3/12/2023

Property,
Plant and
Equipment
Philippine Accounting Standards (PAS) 12

Learning Objectives

• State the recognition criteria, initial measurement, and

subsequent measurement of PPE.
• Apply the principles of PAS 16 in basic computations of a PPE’s
cost, depreciation, carrying amount, and revaluation surplus as
well as the gain or loss on its disposal.

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Objective

• PAS 16 prescribes the accounting treatment for

property, plant and equipment (PPE).
• It addresses the principal issues of recognition as assets,
measurement of carrying amount and recognition of
depreciation charges.

Scope

PAS 16 applies to all items of PPE except to the following for

which other standards apply:
a) Assets classified as held for sale (PFRS 5)
b) Biological assets other than bearer plant (PAS 41)
c) The recognition and measurement of exploration and
evaluation assets (PFRS 6)
d) Mineral rights and mineral reserves such as oil, natural gas and
similar regenerative resources.

PAS 16 applies to PPE used to develop or maintain the assets in

(b), ( c), (d) 5

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Characteristics of PPE

a. Tangible assets – items of PPE have physical

substance
b. Used in normal operations – items of PPE are
used in the production or supply of goods or services,
for rental, or for administrative purposes
c. Long-term in nature – items of PPE are expected
to be used from more than a year

Examples of items of PPE

• Land used in business

• Land held for future plant site
• Building used in business
• Equipment used in the production of goods
• Equipment held for environmental and safety reasons
• Equipment held for rentals
• Major spare parts and long-lived stand-by equipment
• Furniture and fixture
• Bearer plants
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Recognition

The cost of an item of property, plant and equipment

shall be recognized as an asset only if:
a. it is probable that future economic benefits
associated with the item will flow to the entity; and
b. the cost of the item can be measured reliably.

Initial measurement

An item of PPE is initially measured at its cost.

Elements of Cost
a. Purchase price, including non-refundable purchase taxes,
after deducting trade discounts and rebates.
b. 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 the management.
c. Present value of decommissioning and restoration costs
to the extent that they are recognized as obligation 9

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Examples of directly
attributable costs
• Costs of employee benefits arising directly from the
construction or acquisition of PPE;
• Costs of site preparation;
• Initial delivery and handling costs (e.g., freight costs);
• Installation and assembly costs;
• Testing costs, gross of disposal proceeds of samples
generated during testing; and
• Professional fees. 10

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Initial measurement -
Illustration
Entity A acquires equipment on January 1, 2022, Information on cost
is as follows:
Purchase price, gross of trade discount 1,000,000 1,000,000
Trade discount available 10,000 (10,000)
Freight cost 20,000 20,000
Testing cost 30,000 30,000
Disposal proceeds of samples generated
during testing 5,000 -
Present value of estimated costs of dismantling
the equipment at the end of its useful life. 6,209___6,209
Required: How much is the initial cost of the equipment? 1,046,209
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Incidental Operations

Income and related expenses of incidental operations are

recognized in profit or loss, and hence do not affect
the measurement of the cost of PPE.

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Self-constructed assets

The cost of self-constructed asset is determined using the

same principle as for an acquired asset.
 it excludes internal profit and the cost of abnormal
amounts of wasted material, labor, or other resources
incurred in self-constructing the asset.

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Bearer Plants

• is used in the production or supply of agricultural

produce
• is expected to bear produce for more than one period;
and
• has a remote likelihood of being sold as agricultural
produce, except for incidental scrap sales.

 are accounted for similar to self-constructed asset. 14

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Examples of Bearer Plants

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Measurement of Cost

• The cost of an item of PPE is the cash price

equivalent at the recognition date.
• If payment is deferred beyond normal credit terms,
the difference between the cash price equivalent and the
total payment is recognized as interest over the period
of credit unless such interest is capitalized in
accordance with PAS 23 Borrowing Costs.

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Acquisition on Installment Basis

- Illustration
A machinery is purchased at an installment price of
Php350,000. The terms are 50,000 down and the
balance payable in three equal annual installments.
The cash price of the machinery is Php290,000. A
promissory note is issued for installment balance of
Php300,000.
Required: What is the journal entry for the acquisition
of the machinery? How much is the interest expense to
be recognized for the first year of installment?
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Acquisition on Installment Basis

- Illustration
A machinery is purchased at an installment price od Php350,000. The terms
are 50,000 down and the balance payable in three equal annual
installments.
The cash price of the machinery is Php290,000. A promissory note is issued
for installment balance of Php300,000.
Required: What is the journal entry for the acquisition of the machinery?
How much is the interest expense to be recognized for the first year of
installment?
Interest Expense (1st year)
Machinery 290,000 Note
Fractions
Interest
Payable Expense
Discount on Note Payable 60,000 1st Y ear 300,000 3/6 30,000
2nd Y ear 200,000 2/6 20,000
Note Payable 300,000 3rd Y ear 100,000 1/6 10,000
Cash 50,000 600,000 60,000
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Acquisition through exchange

• If the exchange has commercial substance, the asset

received from the exchange is measured using the
following order of priority:
a) Fair value of asset Given up
b) Fair value of asset Received
c) Carrying amount of asset Given up
• If the exchange lacks commercial substance, the asset
received from the exchange is measured at (c) above.
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Exchange with Commercial

Substance - Illustration
Popoy and Basha exchanged equipment
Popoy Basha
Equipment 1,600,000 2,000,000
Accumulated Depreciation 900,000 1,350,000
Carrying Amount 700,000 650,000
Fair Value 600,000 800,000
Cash Paid by Popoy to Basha 200,000 200,000
The cash payment of Php200,000 made by Popoy to Basha is the
difference in fair value.
Required: How much is the cost of the new equipment in the books
of Popoy and of Basha? 20

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Exchange with Commercial

Substance - Illustration
Popoy Basha
Equipment 1,600,000 2,000,000
Accumulated Depreciation 900,000 1,350,000
Carrying Amount 700,000 650,000
Fair Value 600,000 800,000
Cash Paid by Popoy to Basha 200,000 200,000

Popoy Basha
Fair Value of the Asset Given 600,000 800,000
Add/(Deduct): Cash Payment /
(Received) 200,000 (200,000)
Cost of the New Equipment 800,000 600,000 21

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Subsequent Measurement

Subsequent to initial recognition, an entity shall choose

either:
(a) the cost model or
(b) the revaluation model
as its accounting policy and shall apply that policy to an
entire class of PPE.

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Cost Model

After recognition, an item of PPE is measured at its cost

less any accumulated depreciation and any
accumulated impairment losses.

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Depreciation

• Depreciation is the systematic allocation of the

depreciable amount of an asset over its estimated useful
life.
• When computing for depreciation, each part of an
item of PPE with a cost that is significant in relation
to the total cost of the item shall be depreciated
separately.

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Start of Depreciation

Depreciation begins when the asset is available for

use, i.e., when it is in the location and condition
necessary for it to be capable of operating in the manner
intended by management.

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Depreciation Stops

Depreciation ceases when the asset is

a. Derecognized;
b. Classified as “held for sale” under PFRS 5; or
c. Fully depreciated

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Depreciation Method

• There are various methods of depreciation (i.e. Straight

line method, Diminishing balance method and Unit of
production)
• PAS 16 does not prescribe any specific method. The
entity shall select the method that most closely reflects
the expected pattern of consumption of the future
economic benefits embodied in the asset.
• PAS 16 prohibits the use of depreciation method that
is based on revenue
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Depreciation - Illustration

On January 1, 2022, OMC Corp acquires equipment for a total

cost of Php1,000,000. The equipment is estimated to have useful
life of 5 years and a residual value of Php50,000.
Required: How much is annual depreciation and the carrying
amount of the equipment at December 31, 2022?

Cost 1,000,000 Cost 1,000,000

Less: Residual Value (50,000) Accumulated Depn (190,000)
Depreciable Amount 950,000 Carrying Amount 810,000
Divided by Useful life __ 5_ 12/31/2022
Annual Depreciation 190,000 28

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Change in Depreciation Method,

Useful Life, and Residual Value
A change in depreciation method, useful life, or residual
value is a change in accounting estimate accounted for
prospectively.

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Revaluation Model

a PPE is carried at its fair value at the date of the

revaluation less any subsequent accumulated
depreciation and subsequent accumulated impairment
losses.

Fair value is the price that would be received to sell

an asset or paid to transfer a liability in an orderly
transaction between market participants at
measurement date
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Accounting for Revaluation

An increase or decrease in the carrying amount of a PPE

resulting from revaluation is recognized in other
comprehensive income and accumulated in
equity under the “Revaluation Surplus” account, except
for the following:
a. An increase that represents a reversal of a previous
impairment loss is recognized in profit or loss as
impairment gain.
b. A decrease in excess of the credit balance in the
‘Revaluation Surplus” of the asset is recognized in profit or
loss as impairment loss. 31

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Frequency of revaluation

• For items with significant and volatile changes in fair

value, annual revaluation is necessary.
• For items with insignificant changes in fair value,
revaluation may be made every 3 or 5 years.

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Revaluation applied to all assets

in a class
• If an item of PPE is revalued, the entire class of PPE
to which that asset belongs shall be revalued.
• The items within a class of PPE are revalued
simultaneously to avoid selective revaluation of
assets and the reporting of amounts in the financial
statements that are a mixture of costs and values as at
different dates.

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Computation: Revaluation

Fair Value* xx
Less: Carrying Amount (xx)
Revaluation Surplus xx

* The fair value is determined using an appropriate valuation technique,

taking into account the principles set forth under PFRS 13.

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Revaluation - Illustration

On December 31, 2022, Maginhawa Corp determines that

its building with historical cost of Php20,000,000 and
accumulated depreciation of Php5,000,000 has a fair
value of Php17,000,000.
Required: How much is the revaluation surplus?

Fair Value 17,000,000

Less: Carrying Amount (15,000,000)
Revaluation Surplus 2,000,000
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Depreciation after Revaluation

A revalued asset is depreciated based on its fair value

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Subsequent accounting for

revaluation surplus
Subsequently, the revaluation surplus is accounted for
as follows:
a. If the revalued asset is non-depreciable, the
revaluation surplus accumulated in equity is
transferred directly to retained earnings when
the asset is derecognized.
b. If the revalued asset is depreciable, a portion of
the revaluation surplus may be transferred
periodically to retained earnings as the asset is being
used. 37

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Subsequent accounting for

revaluation surplus - Illustration

On December 31, 2022, Maginhawa Corp determines that its

building with carrying amount of Php15,000,000 has a fair
value of Php17,000,000. Remaining useful life of the asset is
10 years.
Required: How much is the amount of revaluation surplus
to be transferred to retained earnings each year?
Depn based on revalued CA (17M / 10) 1,700,000
Depn based on original cost (15M / 10) 1,500,000
Amount of Revaluation Suplus 200,000
transferred to RE each year 38

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Accounting for Revaluation -

Illustration
On December 31, 2020, Maligaya Inc acquires a piece of land for
Php1,000,000. Maligaya Inc revalues the land to fair value on the
following dates
12/31/2021 12/31/2022 12/31/2023
Fair Value 800,000 1,300,000 900,000

Required: How much is the amount of

1. Impairment Loss on 12/31/2021
2. Revaluation Surplus on 12/31/2022
3. Impairment Loss on 12/31/2023
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Accounting for Revaluation -

Illustration
1.) Fair Value - 12/31/2021 800,000 2.) Fair Value - 12/31/2022 1,300,000 3.) Fair Value - 12/31/2023 900,000
Less: Carrying Amount (1,000,000) Less: Carrying Amount (800,000) Less: Carrying Amount (1,300,000)
Impairment Loss* (200,000) Total Increase 500,000 Total Increase (400,000)
Impairment Gain (reversal of 2021
*recognized in profit or loss (200,000) Decrease in Revaluation surplus**** 300,000
impairment Loss)**
Revaluation Surplus*** 300,000 Impairment Loss***** (100,000)

**recognized in profit or loss ****recognized in OCI

***recognized in OCI and accumulated in Equity *****recognized in profit or loss

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Derecognition

The carrying amount of an item or PPE shall be

derecognized:
a. on disposal; or
b. when no future economic benefits are expected from
its use or disposal

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Derecognition - Illustration

Masagana Corp sells a machine with carrying amount of

Php860,000 for Php1,000,000. Masagana Corp paid
broker’s commission of Php100,000.
Required: Compute for the gain (loss) on the sale?
Net disposal proceeds (1M-100K) 900,000
Carrying Amount (860,000)
Gain on Sale 40,000

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General Disclosures

For each class of property, plant, and equipment, disclose: [PAS 16.73]

basis for measuring carrying amount

depreciation method(s) used
useful lives or depreciation rates
gross carrying amount and accumulated depreciation and impairment
losses
reconciliation of the carrying amount at the beginning and the end of the
period, showing: additions, disposals, acquisitions through business
combinations, revaluation increases or decreases, impairment losses
reversals of impairment losses, depreciation, net foreign exchange
differences on translation, other movements
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Additional disclosures

The following disclosures are also required: [PAS 16.74]

restrictions on title and items pledged as security for liabilities

expenditures to construct property, plant, and equipment during the
period
contractual commitments to acquire property, plant, and equipment
compensation from third parties for items of property, plant, and
equipment that were impaired, lost or given up that is included in profit or
loss.

PAS 16 also encourages, but does not require, a number of additional

disclosures. [PAS 16.79]
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Disclosures on Revalued
property, plant and equipment
If property, plant, and equipment is stated at revalued amounts, certain
additional disclosures are required: [PAS 16.77]

the effective date of the revaluation

whether an independent valuer was involved
for each revalued class of property, the carrying amount that would have
been recognized had the assets been carried under the cost model
the revaluation surplus, including changes during the period and any
restrictions on the distribution of the balance to shareholders.

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