FoA-CH-III - PPE - 2021

Chapter 3: Accounting for Plant Assets, Natural Resources, and Intangible Assets
Chapter Three
Accounting for Plant Assets, Natural resources and Intangible Assets
Chapter Learning Objectives:
After studying this chapter, you should be able to:
 Describe the application of the cost principle to plant assets
 Determine the cost of PPE on initial recognition
 Measure and record depreciation
 Describe the procedure for revising periodic depreciation
 Understand when to capitalize or expense Subsequent costs
 Explain how to account for the disposal of a plant asset
 Measure and record depletion of natural resources
 Understand the recognition and subsequent measurement of intangible assets
 Indicate how plant assets, natural resources, and intangible assets are reported on the
statement of financial position.
3.1. Nature of Plant Assets
Plant assets are resources that have physical substance (a definite size and shape), are used in
the operations of a business, and are not intended for sale to customers. They are expected to
provide service to the company for a number of years. Plant asset are called as PPE (Property,
plant and equipment).
Plant asset are not acquired for resale. Any asset that is acquired for resale purpose is not a plant
asset regardless of their durability, nature of the assets, and the length of time they are held.
Example land held for speculation purpose. They are subject to depreciation i.e. declining in
usefulness through passage of time.
3.2. Recognizing and measuring the Cost of Plant Assets (PPE)

Plant asset and intangible asset are recognized in financial statements using the same way as
other assets, when (1) it is probable that future economic benefits associated with the item will
flow to the entity and (2) the cost of the item can be measured reliably.
The historical cost principle requires that companies record plant assets at cost. As it stipulated
in IAS 16 the cost of any asset is the sum of all the costs incurred to bring the asset to its
intended use and constitutes:
Compiled by Gebregergs A 1
 Purchase price, including import duties and non-refundable purchase taxes, after
deducting trade discounts and rebates.
 Any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management
IAS 16 provides some examples of “directly attributable cost:”
 costs of employee benefits, like staff wages and salaries, arising directly from the
construction or acquisition of the item of PPE
 costs of site preparation
 initial delivery and handling costs
 installation and assembly costs
 costs of testing whether the asset is functioning properly, after deducting the net proceeds
etc
A. Land and Land Improvements
The cost of land includes its purchase price (cash plus any note payable given), brokerage
Commission, survey fees, legal fees, and any property taxes that the purchaser pays. Land cost
also includes expenditures for grading and clearing the land and for removing unwanted
buildings. On the other hand the cost of land improvement includes, cost of driving ways,
Fences, outdoor lighting system, Parking lots, Walkways if it does last as long as the life of the
building and Trees and Shrubs. Here land improvement is subjected to depreciation over its
estimated useful life but land is not subjected for depreciation.
B. Buildings, Machinery, and Equipment
The cost of constructing a building includes architectural fees, building permits, contractors’
Charges, and payments for material, labor, and overhead. If the company constructs its own
building, the cost will also include the cost of interest on money borrowed to finance the
construction (if the recognition criteria in IAS 23—Borrowing Costs).
When an existing building (new or old) is purchased, its cost includes the purchase price,
brokerage commission, sales and other taxes paid, and all expenditures to repair and renovate the
building for its intended purpose.
Cost of equipment includes all costs incurred in acquiring the equipment and preparing it for
use such as purchase price, non-refundable Sales taxes, freight charges, insurance during transit
paid by the purchaser and expenditures required in assembling, installing, and testing the unit.
Note: Expenditures resulting from carelessness or errors in installing the assets, from vandalism,
or from other unusual occurrences don’t increase the usefulness of the asset and should be
treated as an expense.
3.3. Measure and Record of Depreciation
Plant asset is expected to have a lower value or no value when it is retired from the service. This
is because plant assets decline in usefulness through the time which we call it depreciation. The
difference between the initial cost and the value remaining when it is retired (Residual Value or
Scrape Value or Salvage Value or Trade in Value) is called depreciable cost that is the cost that
should be allocated over the useful life the assets as a depreciation expense.
Depreciation is the systematic allocation of the cost of a plant asset over its estimated life not
asset valuation. The causes of depreciation are divided into two broad classes:
1. Physical Usage – physical depreciation results from the wear and tear of plant assets due to
operating use and forces of nature such as earth quake, land slide, storm, etc
2. Functional or economic depreciation – results from obsolescence and inadequacy
 Obsolescence – is the process of becoming out of date because of technological
innovation. Example type writing equipment
 Inadequacy – refers to the effect of growth and change in the scale of a business
operation. Inability to meet the demand of customers. Example small machines held by
large business
Plant asset are reported on the balance Sheet at their carrying amounts or book values, which is:
Carrying amount = Cost - Accumulated Depreciation.
Factors that affect periodic depreciation expense are
 Initial cost or acquisition cost
 Residual value: also sometimes called scrap value or salvage value of an asset is the
estimated amount that an entity would currently obtain from disposal of the asset, after
deducting the estimated costs of disposal, if the asset were already of the age and in the
condition expected at the end of its useful life.
 Useful life or estimated economic life: is the length of service expected from using the
asset. Useful life may be expressed in years, units of output, miles, or some other
measure
 method of depreciation
3.3.1. Methods of Depreciation

It is a method of allocating the depreciable amount of an asset on a systematic basis over its
useful life. IAS 16 states that the depreciation method should reflect the pattern in which the
asset’s future economic benefits are expected to be consumed by the entity, and that
appropriateness of the method should be reviewed at least annually in case there has been a
change in the expected pattern. Beyond that, the standard leaves the choice of method to the
entity, even though it does cite the following methods. These are:
1. Straight line method
2. Declining balance method
3. Sum of the year’s digit method and
4. Units of production method
Here for PPE assets with a reasonably constant pattern of consumption, the allocation basis
should be done using the straight-line method. The units-of-production method best fits those
assets that wear out because of physical use rather than obsolescence. An accelerated method
(such as DDB) applies best to assets that generate more revenue earlier in their useful lives and
less in later years
1. Straight Line Method (SLM)
This method allocates depreciable cost to each period of the Estimated Economic Life of the
assets equally. Depreciation per year is computed as follows:
 Depreciation per Year = (Acquisition Cost – Residual Value) / Estimated Economic Life
Illustration 2.1: assume that a machine is acquired at the beginning of 1991 for Br 100,000 and
the residual value of the machine at the end of 10 years of economic life is estimated at Br
10,000. Instruction: compute the amount of depreciation allocable to each year and present the
necessary adjustment at the end of each year.
Depreciation per Year = (Br 100,000– 10,000) / 10 Years = Br 90,000 / 10 = Br 9,000
Depreciation Expense............................................................
9,000
Accumulated Depreciation.........................................
9,000
2. Declining Balance Method
This method yields a decline in periodic depreciation charges over the estimated life of the
assets. The most common techniques are to double the straight line depreciation and multiply the
resulting rate to the cost of the asset less its accumulated depreciation.
Depreciation per year = (2 / EEL) * (Acquisition Cost – Accumulated Depreciation)

Where EEL= estimated economic life of the plant asset.
Illustration 2.2: CC Corporation purchased equipment on January 1, 2000 for Br 20,000 which
has an expected life of 5 years and residual value of Br 1,000. Instruction: calculate the declining
balance rate and the amount of depreciation for its useful life.
 Cost = Br 20,000
 EEL = 5 years
 Residual Value = Br 1,000
Declining balance rate =2 (1/EEL) = 2(1/5)= 40%
Year 2000 = 40% * (Br 20,000 – 0) = 40% * Br 20,000 = Br 8,000
Year 2001 = 40% * (Br 20,000 – 8,000) = 40% * Br 12,000 = Br 4,800
Year 2002 = 40% * (Br 20,000 – 12,800) = Br 2,880
Year 2003 = 40% * (Br 20,000 – 15,680) = Br 1,728
Year 2004 = 40% * (Br 20,000 – 17,408) = Br 1,037
In the year 2004 the calculated amount of depreciation is Br 1,037 but the actual depreciation
expense is Br 1,592 (Br 2,592 – 1000). The 2,592 is the difference between Br 20,000 (cost) and
17,408 (accumulated depreciation). The estimated residual value does not enter into the
computation of depreciation expense until the very end. This is because this method provides an
automatic residual value. If an asset has a Residual Value, this depreciation method should
consider the stated residual value. Thus, in the above example the depreciation expense for year
2004 is Br 1,592 rather than Br 1,037.
3. The Sum Of Years Digits(SOYD) Method

Under this method the periodic charge for depreciation declines steadily or continuously over the
estimated life of the asset because successive small action is applied each year to the original
cost less estimated residual value. The following steps are followed to determine the depreciation
charge under this method:
 Estimate the useful life of the asset in the years
 Assign consecutive numbers for each year starting from 1
 Find the sum of these numbers using the following formula: SOYD = [N (N + 1)] / 2. Where
N = estimated useful life of the asset in years
 Determine the numerator which is a number of the economic life of the asset remaining at the
beginning of each accounting period. Year 1= N, Year 2= N – 1, Year 2 = N – 2 , etc
 Compute depreciation using the formula:
Annual Depreciation = (Remaining useful life/ SOYD) *(Acquisition cost – Residual Value)
Illustration 2.3: JK Company purchased old building on January 1, 1995 for Br 105,000 and its
estimated life is 4 years with a residual value of Br 5,000 and the physical period ends on
December 31, 1995. Instruction: determine the sum-of-years-digit and calculate the amount of
depreciation for its useful life.
 SOYD = [N (N + 1)]/ 2 = [4 (4 + 1)] / 2 = 10
Depreciation Expense
 1995 = 4/10 (105,000 – 5,000) = Br 40,000
 1996 = 3/10 (105,000 – 5,000) = Br 30,000
 1997 = 2/10 (105,000 – 5,000) = Br 20,000
 1998 = 1/10 (105,000 – 5,000) = Br 10,000
4. Units Of Production Method
This method yields a depreciation charge that varies with the amount of usage. To apply this
method the life of the asset is expressed in terms of production capacity such as machine hours,
miles, kilo meters, or no of units, etc. Under this method depreciation is computed as follows:
 Depreciation Rate = (Acquisition Cost – Residual Value) / Estimated Production
Capacity
 Depreciation Expense = Depreciation Rate * Actual Usage of the Asset
Illustration 2.4: XY Company purchased diesel powered generator on January 1, 2000 at Br
50000 and the generator has estimated economic life of 5 years or a production capacity of
500000 machine hours with no residual value. Instruction: calculate the depreciation expense for
the year 2000 and 2001 assuming that the generator was used for 100,000 and 120,000 machine
hours, respectively.
 Depreciation Rate = (Br 50,000 – 0) / 500,000 hours = Br 0.10 per hour
 Year 2000 depreciation expense = depreciation rate * actual usage
 Year 2000 depreciation expense = Br 0.10/ Hr. * 100000 hours
 Year 2000 depreciation expense = Br 10,000
 Year 2001 depreciation expense = depreciation rate * actual usage
 Year 2001 depreciation expense = Br 0.10/ Hr. * 120000 hours

 Year 2001 depreciation expense = Br 12,000
3.3.2. Partial Year Depreciation
To calculate the partial year depreciation, the following are important:
The date of purchase must be known. The number of days in the month in which the purchase is
made affects the depreciation expense in the following manner:
 If it is higher than 50% of the days in the month of purchase, compute depreciation for the
whole month
 If it is less than 50% of the days, ignore the whole month
Illustration 2.KK Company purchases a delivery truck on April 13, 1991 for Br 180,400. The
expected life of the truck was 4 years or 200,000 KMs and has an estimated residual
value of Br 6,400. During the year 1991 and 1992 the truck was driven for 60,000 and 40,000
KMs, respectively. The company’s fiscal period ends on December 31 of each year. Compute
depreciation expense for the year 1991 and 1992 under all the methods of depreciation.
Straight Line Method
 Annual Depreciation= (180,400 – 6,400)/4 =Br 43,500
 1991- Partial Year Depreciation= 9/12 * Br 43,500 = Br 32,625
 1992 Depreciation = 3/12 * Br 43,500 + 9/12 * Br 43,500 = Br 43500
Declining Balance Method
 Annual Depreciation, 1st Year = 2/4 (Br 180,400 – 0)=Br 90,200
 Annual Depreciation, 2nd Year = 2/4 (Br 180,400 – 90,200)=Br 45,100
 1991- Partial Year Depreciation= 9/12 * 90,200=Br 67,650
 1992 Depreciation = 3/12 * 90,200 + 9/12 * 45,100 = 22,550 + 33,825 = Br 56,375
SOYD Method
 SOYD = 4 (4 + 1)]/2= 10
 Annual Depreciation, 1st Year = 4/10 (Br 180,400 – 6,400)= Br 69,600
 Annual Depreciation, 2nd Year = 3/10 (Br 180,400 – 6,400)= Br 52,200
 1991- Partial Year Depreciation= 4/10(180,400-6400) 9/12* 69,600 = Br 52,200
 1992 Depreciation = 3/12 * 69,600 + 9/12 * 52,200= 17,400 + 39,150=Br 56,550
Units-of Production
 Depreciation Rate = (180,400 – 6,400) / 200,000KMs =Br 0.87/ km
 1991 Depreciation= 60,000 KMs * 0.87/km= Br 52,200

 1992 Depreciation= 40,000 KMs * 0.87/km = Br 34,800
3.4. Changes in Estimates and Revision of Periodic Depreciation
Residual value and estimated economic life are estimates. There may be an error in estimates.
Thus, estimates may be revised or changed. The change in estimates is applicable only to the
value or cost not depreciated so far ignoring the portion acquisition cost depreciated in the
previous accounting periods. Revision in estimates does not apply retroactively to the past
accounting periods.
Illustration 2.6: assume that on January 1, 1992 AA Company purchased a delivery truck for Br
52,000. At the time of purchase the truck was estimated to last 5 years with salvage value of Br
2,000 and it was depreciated accordingly on the straight line method for two years and at the
beginning of the year 1994, the life was estimated to last 6 more years with a salvage value of Br
2,600. Determine the revised annual depreciation per annum.
 Givens: cost Br 52,000
 Salvage value= Br 2,000
 EEL = 5 Years
 Depreciation/Year = (52,000 – 2,000) / 5
 Depreciation /Year = Br 10,000
Depreciation from 1992 to 1993
 Accumulated Depreciation = Br 10,000 * 2 years
 Accumulated Depreciation = Br 20,000
Revised Depreciation starting from 1994
 Revised Cost (Carrying Amount) = Br 52,000 – 20,000
 Revised Cost (Carrying Amount) =Br 32,000
 Revised EEL = 6 years
 Revised RV = Br 2,600
 Revised Depreciation = Br 32,000 – 2,600 / 6 = Br 29,400/6=Br 4,900
3.5. Capital and Revenue Expenditures

IAS 16 states that an entity should not recognize the costs of the day-to-day servicing (which
typically comprises the costs of labor and consumables, or small parts of the item) in the carrying
amount of an item of PPE. These costs are expensed or charged to the Income Statement as
incurred. The purpose of these expenditures is often described as for the “repairs and
maintenance” of the PPE and we called them as revenue expenditure. For example, Airbus may
perform regular maintenance of its motor vehicles.
On the other hand, capital expenditures are those expenditures incurred for acquiring plant asset
or for addition to such an asset and that will affect the utility of the plant asset for more than one
accounting period. In other words expenditures that increase the asset’s capacity or extend its
useful life are called capital expenditures. Such expenditures are debited to the asset account or
to the related accumulated depreciation account. The common capital expenditures in addition to
the initial cost includes the following: Additions, Betterments and Extraordinary Repairs
Additions:
 Are those expenditures or costs increase the service potential of the plant asset
 They are debited to the plant asset account
 They would be depreciated over the estimated useful life of the additions
 Example: cost of adding an air conditioning system or an elevator to the building
Betterments:
Betterments are expenditures that increase operating efficiency or capacity for the remaining
useful life of the plant asset. These costs will be added to the plant asset account. Example:
substituting the old power point by a new power unit, substituting the old engine by new one that
improves operating efficiency.
Extraordinary repairs:
These are expenditures that increase the useful life of an asset beyond the original estimate.
These costs are debited to the appropriate accumulated depreciation account and the periodic
depreciation for the future period will be determined on the basis of the revised book value.
The distinction between a capital expenditure and revenue expenditure (expenses) requires
judgment: Does the cost extend the asset’s usefulness or its useful life? If so, record an asset. If
the cost merely repairs the asset or returns it to its prior condition, then record an expense.
Illustration 2.7: assume a delivery truck costing 190,000 has estimated economic life of 9 years
with Br 10,000 residual value. It has been depreciated over the past 5 years on a straight line
basis. At the beginning of year 6 the engine was changed as an extraordinary repair at Br 40,000
which was expected to increase the estimated economic life the truck to 8 years with the same
salvage value. Required: determine the annual depreciation charge for the remaining life of the
asset.
 Initial Cost: Br 190,000
 Residual Life: Br 10,000
 Estimated Economic Life: 9 years
 Annual Depreciation: Br 190,000 – 10,000/ 9 years =Br 20,000
 Accumulated Depreciation: Br 20,000 * 5 years =Br 100,000
Extraordinary Repairs: - it is debited to accumulated depreciation account
Accumulated Depreciation ....................................................
40,000
Cash............................................................................40,000
After extraordinary repairs:
 Cost ...........................................................................Br 190,000
 Accumulated Depreciation......................................... (60,000)
 Book Value................................................................ Br 130,000
 Annual Depreciation= (130,000 – 10,000) / 8=......... Br 15,000
3.6. Disposal of Plant Assets
When an asset is no longer useful to the business, it is retired from the service. This is called
disposal. Disposal refers to discarding, selling, or exchanging plant assets. To journalize the
necessary entries on the date of disposal the following information are required:
 The up-to-date balance of the accumulated depreciation account
 The book value of the asset
 The loss or gain on disposal
1. Retirement of Plant Assets
When a plant asset are no longer useful to the business and has no market or sales value, they are
discarded. Illustration 1: RR Company derecognized machinery on December 31, 2003, which
was fully depreciated. The machine was acquired at a cost of Br 150,000 before six years.
 BV = AC – Accumulated Depreciation
 BV = Br 150,000 – 150,000 = 0
The Accounting Entry for this disposal:
150,000
Machinery..................................................................150,000
Illustration 2: RR Company discarded equipment, which was purchased at a cost of Br 32,000,

after it has been depreciated for 4½ years under the straight line method with a consideration of
Br 2,000 residual value. The estimated economic life of the asset was 5 years. Journalize the
necessary transaction:
 Annual Depreciation = Br 32,000 – 2,000/ 5
 Annual Depreciation = Br 6,000
 Accumulated Depreciation = Br 6,000 * 4.5 years
 Accumulated Depreciation = Br 27,000
 Book Value = Br 32000 – 27,000=Br 5,000
The loss on disposal is Br 5,000 as the business discards an asset with a value of Br 5,000.
The Accounting Entry for this disposal:
27,000
Loss on Disposal....................................................................
5,000
Equipment..................................................................
32,000
2. Selling Old Plant Asset
The entry to record the sale of a plant asset is like the entry of discarding a plant asset except that
the cash or other asset to be received must be accounted for.
 If the selling price > book value, there will be a gain on disposal
 If the selling price < book value, there will be a loss on disposal
Illustration 2.9: RA Furniture Company purchased a computer system for Br 34,000 and the
system was expected to last 8 years with a salvage value of Br 2,000. The equipment was
depreciated for 6 years based on the straight line method and sold at the beginning of year 7.
Required: Journalize the necessary entries assuming that the asset was sold for:
A) Br 15000
B) Br 10000
C) Br 9000
Acquisition Cost = Br 34,000
Residual Value = Br 2,000
Estimated Economic Life = 8 years
Annual Depreciation = Br 34,000 – 2,000/ 8
Annual Depreciation = Br 4,000
Accumulated Depreciation = Br 4,000 * 6 Years

Accumulated Depreciation = Br 24,000
Book Value = Br 34,000 – 24,000 = Br 10,000
A. Br 15,000 disposal price implies a gain of Br 5,000
Accumulated Depreciation .......................................24,000
Cash...........................................................................15,000
Equipment...................................................... 34,000
Gain on Disposal........................................... 5,000
B. Br 10,000 disposal price implies is neither gain nor loss
Cash...........................................................................10,000
Equipment...................................................... 34,000
C. Br 9,000 disposal price a loss of Br 1,000
Cash...........................................................................9,000
Loss on Disposal........................................................1,000
Equipment...................................................... 34,000
3. Exchanging or Trading in
IAS 16 provides guidance on the accounting for nonmonetary exchanges of tangible assets. It
requires that the cost of an item of property, plant and equipment acquired in exchange for a
similar asset is to be measured at fair value, provided that the transaction has commercial
substance
Commercial is defined as the event or transaction causing the cash flows of the entity to change.
That is, if the expected cash flows after the exchange differ from what would have been expected
without this occurring, the exchange has commercial substance and is to be accounted for at fair
value.
If the transaction does not have commercial substance, or the fair value of neither the asset
received nor the asset given up can be measured reliably, then the asset acquired is valued at the
carrying amount of the asset given up. Such situations are expected to be rare. If there is a settle-
up paid or received in cash or a cash equivalent, this is often referred to as boot; that term will be
used in the following example
Illustration: Jamok, Inc. exchanges an automobile with a carrying amount of €2,500 with
Springsteen & Co. for a tooling machine with a fair market value of €3,200 and the fair value of
the automobile is not readily determinable.
In this case, Jamok, Inc. has recognized a gain of €700 (= €3,200 – €2,500) on the exchange, and
the gain should be included in the determination of net income. The entry to record the
transaction would be as follows:
Machine …………………………3,200
Automobile ………………………...….2, 500
Gain on exchange of automobile….……. 700
3.7. Other Accounting Issues Related to PPE

A. Impairment of Plant Assets (PPE)- IAS 36
An asset is impaired when its carrying amount is higher than its recoverable amount.
Recoverable amount is the higher of fair value less cost to sell and value-in-use. Impairment
loss is the excess of the carrying amount of an asset or a cash-generating unit over its recoverable
amount.
Recoverable amount is defined as the higher of fair value less costs to sell or value in-use. Fair
value less costs to sell means what the asset could be sold for after deducting costs of disposal.
Value-in-use is the present value of cash flows expected from the future use and eventual sale of
the asset at the end of its useful life.
If either the fair value less costs to sell or value-in-use is higher than the carrying amount, there
is no impairment. If both the fair value less-costs to sell and value-in-use are lower than the
carrying amount, a loss on impairment occurs. Here the exact determination of the recoverable
amount, and many other aspects of impairment of assets, is beyond an introductory accounting
course. However, it is important for you to know the basic concepts of impairment.
Illustration: Assume again that ABCs equipment has a carrying amount of HK$800,000
(HK$1,000,000 − HK$200,000). However, at the end of 2017, independent appraisers determine
that the asset has a fair value of HK$775,000, which results in an impairment loss of HK$25,000
(HK$800,000 − HK$775,000). To record the equipment at fair value and to record this loss,
ABC makes the following entry.
Accumulated Depreciation—Equipment 200,000
Impairment Loss 25,000
Equipment 225,000
The impairment loss of HK$25,000 reduces net income
B. Subsequent Measurement to Initial Recognition of PPE

Under IAS 16, an entity selects one out of two measurement models for each class of property,
which is defined as a grouping of assets of similar nature and use in an entity’s operations.
Cost model: under this model acquisition or construction cost is used for initial recognition,
subject to depreciation over the expected useful life and to possible write-down in the event of a
permanent impairment in value. This is similar to what we have discussed so far in this chapter.
In many jurisdictions this is the only method allowed by statute. But a number of jurisdictions,
particularly those with significant rates of inflation, do permit either full or selective revaluation
and IAS 16 acknowledges this by also allowing what it calls the “revaluation model.”
Revaluation model: An item of PPE whose fair value can be measured reliably shall be carried
at a revalued amount, being its fair value at the date of the revaluation less any subsequent
accumulated depreciation and subsequent accumulated impairment losses.
As the basis for the revaluation method, the standard stipulates that it is fair value (defined as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date) that is to be used in any such revaluations.
Fair value is usually determined by appraisers, using market-based evidence.
If revaluation is used, it must be applied to all assets in a class of assets and if an assets
experiencing rapid price changes must be revalued on an annual basis.
Illustration: ABC Company applies revaluation to equipment purchased on January 1, 2017,

for HK$1,000,000. The equipment has a useful life of 5 years, and no residual value. ABC
Company makes the following entry to record depreciation for 2017, assuming straight-line
depreciation.
Depreciation Expense 200,000

Accumulated Depreciation—Equipment 200,000
At the end of 2017, independent appraisers determine that the asset has a fair value of
HK$850,000. The entry to record the revaluation is as follows.
Depreciation expense —Equipment 200,000

Accumulated depreciation- Equipment 150,000
Revaluation Surplus 50,000

Here revaluation adjustments increasing an asset’s carrying amount are recognized in other
comprehensive income and accumulated in equity as “revaluation surplus.
Here: $850,000 is the new basis of the asset, Depreciation expense of HK$200,000 in the income
statement, HK$50,000 in other comprehensive income and assuming no change in the total
useful life, depreciation in year 2 will be HK$212,500 (HK$850,000 ÷ 4).
3.8. Accounting for Natural Resources and Depletion
Natural resources consist of standing timber and resources extracted from the ground, such as
oil, gas, and minerals. IFRS defines extractive industries as those businesses involved in
finding and removing natural resources located in or near the earth’s crust.
Standing timber is considered a biological asset under IFRS. In the years before they are
harvested, the recorded value of biological assets is adjusted to fair value each period
Acquisition cost of an extractable natural resource is the
 price needed to acquire the resource and
 Prepare it for its intended use.
Depletion is the allocation of the cost to expense in a rational and systematic manner over the
resource’s useful life.
 Depletion is to natural resources as depreciation is to plant assets.
 Companies generally use units-of-activity method.
 Depletion generally is a function of the units extracted.
Illustration: Lane Coal Company invests HK$50 million in a mine estimated to have 10 million
tons of coal and no residual value. In the first year, Lane extracts and sells 250,000 tons of coal.
Lane computes the depletion expense as follows:
Depletion cost per unit = (Total cost – Residual Value)/total estimated units available
$50,000,000/10,000,000= $5 per ton
Annual depletion expense = $5.00 per ton x 250,000 tons = $1,250,000 annual depletion
Inventory (coal) 1,250,000

Accumulated Depletion 1,250,000
3.9. Accounting for Intangible Assets and Amortization

Intangible assets are those assets which don’t have any physical substance. However, for
accounting purposes intangible assets include patents, copy rights, trademarks, trade names, and
goodwill etc. the basic principles of accounting for intangible asset are the determination of the
acquisition costs and the recognition of periodic cost expiration which is called amortization.
1. Patents: Exclusive right to manufacture, sell, or otherwise control an invention for a
specified number of years from the date of the grant
Capitalize costs of purchasing a patent and amortize over its legal life or its useful life,
whichever is shorter. Expense any Research and Development costs in developing a patent.
Legal fees incurred successfully defending a patent are capitalized to Patents account.
Illustration: National Labs purchases a patent at a cost of NT$720,000. National estimates the
useful life of the patent to be eight years. National records the annual amortization for the ended
December 31 as follows
Cost NT$720,000
Useful life ÷ 8 years
Annual expense NT$ 90,000
Amortization Expense 90,000
Accumulated amortization Patents 90,000
2. Copy right is an exclusive right granted by the government to protect the production and
sale of literary or artistic materials. It granted for the life of the creator plus a specified
number of years, commonly 70 years. Capitalize costs of acquiring and defending it.
Amortized to expense over useful life.
3. Trademarks and Trade Names
Word, phrase, jingle, or symbol that identifies a particular enterprise or product. It has a Legal
protection for specified number of years, commonly 20 years. Protection may be renewal
indefinitely. Capitalize cost of acquisition and No amortization.
4. Goodwill- is an intangible asset that is attached to a business as a result of such favorable
factors as location, product superiority, reputation, managerial skill, etc. Goodwill is recorded
normally when it is purchased from others. Here there is no legal life for goodwill, and
purchased goodwill will remain on the balance sheet as an asset and not subjected for
amortization raze than an Impairment Tests will made periodically. Internally created goodwill
should not be capitalized
3.10. Presentation of Plant Assets, Natural Resource and Intangible Assets on the
Financial Statements
Plant assets and natural resources are reported with the related accumulated depreciation and
accumulated depletion on the financial statement. On the other hand intangible assets may be
reported at net of the related accumulated amortization or with accumulated amortization in the
statement of financial position.

FoA-CH-III - PPE - 2021

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Chapter 3: Accounting for Plant Assets, Natural Resources, and Intangible Assets

3.2. Recognizing and measuring the Cost of Plant Assets (PPE)

3.3.1. Methods of Depreciation

Depreciation per year = (2 / EEL) * (Acquisition Cost – Accumulated Depreciation)

3. The Sum Of Years Digits(SOYD) Method

 Year 2001 depreciation expense = Br 0.10/ Hr. * 120000 hours

 1991 Depreciation= 60,000 KMs * 0.87/km= Br 52,200

3.5. Capital and Revenue Expenditures

Illustration 2: RR Company discarded equipment, which was purchased at a cost of Br 32,000,

Accumulated Depreciation = Br 4,000 * 6 Years

3.7. Other Accounting Issues Related to PPE

The impairment loss of HK$25,000 reduces net income

B. Subsequent Measurement to Initial Recognition of PPE

Illustration: ABC Company applies revaluation to equipment purchased on January 1, 2017,

Depreciation Expense 200,000

Depreciation expense —Equipment 200,000

Revaluation Surplus 50,000

Inventory (coal) 1,250,000

3.9. Accounting for Intangible Assets and Amortization

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