PROPERTY, PLANT AND EQUIPMENT

- Tangible assets
- Held for use in the production of supply of goods, services, or program outputs, for rental to
others, of for administrative purposes, and not intended to resale in the ordinary course of
operations,
- Expected to be used for more than one (1) reporting period
- Recognized when it meets
 the definition of PPE
 recognition criteria of assets
 capitalization threshold of P15,000

Capitalization threshold
- is the minimum cost an asset should have before it is capitalized as Property, Plant and
Eqpmnt
- applied on per item basis
XPNS
a) Individual items with values below the threshold but work together as a
group of assets are recognized as PPE if the total cost of the assets as a group
is P 15,000 or more
b) Bulk acquisition of small items of PPE like library books, computer
peripherals, and small items of equipment are recognized as PPE if their
aggregate cost is P15,000 or more
- Items below the capitalization threshold are recognized as inventories.
Initial Measurement
- PPE are initially measured at cost.
- Initial cost is composed of the following:
o Purchase price (import duties and non-refundable purchase taxes, after deducting
discounts and rebates)
o Direct cost
o Present value of Decommissioning and Restoration costs
1. Decommissioning cost- refers to the cost of dismantling or uninstalling a
PPE at the end of its useful life
2. Restoration cost- refers to the cost of restoring the site where the PPE is
previously installed

DIRECTLY ATTRIBUTABLE COST COST that are EXPENSED OUTRIGHT

1. Cost of employee benefits arising
directly from the construction or
acquisition of PPE
2. Cost of site preparation
3. Freight cost and handling cost
4. Installation and assembly cost
5. Testing cost, net of disposal
proceeds of samples generated
during testing
6. Professional fees
1. Cost of opening a new facility
2. Cost of introducing a new product
or service (i.e. advertising and
promotional activities)
3. Cost of conducting business in a
new location or with a new class
of customers
4. Administration and other general
overhead cost
MODES OF ACQUISITION

Property, Plant and Equipment can be acquired through the following modes of acquisition:

1. Acquisition by Purchase
2. Acquisition by Construction
3. Acquisition through Exchange
4. Acquisition through Non-Exchange Transactions
5. Acquisition through Intra-agency or Inter-agency Transfers
6. Acquisitions through Finance Lease

 Acquisition by PURCHASE
o classified as Capital Outlays in the budget registries
o Cash discounts, whether taken or not, are not included in the initial measurement
of an item of PPE.
o Cash discount not taken is recognized as “Other Losses”
o A PPE purchased under installment basis is initially measured at the cash price
equivalent.
o Promotional items acquired in conjunction with the purchase PPE are accounted
as follows:
 Same item- total acquisition cost is allocated to all items acquired
including the promotional item.
 Different- initial cost of the promotional item is its fair value. The purchase
price, net of the value of the promotional item, is allocated to the other
assets acquired.
o The individual cost of items acquired at a “lump sum price” are determined by
allocating the lump-sum price based on their relative fair value of the item
acquired.
o “Lump sum price” indicated in the invoice
 the item shall be recognized at their individual cost as indicated in
the invoice

 Acquisition by CONSTRUCTION
o Classified as Capital Outlays in the Budget Registries
o Construction cost are initially recorded in the “Construction in Progress” account
pending the completion of an asset
o Upon completion, the construction costs are classified to the appropriate PPE
account
o Can be classified into two (2):

 Acquisition through Construction Contracts awarded by contracted-

 cost of PPE is the contract price

 Construction by Administration/ Self-construction

 includes cost of direct materials, labor, and other construction
overheads
  cost of wasted materials, labor, or other resources incurred in
constructing the property are recognized as an expense

 Acquisition through EXCHANGE

o Exchange WITH Commercial Substance
 An exchange with commercial substance if the subsequent cash flows of
the entity change as a result of the exchange
 Order of Priority (measurement)
o Fair Value of asset GIVEN UP (+ any cash paid/ - any cash
received)
o Fair Value of asset RECEIVED
o Carrying amount of asset GIVEN UP (+ any cash paid/ - any cash
receiveds
o Exchange that LACKS Commercial Substance
 Measured at Carrying amount of asset GIVEN UP (+ any cash paid/ - any
cash received)
- No Gain or Loss shall arise if the asset received is measured at the CA of asset Given UP

 Acquisition through NON-EXCHANGE TRANSACTION

o Measured at FAIR VALUE at the acquisition date
o Without Condition
 Recognized immediately as income (i.e, ‘Income from Grants and
Donation in Kinds’)
o With Condition
 Initially recognized as liability (i.e., ‘Other Deferred Credits’) and
subsequently recognized as income when the donation is met

 Acquisition through INTRA-AGENCY or INTER-AGENCY TRANSFERS

o Measured at the CARRYING AMOUNT of the ASSET RECEIVED

SUBSEQUENT EXPENDITURES
- Capitalization of cost ceases when the PPE is in the location and condition necessary for it
to be capable of operating in the manner intended by management.
- Cost incurred in redeploying PPE is NOT capitalized.
- As a GENERAL RULE, subsequent expenditures on PPE are EXPENSED.
o Cost incurred while an item is capable of operating in the manner intended by
management has yet to be brought into use or is operated at less than full capacity
o Initial operating losses
o Cost of relocating or reorganizing part or all of the entity’s operation
XPNS:
 ** Subsequent expenditures are capitalized when it is clear that they meet the recognition
criteria for PPE, including the P15,000 capitalization threshold.

GUIDELINES when ACCOUNTING FOR SUBSEQUENT EXPENDITURE (GAM

for NGAs)

1. Repairs and Maintenance

 MINOR repairs
o Cost of day-to-day servicing of an item of PPE, necessary to
maintain its operating capability
o EXPENSED
 MAJOR repairs
o Considered “betterments”
o CAPITALIZED

2. Replacement Costs
 CAPITALIZED
 The carrying amount of replaced part is derecognized and recognized as
loss on derecognition
 If CA of replaced cost cannot be determined, the cost of the replacement
part is used as an indication of what the cost of the replaced part was at the
time it was acquired or constructed.

3. Spare parts and servicing equipment

 MINOR spare parts
o Recognized as INVENTORY
o Charged as EXPENSE when consumed
 MAJOR spare parts and stand-by equipment
o Recognized as PPE when they met the recognition criteria
4. Betterments
 Enhancements to the future economic benefits or service potential of a PPE
 CAPITALIZED (if they meet the recognition criteria of PPE)
 Subsequently Depreciated as follows:
o Over the remaining useful life
 If the betterment increases the service potential of the asset
without extending its useful life
o Over the extended useful life
 If the betterment extends the useful life of an asset
5. Additions and Rearrangements
 Additions are modification which increases the physical size or function
of PPE
o New unit – depreciated over its OWN useful life
 o Expansion, extension, or enlargement of the old unit- depreciated
over the SHORTER of its useful life and the remaining life of the
PPE of which it is part
 Rearrangements is the relocation or reinstallation of an asset which
proves to be less efficient in its original location.
o CAPITALIZED
o Depreciated over the remaining life of related asset
o Carrying amount of the original installation cost is derecognized
and charged as loss

SUBSEQUENT MEASUREMENT
- PPE are subsequently measured at COST MODEL
- COST MODEL
o An item of PPE is measured at its cost less any accumulated depreciation and any
accumulated impairment loss.

GUIDELINES in DEPRECIATING items of PPE

i. Three (3) factors considered when determining the depreciation are: initial cost, useful life,
and residual value
ii. All items of PPE shall be depreciated EXCEPT land and heritage assets
iii. Depreciation begins when the asset is available for its intended use
 On or before 15th of the month- computed at the BEGINNING of that month
 After the 15th of the month- computed at the BEGINNING of the FOLLOWING
month
iv. Depreciation CEASES when the asset is derecognized or fully depreciated. It does not cease
when the asset becomes idle or retired from active use and held for disposal.
v. The STRAIGHT LINE METHOD of depreciation shall be used unless another method is
appropriate.
vi. Estimation of useful life of an asset is a matter of judgement, based on the entity’s experience
with similar assets.

Estimated Useful Life Property, Plant, and Equipment

20-50 years Infrastructure Assets
30-50 years Buildings and Other Structure
5-15 years Machinery and Equipment
Motor Vehicles (Transportation
Equipment)
3-20 years Military Vehicles (T. E)
10-20 years Trains (T. E)
Aircrafts and Ground Equipt. (T. E)
10-25 years Watercrafts (T.E)
2-15 years Furniture, Fixtures and Books
**Others
SHORTER of the asset’s useful life and Leased assets, excluding land
lease term (including the extension period if Leased Assets Improvement
renewal is expected)
SHORTER of the asset’s useful life and Service Concession Assets
 terms of service concession arrangement
(including the extension period if renewal is
expected)
Over the useful life of the asset to which the Land Improvements
improvement was made of the useful life of
the improvement is significantly shorter

vii. Residual value shall be AT LEAST 5% of the cost, unless an entity determines a more
appropriate estimate, subject to the approval of COA.
viii. The residual value of an asset shall be reviewed at least each annual reporting date and, if
expectations differ from previous estimates, the changes shall be accounted for as change in
an accounting estimate.
ix. Depreciation shall be recognized on a MONTHLY basis.

IMPAIRMENT
- A PPE is impaired if its CA >> Recoverable service amount
- Recoverable Service Amount
o HIGHER of a non cash generating asset’s fair value less cost to sell and its value in
use
- Assessed whether there are indication that an asset may be impaired at each reporting date
- If such indication exists, the entity shall estimate the recoverable amount of the asset

External Sources Internal Sources

a. Cessation, or near cessation, of the
demand for services provided by the
asset.
b. Significant long-term changes with the
adverse effect on the entity have taken
place during the period, or will take
place in the near future, in
technological, legal, or government
policy environment in which the entity
operates.
a. Physical damage of an asset
Method of Computing VIU
- RCA/ DRCA whichever is more
appropriate
b. Significant changes in the expected use
of an asset that adversely affect its
recoverable amount
c. Cessation of the construction of an asset
before it is completed

Method of Computing VIU d. Indications that the service performance

-DRCA/ SUA whichever is more of an asset is, or will be, significantly
appropriate worse than expected.

VALUE IN USE
 Value in use of a cash generating asset- PV of the est. future cash flows expected to be
derived from the continuing use of an asset and from its disposal at the end of its useful life
 Value in use of non-cash generating asset- PV of the assets remaining service potential

***Computation of Value in Use

i. Depreciated Replacement Cost Approach
- Value in Use is equal to the asset’s replacement cost adjusted for depreciation to reflect
the asset’s used condition.
 ii. Restoration Cost Approach
-Value in Use is equal to the asset’s depreciated replacement cost or depreciated
reproduction cost (whichever is lower) minus estimated restoration cost
iii. Service Units Approach
- Value in Use is equal to the asset’s depreciated replacement cost or depreciated
reproduction cost (whichever is lower) minus a proportionate reduction to reflect the
reduced number of service units expected from the asset in its impaired state.

HERITAGE ASSETS
- Heritage assets are those which have historical, cultural, and environmental significance,
and are intended to be present for future generation
- Characteristics
o Value in cultural, environmental, educational, and historical terms is unlikely to be
fully reflected in a financial value based purely on market price;
o The law may impose restrictions on their disposal by sale;
o They are often irreplaceable and their value may increase over time, even their
physical condition deteriorates
o It may be difficult to estimate their useful lives, which in some cases could be
several hundred years
- Measured at cost
**If acquired through non-exchange transaction- COST = Fair Value at
Acquisition Date
- NOT SUBJECT to Depreciation but SUBJECT to IMPAIRMENT
- H.A not recognized in the books of accounts are recorded in the Registry of Heritage
Assets