PROPERTY, PLANT AND EQUIPMENT

INITIAL MEASUREMENT at Cost.

Cost of acquisition Present value of

*Cost of acquisition depends on the mode of acquisition; Incidental cost the initial estimate
in bringing the of dismantling,
asset to its removal or site
A. Cash purchase=  Cash price + import duties + non present restoration cost (to
refundable taxes (net of discounts and rebates) location and the extent that the
condition company has
necessary for incurred an
B. On account = at Cash price equivalent (net of discounts obligation over
use.
whether taken or not) these future costs,
credit goes to a
C. Installment/ Deferred payment basis - at cash price provision account-
equivalent or at present value of deferred payment asset retirement
obligation)

D. Share/ bond issue - at fair value of asset received, if not

determinable, at fair value of shares issued.

E. Exchange with commercial substance - at fair value of

asset received (which is equal to the fair value) of asset
given up + cash paid or - received

F. Exchange without commercial substance-  at book value

of asset given up +cash paid or -cash received

G. Donation where the donor is a related party- at fair value

(credit to APIC/ Donated capital)

H. Donation where the donor is a non-related party (e.g.

Government Grant) - at fair value (credit to Income, if
unconditional grant or deferred income, if conditional grant)

SUBSEQUENT
MEASUREMENT

Cost Method: At cost, net of

Appraisal/ Revaluation method: at fair
accumulated depreciation, and
market value
impaired loss
Depreciation methods
1. Uniform/ Fixed Charge Method

 Straight line= Depreciation cost/useful life

2. Variable Charge Methods

 Working hours = Depreciable cost/ life in terms of working hours * actual hours used
 Output method = depreciable cost / life in terms of total output * actual output

3. Diminishing balance Methods

 SYD= Depreciable cost * SYD rate
 Declining balance = cost * Db rate (consider salvage value only on the last year of depr.)

4. Others (useful for depreciating small tools and similar items )

 Inventory method = beg tools + purchases - end tools - proceeds from disposal of tools
 Replacement method = tools disposed * cost of latest purchases - proceeds from disposal
 Retirement method= tools disposed *cost of earlier purchases- proceeds from disposal

** For the computation of depreciation, where there are several transactions happening during the
period
List down all the items which became outstanding at one time or another during the period
Disposed (Depreciate from Jan 1 to date of disposal)
Newly acquired (Depreciate from date of acquisition to Dec 31)
Outstanding during the entire year

IMPAIRMENT LOSS
An asset is impaired if only if the Carrying value is > that the Net recoverable value
*Net recoverable value is the higher between fair value less cost to sell or the value in use
*Fair value less cost to sell = Estimated Selling price - Estimates cost to sell
*Value in use= PV of the future net cash flows from the continued use of the asset and
from its ultimate disposal using a pre-tax discount rate.

REVALUATION/ APPRAISAL
A. If asset have an active market, thus FM is readily determinable:
Fair value of Asset
Less: Carrying value
 Revaluation Surplus

B. If asset have no active market, thus appraisal is determined through the current replacement
cost:

Replacement Cost xx - xx Original Cost

Replacement AD (xx)-(xx) Accumulated depreciation on Cost
Fair Value/ Sound Value xx - xx Carrying Value

Fair value/ Sound value = Replacement Cost* Condition Percent

Condition Percent = (remaining life/ total life, original estimate) or (carrying
value/ depreciable cost, original estimate) 
Transfer of Revaluation Surplus: (credit to retained earnings)
a. Piecemeal: RS/ remaining life o depreciation asset
b. Lump sum: Realize upon disposal or retirement

Impairment with subsequent revaluation

a. Recognized impairment loss on the year of incurrence.
b. Continue Depreciation based on the impaired value.
c. Upon revaluation, recognize the gain on recovery = CV had there been no impairment - CV
based on impaired value
d. Recognize as revaluation surplus (under revaluation method) = Fair Value - CV had there been
no impairment
Revaluation with subsequent impairment 
a. Recognize the revaluation surplus in the stockholders’ equity
b. Continue deprecation based on the revalued amount (realize revaluation surplus on a piecemeal
basis if applicable)
c. Upon impairment, write off the remaining rev. surplus =
CV based on the revalued amount - CV had there been no revaluation
d. Recognize as impairment loss in the income statement =
CV had there been no revaluation - Impaired value/Fair value
Compensation for Impairment loss of PPE

a. Compensation for impairment loss of PPE shall be recognized as an asset in the BS and income in
the IS, when and only when it becomes virtually certain (when it becomes receivable)
b. The impairment loss shall be recognized separately at gross amount in the income statement
c. The impairment loss and the compensation shall be separately recognized and are not to be
offset

PFRS for SMESs, SEC 17. PPE

 (along with SEC 25, Borrowing cost), requires all borrowing cost to be expensed as incurred
  requires to measure PPE at the balance sheet date at cost, less Accumulated Depreciation,
less impairment loss
*UPDATE: Effective for annual periods beginning on or after January 1, 2017 with earlier application
permitted: SMEs have an option to use revaluation model for property, plant and equipment. 

Problems

#1 (Ocampo, 2010)

Aliaga Corporation was incorporated on January 2, 2010. The following items relate to the Aliaga’s
property and equipment transactions:

Cost of land, which included an old apartment building appraised at 300,000 3,000,000
Apartment building mortgage assumed, including
related interest due at the of purchase 80,000
Delinquent property taxes assumed by Aliaga 30,000
Payments to tenants to vacate the apartment building 20,000
Cost of razing the apartment building 40,000
Proceeds from sale of salvaged materials 10,000
Architects fee for new building 60,000
Building permit for new construction 40,000
Fee for title search 25,000
Survey before construction of new building 20,000
Excavation before construction of new building 100,000
Payment to building contractor 10,000,000
Assessment by city for drainage project 15,000
Cost of grading and leveling 50,000
Temporary quarters for construction crew 80,000
Temporary building to house tools and materials 50,000
Cost of changes during construction to make new building more energy efficient 90,000
Interest cost on specific borrowing incurred during construction 360,000
Payment of medical bills of employees accidentally injured while inspecting
Building construction 18,000
Cost of paying driveway and parking lot 60,000
Cost of installing lights in parking lot 12,000
Premium for insurance on building during construction 30,000
Cost of open house party to celebrate opening of new building 50,000
Cost of windows broken by vandals distracted by the celebration 12,000

Based on the above and the result of your audit, determine the following
1. Cost of land
Answer:
2. Cost of building
Answer:
 3. Cost of land improvements
Answer:
4. Amount that should be expensed when incurred
Answer:
5. Total Depreciable property and equipment
Answer:

Solution: