PROPERTY PLANT EQUIPMENT

I. INTRODUCTION AND SCOPE

 PAS 16 – governs PPE
 CLASSES OF PPE:
1. Land
2. Land and Building
3. Machinery
4. Ships
5. Aircraft
6. Motor Vehicle
7. Furniture and Fixtures
8. Office Equipment
9. Bearer Plants
 DOES NOT APPLY TO:
1. Classified as held for sale (PFRS 5)
2. Biological Assets OTHER THAN Bearer plants (PAS 41)
3. Exploration and Evaluation Assets (PFRS 6)
4. Mineral rights and reserves (e.g. oil, gas)
5. Land held for undetermined use or for capital appreciation (PAS 40)
6. Land by real estate developer held for sale in normal course of business (PAS 2)
 DEFINITION OF PPE:
Tangible Assets – items of PPE have physical substance
Used In Normal Operations – items of PPE are used in the production of supply of
goods or services, for rental, or for administrative purpose
Long-term in nature – items of PPE are expected to be used from more than a year
 RECOGNITION
o The cost of an item of PPE shall be recognized as an asset only if:
a) It is probable that the future economic benefits associated with the item will
flow to the entity
b) The cost of the item can be measure reliably
 DERECOGNITION
o The carrying amount of an item of PPE shall be derecognized:
a) On disposal (e.g. when you sell them (asset/PPE))
b) When no future economic benefits are expected from its use or disposal (It
doesn’t mean that when asset is fully depreciated in the book, it has already
no future economic benefits sometimes there are times that even though the
asset is fully depreciated, the company is still using them meaning this case
has no derecognition that take place)
II. MEASUREMENT
 INITIAL
 At cost
 SUBSEQUENT
 Using cost or revaluation model
 INITIAL COST
1) Purchase price
a) Invoice price
b) Import duties (from abroad)
c) Non-refundable purchase taxes (VAT is refundable)
d) Less trade discounts and rebates
2) Directly attributable costs
 cost necessary to bring the asset to the location and condition intended by management
a) Freight
b) Insurance during shipping
c) Cost of testing
3) Estimated cost of dismantling
 cost of dismantling and removing the item and restring the site on which it is located
 a future cost which is computed by getting the present value
 corresponding liability is credited with this cost and the estimated dismantling cost will
be capitalized to the initial cost of PPE
 ACQUISITION THROUGH CASH
 Cash PLUS Directly Attributable Cost
 LOAN OR INSTALLMENT OR ISSUANCE OF BONDS
 Present Value of Obligation PLUS Directly Attributable Cost
 In case Present Value is not given, “Cash Price Equivalent” will be the cost of PPE
 ON ACCOUNT (WITH DISCOUNT)
 Deduct cash discount whether TAKEN or NOT
 In PPE (debit) balance, it does not matter if the cash discount will be taken or not.
However, it can affect the liability (credit) account
 VAT is not included or capitalized since this is a refundable tax
III. SPECIAL CASES OF ACQUISITION (INITIAL MEASUREMENT)
DEFERRED SETTLEMENT
 Cash price equivalent (or present value of deferred payments)
 Any difference from total amount paid recognized as interest expense
 But if the deferred settlement is short term, invoice price less discount, whether taken or
not (so always deduct the short term discount)
ISSUANCE OF BONDS
 Hierarchy:
a) Fair value (or present value) of the bonds issued = FV and PV here are synonymous
(because they are amortized using the effective rate)
b) Fair value of the asset (property) received
c) Face value of the bonds issued
ISSUANCE OF SHARES
 Hierarchy:
a) Fair value of asset received
b) Fair value of shares issued
c) Par value or stated value of shares issued
 EXCHANGE OF ASSETS
 If with commercial substance: (took place when the value of asset given and asset received
vary from each other) – when the transaction is material (Has an effect or an impact on the
operation of the company). Prioritize the Fair Value
a) Fair value of asset given up plus additional cash paid minus cash received
b) Fair value of asset received plus cash paid minus cash received
c) Carrying Amount or Book value of asset given up plus cash paid – cash received
 Lacks commercial substance: Fair Value does not matter
a) Carrying Amount or Book value of asset given up plus cash paid – cash received
 EXCHANGE GAIN OR LOSS
 difference between new asset and asset given up
 when the value of the new asset is higher than the asset given, there is a gain if
baliktad, there is a loss
Initial measurement of the new asset XXX
Carrying Amount of asset given up (XXX)
Gain or Loss on Exchange XXX
DONATED ASSET
 If from a shareholder, Treated as Donated Capital, measured at fair value of the asset
(TREAT AS ADDITIONL PAID IN CAPITAL OR SHARE PREMIUM)
PPE XX
Donated Capital/APIC XX
NOTE: Registration Fees of donation or Legal Fees from donation are deducted from APIC
(FOR THE DONATION TO BE ENFORCEABLE)
 If from non-shareholder, Treated as Income
PPE XX
Income from Donation XX
NOTE: If donation has a condition, treated as liability until conditions are met. And when
conditions are met, this will be the time that the donated capital and income from donation
will be recognized. Registration Fees of donation or Legal fees from donation are
CAPITALIZED
SELF-CONSTRUCTED ASSET
 CAPITALIZE THE FOLLOWING:
a) Direct costs of materials
b) Direct costs of labor
c) Indirect costs (ex. Overheads, indirect materials, indirect labor)
d) Normal wastes and capitalizable borrowing costs shall be included as part of the cost
of the asset. However, abnormal wastes (expense immediately) and any initial
operating losses or profits that arise during construction shall be excluded from the
capitalizable cost of the item of PPE.
LUMP-SUM PURCHASE (BUNDLE PURCHASES)
 The acquisition cost of a group of items of PPE acquired on a lump-sum (basket price) is
allocated to the individual assets based on their relative fair values at the date of purchase
(PRORATING THE ASSET SA BUNDLE PURCHASE)
IV. LAND AND BUILDING
COST OF LAND
 The following cost shall be included as part of the “Land” account:
a) Purchase price
b) Legal fees and other expenditure to acquire clean title
c) Broker’s commission
d) Escrow fees (it’s like bond or deposits)
e) Fees for registration and title transfer
f) Cost of relocation or reconstruction of property belongings to others to acquire
possession
g) Mortgages, encumbrances and interest on such mortgages assumed by the buyer
h) Unpaid property taxes assumed up to date of acquisition. Taxes accruing after the
acquisition is expensed
i) Cost of surveying
j) Cost of demolishing unwanted old structures, less proceeds from sale of salvage
materials
 But if you build a new building there, the cost of the demolition will be
capitalized to the building
k) Payment to tenants to induce them to vacate land (or costs of relocating squatters)
l) Cost of non-depreciable, permanent improvements such as grading, levelling,
subdividing and landfill.
 However, if it is depreciable such as driveway, parking area, gardening,
landscaping are under “Land Improvements” which is another account.
m) Cost of option to buy the acquired land (Option Price). However, if the land is not
acquired, the cost of option is expensed.
n) Special assessments (the land is included for improvement such that your land has
sewerage system or traffic lights then you are given special assessment which is a kind
of tax)
 SIR ROMMEL PPT:
- Prorating is not appropriate (DON’T DO PRORATING) – it can be directly attribute to
the land, building and land improvement
- Prorating can be done when it is a bundle purchase
 Unpaid Real Property Taxes (after acquisition, ikaw sumalo sa tax) Capitalized
 Option price for land not acquired  Expensed : However, if it is actually
acquired, it is Capitalized
 Special assessments paid  Capitalized
 Demolition Cost for clearing the land (without intention of constructing a
building)  Capitalized : If the company has the intention of construction,
demolition cost will be capitalized in the building
 Proceeds from Demolition/Salvage Value  Income (Based on the new
amendment)  Before, treated as a deduction in the cost of PPE
 Cash paid to squatters(informal settlers)  para siyang kasama sa demolition
cost of land; more on cost of land
 Cash paid to Tenants  part of cost of building (intention is building will be
demolished or renovated
 COST OF BUILDING
 The following costs shall be included as part of the “Building” account.
 If purchased:
a) Purchase price
b) Legal fees
c) Unpaid taxes up to date of acquisition. Acquisition accruing after the acquisition is
expensed.
d) Interest, mortgages, liens, and encumbrances on the building assumed by the
buyer.
e) Payments to tenants to induce vacation from the existing building
f) Any renovation or remodeling costs incurred to put the building in its necessary
condition (ex. Lighting installations, partitions and major repairs)
 If self-constructed
a) Materials, labor and overhead incurred
b) Building permit and licenses
c) Professional fees such as architect fees, safety inspector fees and superintended
fees
d) Cost of excavation to layout foundation
e) Cost of temporary building used as construction offices and storage for tools and
materials to be used
f) Interest on construction loans and insurances (PAS 23: Borrowing Cost)
g) Expenditures for service equipment and fixtures made a permanent part of the
building (ex. Partitions, windows, lighting installations)
h) Temporary safety fence around the site and the costs of removing that temporary
safety fence
i) Insurance taken during construction
j) Ventilation, lighting, elevator systems installed during construction
COST OF LAND IMPROVEMENTS
a) New or permanent fence built
b) Driveways, parking bays, and safety lighting
c) Cost of trees, shrubs, and other landscaping
 SIR ROMEL’S PPT

V. MACHINERY
COST OF MACHINE
 The following costs are included under the “Machinery and equipment” account:
a) Purchase price, net of VAT
b) Freight, handling, storage and other cost related to acquisition
c) Insurance while in transit
d) Installation cost, site preparation and assembling costs
e) Cost of testing and trial runs, and other costs necessary in preparing the item for use
f) Initial estimate of cost of dismantling and removing the machinery and restoring the
site on which it is located, and for which the entity has present obligation to do so
either under the contract or legal requirements
 g) Fees paid to consultations for advice on the acquisition of the item
h) Costs of safety rail and platform surrounding the item
i) Costs of water device to keep the machinery or equipment cool
j) Irrevocable or irrecoverable purchase tax
VI. DEPRECIATION
SUBSEQUENT MEASUREMENT
A. Cost Model
 Original cost less any accumulated depreciation and any impairment losses
B. Revaluation Model
 Fair value at the date of revaluation less any subsequent accumulated depreciation and
any subsequent impairment losses
GENERAL CONCEPTS
 Depreciation is the periodic adjustment of the carrying amount of fixed asset due to the
passage of time and/or their continuous use
 Depreciation expense is recognized in PL, except when it is capitalizable in the carrying
amount of another asset
 Depreciation of an asset begins when it is available for use, meaning when it is already in
the condition and location intended by the management even though you are not using it
 Depreciation of an asset ceases at the earlier of the date that the asset is classified as held
for sale and the date that the asset is derecognized
DEORECIABLE AMOUNT AND PERIOD
 The depreciable amount of an asset shall be allocated on a systematic basis over its useful
life
 Depreciable cost is initial cost less residual value
 The residual value and the useful life of an asset shall be reviewed at least at each financial
year-end and, if expectations differ from previous estimates, the changes shall be
accounted for as a change in an accounting estimate
DEPRECIATION METHOD
 The depreciation method used shall reflect the pattern in which the asset’s future
economic benefits are expected to be consumed by the entity
 There are various methods and it shall be reviewed at least at each financial year-end and,
if there has been a significant change in the expected pattern of consumption, the method
shall be changed to reflect the changed pattern. Such a change shall be accounted for as
change in an accounting estimate
1. STRAIGHT-LINE METHOD
o Most common depreciation method where annual depreciation is equal throughout
the useful life of the asset
o Depreciation is function of time instead of usage
o Formula: Depreciable cost divided by useful life
2. USAGE/OUTPUT METHOD
o Usage pertains to production or units of output
o Depreciation is a function of usage rather than time
o Formula: Depreciable cost multiply to (units of production this period/total
production throughout the life of asset)
 3. SUM-OF-THE-YAERS-DIGIT (SYD) METHOD
o Higher depreciation charges in the first years of the asset’s useful life (habang
tumatagal mas kumukonti ang depreciation; use this method when the asset is
expected to be used more in the earlier life of the asset)
o Asset is used more during its earlier life
o Formula: Depreciable cost multiply to (Remaining useful life/Sum of all the years)
4) DECLINING BALANCE METHOD
o Higher depreciation charges in the first years of the asset’s useful life
o Asset is used more during its earlier life
o Formula: Carrying amount, beginning multiply to Depreciation rate
o Depreciation rate = Declining rate divided by Useful life
 Declining rate: Double declining (200%)  2/Life & Declining balance (150%)
 1.5 /Life
CHANGE IN ESTIMATES
 When purchasing a plant asset, companies carefully determine depreciation rates based on
past experience with similar assets and other pertinent information
 The provisions for depreciation are only estimates, however
 Companies may need to revise them during the life of the asset
 Accounted for as change in accounting estimates or prospectively (changes will be on the
current and future depreciation)
PARTIAL DEPRECIATION
 Companies seldom purchase plant assets on the first day of as fiscal period or dispose of
them on the last day of the fiscal period (it can occur in the middle of the year)
 In computing depreciation expense for partial periods, companies must determine the
depreciation expense for the full year and then prorate this depreciation expense between
the two periods involved.
 This process should continue throughout the useful life of the asset

VII. REVALUATION
SUBSEQUENT MEASUREMENT
C. Cost Model
 Original cost less any accumulated depreciation and any impairment losses
D. Revaluation Model
 Fair value at the date of revaluation less any subsequent accumulated depreciation and
any subsequent impairment losses
REVALUATION MODEL
 Fair value changes are accounted for in subsequently valuing items of PPE
 If this policy is elected for a class of PPE, assets under the class whose fair values can be
measured reliably shall be carried at a revalued amount less any depreciation and
impairment losses
 The frequency of revaluation may be:
a) Annual revaluation for PPE items that experience significant and volatile changes in
fair value
b) Every three or five years for PPE with only insignificant changes in fir value
  If an item is revalued, the entire class of assets to which that asset belongs should be
revalued
 When an item of PPE is revalued, any accumulated depreciation at the date of the
revaluation is treated in one of the following ways:
a) Restated proportionately with the change in the gross carrying amount of the asset
so that the carrying amount of the asset after revaluation equals its revalued amount.
This method is often used when an asset is revalued by means of applying an index to
its depreciated replacement cost. (used when replacement cost is given; most
complicated method)

HISTORICAL COST - REPLACEMENT COST = INCREASE IN COST

LESS: Accumulated - LESS: Assumed = LESS: Increase in
depreciation accumulated accumulated
depreciation depreciation
EQUALS: carrying EQUALS: Sound EQUALS: Revaluation
amount value or Depreciated surplus
Replacement cost

b) Eliminate the entire accumulated depreciation against the gross carrying amount of
the asset and the net amount restated to the revalued amount of the asset. (often
used for buildings)
REVALUATION SURPLUS
 This is an OCI ACCOUNT to be presented under SHE section
 The standard requires revaluation surplus to be presented net of tax effects
 For depreciable assets, the revaluation surplus, net of tax, is periodically transferred to
retained earnings systematically following the same pattern that the asset is depreciated
 For non-depreciable assets, revaluation surplus is transferred to retained earnings only
when asset is sold
REVERSAL OF REVALUATION
 If a previous revaluation increase is reversed due to changes in the fair value, the decrease
is first closed to any existing revaluation surplus in the books. Any excess is debited to
impairment loss and should be recognized in profit or loss. (separate the two because
revaluation surplus is an OCI item which does not affect the profit/loss while impairment
loss is a profit/loss item)
 Likewise, if a previous impairment loss is reversed, the increase is first credited to gain on
reversal of impairment as part of profit/loss to the extent of the prior impairment loss. Any
excess is credited to revaluation surplus (OCI)
VIII. IMPAIRMENT
 Governed by PAS 36
SUBSEQUENT MEASUREMENT
A. Cost Model
 Original cost less any accumulated depreciation and any impairment losses
B. Revaluation Model
  Fair value at the date of revaluation less any subsequent accumulated depreciation and
any subsequent impairment losses
INDICATORS OF IMPAIRMENT
 An asset is impaired when its carrying amount exceeds its recoverable amount
 An entity shall assess at the end of each reporting period whether there is any indication
that an asset may be impaired. If any such indication exists, the entity shall estimate the
recoverable amount of the asset
 TYPES OF INDICATORS:
a) EXTERNAL
o significant decline in market value
o unfavorable changes in technological, market, economic or legal environment
o decrease in interest rates
o low market capitalization
b) INTERNAL
o Evidence of obsolescence or physical damage
o Discontinuance, disposal or restructuring plans
o Declining asset performance
 If this indicators exist then you need to estimate the recoverable amount of the
asset and compare it with the carrying amount if it is already lower, then if it is
lower then there is an impairment
IMPAIRMENT LOSS
 According to PAS 36, this an amount by which the carrying amount of an asset or cash-
generating unit exceeds its recoverable amount
RECOVERABLE AMOUNT
 Higher amount between an asset or CGU’s fair value less costs to sell and its value in use
 FAIR VALUE LESS COSTS TO SELL  External Information
o Amount obtainable from the sale of an asset or CGU in an arm’s length transaction
between knowledgeable, willing parties, less the costs of disposal
 VALUE IN USE  Internal Information
o Present value of estimated future cash flows expected to arise from the continuing
use of an asset and from its disposal at the end of its useful life
DETERMINING RECOVERABLE AMOUNT
 If fair value less costs to sell or value in use is more than carrying amount, it is not necessary
to calculate the other amount. The asset is not impaired
 If fair value less costs to sell cannot be determined, then recoverable amount is value in
use.
 For assets to be disposed of, recoverable amount is fair value less costs to sell
RECOGNITION OF IMPAIRMENT LOSS
A. INDIVIDUAL ASSET
 An impairment loss should be recognized whenever recoverable amount is below
carrying amount
 The impairment loss is an expense in the income statement unless it relates to a
revalued asset where the value changes are recognized directly in equity
 Adjust depreciation or amortization charges for future periods
 REVERSAL OF IMPAIRMENT
A. INDIVIDUAL ASSET
 The increased carrying amount of an asset other than goodwill attributable to a reversal
of an impairment loss shall not exceed the carrying amount that would have been
determined (net of amortization or depreciation) had no impairment loss been
recognized for the asset in prior years (WHBCA).
 Recognized immediately in PL, unless carried at revalued amount (gain on reversal of
impairment)
 Depreciation charges shall be adjusted in future periods
B. CASH-GENERATING UNIT
 A reversal of an impairment loss for a CGU shall be allocated to the assets of the unit,
except for goodwill, pro rata with the carrying amounts of those assets provided that the
increase should not exceed the amount lower between their recoverable amount (if
determinable) and their individual WHBCA.
 An impairment loss recognized for goodwill shall not be reversed in a subsequent period
RECOGNITION OF IMPAIRMENT LOSS
 CASH-GENERATING UNIT
o If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit
and the goodwill allocated to the unit is not impaired
o If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity
must recognize an impairment loss
o The impairment loss is allocated to reduce the carrying amount of the assets of the unit
(group of units) in the following order:
1. First, reduce the carrying amount of any goodwill allocated to the cash-
generating unit (group of units)
2. Second, reduce the carrying amounts of the other assets of the unit (group of
units) pro rata basis of their book values
o The carrying mount of an asset should not be reduced below the highest of:
1. Its fair value less costs to sell (if determinable)
2. Its value in use (if determinable)
3. Zero
IX. DEPLETION
EXPLORATION AND EVALUATION
 Governed by PFRS 6
o According to this standard this is the step in doing mining activities:
1) Prospecting – looking for site or area on where to conduct the mining activities
2) Exploration – titingnan mo kung meron bang mga natural resources dun sa site
or area na napili mo
3) Evaluation – is there any possibility or viability in the area chosen like pwede
bang magconduct ng mining activities
4) Development – if you already achieve economic feasibility and technical
feasibility and commercial viability, the development of the location will start
5) Production – this where you already extract or produce natural resources from
your mine
 6) Closure and rehabilitation - after you extract natural resources make sure
that there should be a closure and rehabilitation, meaning you need to revert
back the location to its original form
o PFRS 6 only governs the Exploration and Evaluation parts
 Exploration for and evaluation of mineral resources is the search for mineral resources,
including minerals, oil, natural gas and similar non-regenerative resources after the entity
has obtained legal rights to explore in a specific area, as well as the determination of the
technical feasibility and commercial viability of extracting the mineral resource.
 Exploration and evaluation expenditures are expenditures incurred by an entity in
connection with the exploration for and evaluation of mineral resources before the
technical feasibility and commercial viability of extracting mineral resource are
demonstrable.
ACCOUNTING FOR EXPLORATION AND EVALUTAION EXPENDITURES
 PFRS 6 permits entities to develop their own accounting policy for exploration and
evaluation assets which results in relevant and reliable information based entirely on
management’s judgment and without the need to consider the hierarchy of standards in
PAS 8.
 This means that the entity my recognize exploration and evaluation expenditures either as
expense or asset depending on the entity’s own accounting policy.
MEASUREMENT
 AS AN ASSET
 INITIAL
o AT COST:
a) Acquisition of rights to explore
b) Topographical, geological, geochemical and geophysical studies
c) Exploratory drilling
d) Trenching
e) Sampling
f) Activities in relation to evaluating technical feasibility and commercial viability of
extracting mineral resource (not exhaustive: basta in relation siya sa exploration
and evaluation then that is included in the initial cost)
 SUBSEQUENT
o Using the cost or evaluation model and must be applied consistently
o Classified as either tangible or intangible according to their nature

 METHODS OF ACCOUNTING FOR EXPLORATION COST

 Successful Effort Method  Only Capitalized if successful (Drilling Costs for Dry
Holes are Expensed)  LARGE COMPANIES
 Full Cost Method  Capitalized whether successful or not  SMALL COMPANIES

DEPLETION
 Depletion pertains to the periodic amortization of “wasting” assets such as mines. It is a
systematic allocation of the cost of the natural resource or wasting asset. (similar to
depreciation but it pertains to a “wasting” asset)
 The computation of depletion expense is an adaptation of the productive output method
(base on number of how much were being produced and extracted) of depreciation
 When structures and improvements are constructed in connection with the removal of
mineral resources and their usefulness is limited to the duration of the project, it is
reasonable to recognize the depreciation on such properties using the output method.
 However, when the structures and improvements provide benefits expected to terminate
prior to the exhaustion of the natural resource, the cost of such improvements should be
allocated on the basis of the expected number of units to be extracted or produced during
the life of the improvements or on a time basis, whichever is more suitable.
 Equipment used in the exploration and development activity should be depreciated using
the shorter of the life of the natural resource, or life of the equipment, provided the
equipment will be of no use after the natural resource has been totally exhausted.
 However, if the equipment is of a significant use after the natural activity is over, the
equipment should be depreciated using its own estimated life.
DEPLETION RATE
 Depletion only applies for natural resources
 A depletion rate is computed to identify the amount of depletion expense per unit of
output. The computation for depletion rate is as follows:
Total Cost of Wasting Asset (Acquisition Cost + Exploration
+ Development Cost less Residual Value
DEPLETION RATE per unit = Estimated Resource Deposit to be Extracted
* The depletion rate result will be multiplied to the extracted resource every year to get
the total depletion expense for the year
COST OF WASTING ASSET
 Acquisition Cost
o Purchase price of the property
 Exploration Cost
o Cost incurred to locate the minerals and other resources beneath the surface of the
property
 Development Cost
o Cost incurred for the actual production or extraction of the minerals and other
resources
*Development cost is naturally incurred multiple number of times during the period of
production and will usually cause the recomputation of the rate. (pabago-bago;
accounted as change in accounting estimate). Development cost related to other tangible
assets should not be capitalized as part of the wasting asset rather as other items of PPE
and depreciated separately, like equipment, machinery and processing facilities.
 Restoration Cost
o Future cost to be paid to restore the property back to its original condition but
recorded as a provision (liability that is estimated at its present value.
X. BORROWING COSTS
 Governed by PAS 23: part of initial measurement for PPE
o According to this standard, borrowing costs that are directly attributable to the
acquisition, construction or production of a qualifying asset form part of the cost of
that asset. Other borrowing costs are recognized as an expense.
BORROWING COSTS
 Interest and other costs incurred by an enterprise in connection with the borrowing of
funds.
o EXAMPLES:
a) Interest expense calculated using the effective interest method (most common)
b) Finance charges in respect of finance leases
c) Exchange differences arising from foreign currency borrowings to the extent that
they are regarded as an adjustment to interest costs

QUALIFYING ASSET
 An asset that takes a substantial period of time to get ready for its intended use
o EXAMPLES:
1) Inventories – wines, cars, power plants, condo units
2) Manufacturing plants
3) Power generation facilities
4) Intangible assets
5) Investment properties
6) Bearer plants
GENERAL RULE
 An entity shall capitalize borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset as part of the cost of that asset. (rarely to
be capitalized)
 An entity shall recognize other borrowing costs an expense in the period in which it incurs
them.
 The amount of borrowing costs that an entity capitalizes during a period shall not exceed
the amount of borrowing costs actually incurred during that period.
COMMENCEMENT OF CAPITALIZATION
 The capitalization of borrowing costs as part of the cost of a qualifying asset shall
commence when ALL of the following are met:
o Expenditures for the asset are being incurred
o Borrowing costs are being incurred
o Activities that are necessary to prepare the asset for its intended use or sale are in
progress
SUSPENSION OF CAPITALIZATION
 Capitalization of borrowing costs shall be suspended during extended periods of
suspension of active development of a qualifying asset.
 However, an entity does not normally suspend capitalizing borrowing costs during a
period when it carries out substantial technical and administrative work.
  An entity also does not suspend capitalizing borrowing costs when a temporary delay is a
necessary part of the process of getting an asset ready for its intended use or sale.
CESSATION OF CAPITALIZATION
 An entity shall cease capitalizing borrowing costs when substantially all the activities
necessary to prepare the qualifying asset for its intended use or sale are complete.
 When an entity completes the construction of a qualifying asset in parts and each part
is capable of being used while construction continues on other parts, the entity shall
cease capitalizing borrowing costs when it completes substantially all the activities
necessary to prepare that part for its intended use or sale
DETERMINING AMOUNT FOR CAPITALIZATION
 TYPES:
A. SPECIFIC BORROWINGS
o Borrowing that are specifically for the construction or development of the qualifying
asset
o Actual borrowing costs incurred on that borrowing during the period less any
investment income on the temporary investment of those borrowings.

B. GENERAL BORROWINGS
o All other liabilities that are not specifically for a certain project
o Amount capitalized is determined by applying a capitalization rate to the
expenditures on that asset. (capitalization rate X expenditures on that asset)
o The computation is as follows:
 Average expenditures (using peso months) xxx
Less: Specific borrowings (at face amount) xxx
Average expenditures financed by general borrowings xxx
Multiply: Capitalization rate %
Capitalization general borrowings costs xxx

Total annual interest from general borrowings

 Capitalization rate = Total face value of general borrowings

o The amount computed in the formula shall be compared with actual borrowing
costs incurred during the period. The amount to be capitalized is the lower
amount. (should not exceed the actual borrowing costs)

XI. GOVERNMENT GRANTS

 Governed by PAS 20
o This is used when the government gave a form of assistance or grant for you to be
able to purchase PPE items
o According to this standard, government grants are assistance by government in the
form of transfers of resources to an entity in return for past or future compliance
with certain conditions relating to the operating activities of the entity. They
exclude those forms of government assistance which cannot reasonably have a
 value placed upon them and transactions with government which cannot be
distinguished from the normal trading transactions of the entity.
RECOGNITION
 Government grants, including non-monetary grants at fair value, shall not be recognized
until there is reasonably assurance that:
o The entity will comply with the conditions attaching to them
o The grants will be received or receivable
CLASSFICATION
 GRANTS RELATED TO ASSETS
o Grants whose primarily condition is that an entity qualifying for them should
purchase, construct or otherwise acquire long-term assets
o ACCOUNTING:
 Recognize as income over the periods and in the proportions in which
depreciation on those assets is charged or over the periods which bear the
cost of meeting obligations (match the income to the depreciation)
o PRESENTATION:
 Either by setting up the grant as deferred income (liability account which is
gross method) or by deducting the grant in arriving at the carrying amount of
the asset (net method).
o REPAYMENT:
 When there is a change for repayment, account it as a change in accounting
estimate or prospectively
 Increase the carrying amount of the asset (when you recorded it initially as a
deduction in carrying amount) in or reduce the deferred income balance
(when you recorded it initially as a deferred income). The cumulative
additional depreciation that would have been recognized to date as an
expense in the absence of the grant should be recognized immediately as an
expense
 GRANTS RELATED TO INCOME
o Grants other than those related to assets
o ACCOUNTING:
 Should be deferred and recognized as income in the same period as the
relevant expense (match the income to the relevant expense)
o PRESENTATION:
 Either separate income or under a general heading such as “Other Income”
(gross method) or deducted in reporting the related expense (net method).
o REPAYMENT:
 Apply first against any unamortized deferred income, or where no deferred
income exists, recognize immediately as expense
INVESTMENT PROPERTY

 Governed by PAS 40
o According to this standard, investment property is a property (land, or a building, or part of a
building, or both) held (by the owner or by the lessee under a finance lease) to earn rentals or
for capital appreciation or both, rather than for:
a) Use in the production or supply of goods or services or for administrative purposes (PPE)
b) Sale in the ordinary course of business (Inventory)
CLASSIFICATION
 INCLUDED:
1) Land held for long-term capital appreciation (increasing the land’s value)
2) Land held for undecided future use
3) Building leased out under an operating lease
 In operating lease, the lessee is not to consider the asset into its financial statement
while in finance lease, although the lessor was the owner of the asset, the lessee will
recognize the asset in its financial statement
4) Vacant building held to be leased out under an operating lease
5) Property under construction as investment property
 NOT INCLUDED:
1) Property held for use in the production or supply of goods or services or for administrative
purposes (PAS 16)
2) Property held for sale in the ordinary course of business or in the process of construction of
development for such sale (PAS 2)
3) Property being constructed or developed on behalf of third parties (PFRS 15)
 Only revenues are recognized
4) Property leased to another entity under a finance lease (PFRS 16)
 In finance lease, the lessor will derecognize the asset because technically the lessor has
no control over the asset and the lessee will be the one who would recognize it.
 ISSUES:
PROPERTY HELD UNDER OPERATING LEASE
 A property interest that is held by a lessee under an operating lease may be classified and
accounted for as investment property provided that:
1) The rest of the definition of investment property is met – the purpose of the property
is for rental, capital appreciation, or land/building
2) The operating lease is accounted for as if it were a finance lease in accordance with PAS
17/PFRS 16
3) The lessee uses the fair value model set out in PAS 40 for the asset recognized
4) An entity may make the foregoing classification on a property-by-property basis
PARTIAL OWN USE
 A property that has a various purposes
 If the portions can be sold or leased out separately, they are accounted separately.
Therefore, the part that is rented out is investment property.
 If the portions cannot be sold or leased out separately, the property is investment property
only if the owner-occupied portion is insignificant. (Meaning if rental is more significant
then it is an investment property but if the owner-occupied is more significant then it is a
PPE)
ANCILLARY SERVICES
 Additional services that you give to the one who uses the property or who rents the
property
 If those services are a relatively insignificant component of the arrangement as a whole (for
instance, the building owner supplies security and maintenance services to the lessees) then
the enterprise may treat the property as investment property.
 When the services provided are more significant (such as in the case of an owner-managed
hotel), the property should be classified as owner-occupied.
INTERCOMPANY RENTALS
 Rentals on subsidiaries or parent company
 Not investment property in consolidated financial statements that include both the lessor
and the lessee, because the property is owner-occupied from the perspective of the group.
 However, such property could qualify as investment property in the separate financial
statements of the lessor, if the definition of investment property is otherwise met.
RECOGNITION
 Investment property shall be recognized as an asset when and only when:
1) It is probable that the future economic benefits that are associated with the
investment property will flow to the entity
2) The cost of the investment property can be measured reliably.
INITIAL MEASUREMENT
 AT COST
o Purchase price plus any directly attributable expenditure
o Directly attributable expenditure includes, for example, professional fees for legal
services, property transfer taxes and other transaction costs
 Property held under an operating lease shall be measured initially using the principles
contained in PAS 17/PFRS 16 – at the lower of the fair value and the present value of the
minimum lease payments
SUBSEQUENT MEASUREMENT
 COST MODEL
o Cost less accumulated depreciation and less accumulated impairment losses
 FAIR VALUE MODEL (not same with revaluation model)
o At fair value (no depreciation and impairment losses)
o Any gain or loss from changes in fair value shall be recognized in P/L
 OTHER CONSIDERATIONS
o If, on acquisition, it is not possible to determine fair value reliably on a continuing
basis, then the asset shall be measured using the cost model under PAS 16 until
disposal. Residual value shall be assumed to be zero.
o If an entity measures investment property at fair value, it shall continue to do so until
disposal, even if readily available market data become less frequent or less readily
available.
o If an entity elects to classify property held under an operating lease as investment
property, then it must select the fair value model for all of its investment property.
o Investment properties that meet the criteria to be classified as held for sale (or are
included in a disposal group that is classified as held for sale) shall be measured in
accordance with PFRS 5.
o Change is permitted only if this results in a more appropriate presentation. PAS 40 notes
that this is highly unlikely for a change from a fair value model to cost model.
TRANSFERS AND DISPOSAL
 Transfers to and from investment property shall be made when and only when there is a
change of use evidenced by:
1) Commencement of owner occupation (transfers from Investment Property to PPE)
2) Commencement of development with a view to sale (transfer from Investment
Property to Inventories)
3) End of owner occupation (transfer from PPE to Investment Property)
4) Commencement of an operating lease to another party (transfer from Inventories or
PPE to Investment Property)

From To Initial Measurement Subsequent

Measurement
Investment PPE COST Cost model or
Property (FV; if fair value Revaluation model
model or CA; if cost (PAS 16)
model at the date of
transfer)
Investment Inventories COST Lower of cost or
Property (FV; if fair value NRV (PAS 2)
model or CA; if cost
model at the date of
transfer)
PPE Investment FAIR VALUE Cost model or Fair
Property (Any difference from value model
CA shall be treated as (PAS 40)
 revaluation) – If the
fair value is higher
than the CA of the
PPE then that
difference will be
credited to
“Revaluation
Surplus”. However, if
the fair value is lower
than the CA there are
two cases:
1) If there is a
revaluation
surplus, you
will debit the
decrease to
R.S
2) If there is no
revaluation
surplus
existing, then
debit the
decrease in
loss
Inventories Investment FAIR VALUE Cost model or Fair
Property (Any difference value model
recognized in P/L) (PAS 40)

 An investment property shall be derecognized on disposal or at the time that no benefit is

expected from future use or disposal. Any gain or loss is determined as the difference
between the net disposal proceeds and the carrying amount and is recognized in P/L.
INTANGIBLE ASSETS

 Governed by PAS 38
o According to this standard, intangible assets are identifiable (separable, arises from legal or
other contractual rights), non-monetary assets without any physical substance (existing that
gives future economic benefits).
EXAMPLES:
1) Patents – original creation - Technology
2) Trademarks or brand names - Product
3) Copyrights – literary works - Artistic
4) Franchise – Contractual Rights or Legislative Rights
5) Leaseholds or lease rights
6) Computer software
7) Service rights
NOT INTANGIBLE ASSETS
1) Internally generated goodwill
o However, goodwill can be considered as an intangible assets when it is acquired in
connection with a business combination, other than this goodwill is not considered as an
I.A.
2) Internally generated brands
3) Mastheads and publishing titles
4) Customer lists
 EXCEPTION:
o All mentioned above can be considered as an I.A. when they are purchased.
 Examples, when you acquired another company through a business
combination and they have internally generated brands, mastheads,
customer lists and you purchased that company then you could considered
those assets as an I.A.
RECOGNITION
  The recognition of an item as an intangible asset requires an entity to demonstrate that the
item meets:
a) The definition of an intangible asset
b) The recognition criteria which are; probable future economic benefits and cost can be
measured reliably.
INITIAL MEASUREMENT
 AT COST
o Purchase price (including import duties and non-refundable purchase taxes, after
deducting trade discounts and rebates. If payment is deferred, the cost of the asset is
equal to the cash price equivalent.)
o Directly attributable costs of preparing the asset to its intended use (Cost of
Registration)
 Acquisition as part of Business Combination
o Fair value at the acquisition date
 Acquisition by way of Government Grant
o At fair value or nominal amount plus any expenditure that is directly attributable to
preparing the asset for its intended use
 Exchange of assets
o HIERARCHY: (W/ COMMERCIAL SUBSTANCE)
a) Fair value of asset given up
b) Fair value of the asset received
c) Carrying amount of the asset given up
o However, if the transaction lacks commercial substance, then the cost of the asset
acquired is equal to the carrying amount of the asset given up.
 Internally generated
A. Research phase  Research and Development Expense
o Always expense
 Example of activities in this phase:
1) Activities aimed at obtaining new knowledge
2) The search for, evaluation and final selection of, applications of
research findings or other knowledge
3) The search for alternatives for materials, devices, products, processes,
systems or services
4) The formulation, design, evaluation and final selection of possible
alternatives for new or improved materials, devices, products,
processes, systems or services.

B. Development phase
o Capitalize if MAPAIT
 All criteria must be met for it to be capitalized:
1) Measured reliably
2) Ability to use or sell
3) Probable future economic benefits
4) Adequate technical, financial resources
 5) Intention to complete the project
6) Technical feasibility
 Example of activities in this phase:
1) The design, construction and testing of pre-production or pre-use
prototypes and models
2) The design of tools, jigs, molds and dies involving new technology
3) The design, construction and operation of a pilot plant that is not of a
scale economically feasible for commercial production
4) The design, construction and testing of a chosen alternative for new
improved materials, devices, products, processes, systems or services
o If an entity cannot distinguish the research phase from the development phase of an
internal project to create an intangible asset, the entity treats the expenditure on that
project as if it were incurred in the research phase only.
o It is important to classify those internally generated expenditures in relation with
intangible assets into two phases which research phase and development phase
because the accounting for intangible asset depends on what phase it was generated
o “Organization Cost”  fall under either inventory or selling expense (commercial stage
or production – launching, etc.)
o Internally generated (within the company) brands, mastheads, publishing titles,
customer lists and items similar in substance shall not be recognized as intangible
assets.

SUBSEQUENT MEASUREMENT
 COST MODEL
o Cost less accumulated amortization less accumulated impairment losses
 REVALUATION MODEL
o Fair value less accumulated amortization less accumulated impairment losses
AMORTIZATION (depreciation in PPE)
A. Finite life
o A limited period of benefit to the entity (meaning there is an end in the useful life of an
asset) , thus,
o Amortize over useful life or legal life, whichever is shorter
o LEGAL LIFE: set by the intellectual property rights of the Philippines (LAW)
1) Patent – 20 years
2) Trademark – 10 years
3) Copyright – 50 years
4) Franchise – 20 years

B. Indefinite life
o No foreseeable limit to the period over which the asset is expected to generate net
cash inflows for the entity (there’s no end in useful life, thus, cannot be amortized)
o Not amortized but tested for impairment
o Value in Use is determine by using Perpetuity Formula:
Annul Cash Flow / Effective Interest Rate
  AMORTIZATION METHOD
o Should reflect the pattern of benefits
o If the pattern cannot be determined reliably, amortize by the straight-line
method
 RESIDUAL VALUE
o Presumed zero
o Unless a third party is committed to buy the asset at the end of useful life
 OTHER CONSIDERATIONS
o The amortization charge is recognized in P/L unless another PFRS requires that it
be included in the cost of another asset
o The amortization period and method should be reviewed at least annually
o Changes in the period or method shall be accounted for as changes in
accounting estimates or accounted for prospectively

 Acquisition date and registration dates are the same  the start of
amortization
IMPAIRMENT
 GENERAL RULE
o The provisions in recognizing impairment loss and reversals of impairment as set
forth in PAS 36 shall also apply to intangibles (same rules with PPE)
o There is impairment when the carrying amount of the asset exceeds its
recoverable amount (i.e. the higher between the fair value less cost to sell and
the asset’s value in use).
 INDEFINITE LIFE
o The recoverable amount of an intangible asset with an indefinite useful life is
usually equal to its value in use, since such assets have no known market.
o Because the term is indefinite, the value in use (present value) is computed
using the formula in computing perpetuity:
Expected annual cash flows Perpetuity
Value in Use = Discount rate Present value

RETIREMENTS AND DISPOSAL

 An intangible asset shall be derecognized:
o On disposal, or
o When no future economic benefits are expected from its use or disposal
 The gain or loss arising from the derecognition of an intangible asset shall be
determined as the difference between the net disposal proceeds, if any, and the
carrying amount of the asset
BIOLOGICAL ASSET

 Governed by PAS 41 (Agriculture)

I. SCOPE AND DEFINITION

SCOPE OF PAS 41
 Biological assets, except for bearer plants which are governed by PAS 16
 Agricultural produce at the point of harvest
 Government grants covered by paragraphs 34 and 35
DOES NOT APPLY TO PAS 41
 Land related to agricultural activity (PAS 16; PAS 40)
 Bearer plants related to agricultural activity (PAS 16)
 Government grants related to bearer plants (PAS 20)
 Intangible assets related to agricultural activity (PAS 38)
BIOLOGICAL ASSET
  A living animal or plant
BEARER PLANT
 A living plant that:
a) Is used in the production or supply of agricultural produce
b) Is expected to bear produce for more than one period
c) Has a remote likelihood of being sold as agricultural produce, except for
inccidental scrap sales
 Not bearer plants:
a. Plants cultivated to be harvested as agricultural produce
b. Plants cultivated to produce agricultural produce when there is more than a
remote likelihood that the entity will also harvest and sell the plant as agricultural
produce
c. Annual crops (palay, mais)
AGRICULTURAL PRODUCE
 The harvested produce of the entity’s biological assets
AGRICULTURAL ACTIVITY
 The management by an entity of the biological transformation and harvest of biological
assets for sale or for conversion into agricultural produce or into additional biological
assets
 Harvesting from unmanaged sources (such as ocean fishing and deforestation) is not an
agricultural activity

II. RECOGNITION AND MEASUREMENT

RECOGNITION CRITERIA
1) The entity controls the asset as a result of past events
2) It is probable that future economic benefits associated with the asset will flow to
the entity
3) The fair value or cost of the asset can be measured reliably

MEASUREMENT
A. BIOLOGICAL ASSETS
 INITIAL & SUBSEQUENT
o Fair value less costs to sell
 When fair value cannot be measured reliably
o Cost less any accumulated depreciation and any accumulated
impairment losses

B. AGRICULTURAL PRODUCE
 INITIAL
o Fair value less costs to sell at the point of harvest (PAS 41)
 SUBSEQUENT
o Net realizable value (PAS 2)
  Point-of-sale costs include brokers’ and dealers’ commissions, any levies by
regulatory authorities and commodity exchanges, and any transfer taxes and
duties. They exclude transport and other costs necessary to get assets to a
market.
C. GAINS AND LOSSES
1) Gain and loss on changes in fair value less cost to sell
2) Gain or loss on initial recognition of agricultural produce (meant to be sold)
3) Gain or loss on initial recognition of biological asset (meant to be B.A)
D. GAIN OR LOSS ON CHANGES IN FAIR VALUE LESS COST TO SELL
1) Due to price change
o (FVLCS, end @ Age, beg) – (FVLCS, beg @ Age, beg)
2) Due to physical change
o FVLCS, end @Age, end) –(FVLCS, end, @Age)