus transaction cost
 Subsequently measured
amortized cost
 Except for financial liabilities at fair
value through surplus or deficit w/c
are initially and subsequently
measured at fair value.
Initial Recognition
A financial liability is recognized when an
entity becomes a party to the contractual
provisions of the instrument. (PPSAS 29.16)
Initial Measurement
 Financial liabilities are initially
measured at fair value minus
transaction costs, except for
financial liabilities at fair value
through surplus or deficit (e.g.,
designated financial liabilities and
derivative liabilities) whose
transaction costs are expensed.
(PPSAS 29.45)
 Transaction costs are incremental
costs that are directly attributable
to the acquisition, issue, or disposal
of a financial instrument.
Subsequent Measurement
 Financial liabilities are
subsequently measured at
amortized cost, except for financial
liabilities at fair value through
surplus or deficit which are
subsequently measured at fair
value.
Derecognition of Financial Liability
 A financial liability is derecognized
when it is extinguished, such as
at when it is discharged, waived,
cancelled, or it expires.
Provisions, Contingent liabilities and
Contingent assets
Provision – is a liability of uncertain
timing or amount.
Contingent liability
 Is one that meets some but not all
of the liability recognition criteria.
 Is not recognized but disclosed only,
if its occurrence or settlement is
reasonably possible; otherwise it is
ignored.
Contingent asset
  Is not recognized but disclosed only,  The manner in w/c those
if its occurrence or realization is activities carried out (PPSAS
probable; otherwise it is ignored. 19.18)
Measurement

 A provision is measured at the

entity’s best estimate of the
 A legal obligation to restructure
amount needed to settle the
exist if; At the reporting date, the
liability at the reporting date.
entity has entered into a binding
 If the effect of time value of money
agreement to sell or transfer an
is material, the provision is
operation.
measured at present value.
 A constructive obligation to
Reimbursement restructure exists if; at the
reporting date, both the ff. are
 a reimbursement asset is
present:
recognized and presented in the
 Detailed formal plan for the
statement of financial position
restructuring;
separately from the provision.
 The plan is announced to those
 The amount recognized for the
affected by it.
reimbursement shall not exceed the
amount of the provision.
 A restructuring provision includes
Application of the recognition and only the direct costs resulting from
measurement rules the restructuring.
 It does not include costs associated
a. Future Operating Net Deficits – No
with the ongoing activities of the
provision shall be recognized for
entity, retraining; or
expected net deficits from future
 Relocating continuing staff,
operating activities.
marketing, or investment in new
b. Onerous contracts - A contract is
systems and distribution networks.
deemed onerous (ex. Burdensome),
the obligation under an onerous
contract is recognized as a
provision.
c. Restructuring – is a program that is
planned and controlled by
management, and materially
changes either:
 The scope of entity’s
activities; or