FAR: PROPERTY, PLANT, AND EQUIPMENT

I. Definition and Nature

IAS 16
Tangible items ➢ Used in Production – Held for use in production or supply of goods or services, for rental
that: to others, or for administrative purposes; and
➢ Long-term – Are expected to be used during more than one period

II. Recognition Principle

➢ Probable inflow of economic benefits ➢ Cost can be measured reliably

III. Initial Measurement

At COST Components:
➢ Purchase Price including import duties and non-refundable purchase taxes (net of trade
discounts and rebates)
➢ Any costs directly attributable to bring the asset to the location and condition necessary
for it to be capable of operating in the manner intended by management
➢ The initial estimate of the costs of dismantling and removing the item and restoring the
site on which it is located incurred at acquisition.
IV. Amendments to IAS 16
Proceeds before ➢ Prohibits the deduction of the net proceeds from selling any items produced while bringing
intended use the asset to the location and condition necessary for it to operate in the manner intended by
management (i.e., samples produced when testing equipment)
➢ Net proceeds shall be recognized in P/L

Effective for annual periods beginning on or after January 1, 2022.

V. Cessation of Capitalization of Costs

When the PPE is in the location and condition necessary for it to be capable of operating in the manner intended by
the management, capitalization of costs ceases.

VI. Different Modes of Acquisition (Initial Cost Basis)

1. Cash Basis Initial Cost Basis = Cash Price Equivalent
2. Deferred / a) Cash Price Equivalent
Installment Basis • Difference: Interest over the credit period
b) If the Cash Price Equivalent is not available, determine the PV of Future Cashflows
using the imputed interest rate (Effective %)
3. Issuance of Shares As to order of priority:
1. Fair Value of Asset
2. Fair Value of shares
3. Par value of shares
VI. Different Modes of Acquisition (Initial Cost Basis)
4. Issuance of Bonds As to order of priority:
1. Fair Value of Bonds
2. Fair Value of Asset
3. Face Value of Bonds
5. Lumpsum Purchase Initial Cost Basis = allocated to individual assets based on Fair Value at the date of
purchase

PIC Interpretation on Land and Building acquired at Basket Price

Old Building is still usable The single cost is allocated to land and building based on relative Fair Value
Old Building in already unusable The single cost is assigned to land only

PIC Interpretation on Unusable Building demolished

Old Building is demolished
immediately to make room for the
construction of a new building
➢ Any allocated carrying amount of the USABLE Old Building is recognized
as a loss (treated as indirect cost)
➢ Net Demolition Cost (Demolition Cost – Salvage Value) is capitalized cost
of NEW Building. However, if the Old Building was demolished to prepare
land for its intended use and not to construct a new building – capitalized
as cost of Land.
 PIC Interpretation on Unusable Building demolished
Old Building in demolished at a ➢ Carrying amount of the Old Building is recognized as a loss
later period to make room for the ➢ Net Demolition Cost (Demolition Cost – Salvage Value) is capitalized cost
construction of a new building of NEW Building.
➢ If the Old Building is subject to a contract of lease, any payments to induce
them to vacate the old building shall be capitalized as a cost of the NEW
Building.

Machinery (considerations)
If a machinery is removed and retired to make room for the installation of a new one, the removal cost not
previously recognized as a provision is charged to expense.
The VAT on the purchase of machinery is not capitalizable but charged to input tax to be offset against output tax.
However, any irrevocable or nonrefundable purchase tax is capitalized as cost of the machinery.

VI. Different Modes of Acquisition (Initial Cost Basis)

With Commercial Substance Without Commercial Substance
FV of property given XXX CV of property given XXX
6. Exchange + Cash Paid XXX + Cash Paid XXX
- Cash Received XXX - Cash Received XXX
Initial Cost XXX Initial Cost XXX
VI. Different Modes of Acquisition (Initial Cost Basis)
Payment in a form of a non cash asset
As to order of priority: FV of Property given up / Trade In Value XXX
7. Trade In 1.) FV of property given up
2.) Trade In Value + Cash Payment XXX
Initial Cost XXX

8. Donations Initial Cost Basis = FV + Directly Attributable Cost

Unrestricted Profit or Loss

Non shareholder
Liability
Restricted (Income when
conditions are met )
Source of Donation

Credited to Donated
Capital

Shareholder
Donation related
costs are charged to
Donated Capital
VII. Land Improvements
Not subject to Depreciation are charged to the LAND 1. Cost of grading, levelling and landfill
account 2. Cost of subdividing and other cost of permanent
improvement
Depreciable and are charged to the LAND 1. Fences
IMPROVEMENTS account 2. Water Systems
3. Drainage Systems
4. Sidewalks
5. Pavements and cost of trees, shrubs and other
landscaping
VIII. Sidewalks, pavements, parking lot, driveways
1. If such expenditure are part of the blueprint for the construction of NEW BUILDING, these are charged to
the BUILDING account
2. If these expenditure are incurred not in connection with the construction of new building, these are charged to
LAND IMPROVEMENTS accounts
IX. Claims for Damages
When insurance is taken DURING the construction of a building, the cost of insurance is charged to the
BUILDING because it is necessary and reasonable cost of bringing the building into existence.
However, when the insurance is not taken and the entity is required to pay claims for damages for injuries
sustained during the construction, payment for such should be expensed outright because the damages represent
management negligence in procuring insurance and are not a reasonable and necessary cost of construction.

X. Building Fixtures
1. If such expenditures are immovable in the sense that these are attached to the building in such a manner that
the removal may destroy the building, these are charged to the BUILDING account.
2. If such expenditures are movable, these are charged to the FURNITURES and FIXTURES and depreciated
over their useful life.

XI. Ventilating System, lighting system, and elevator

If installed during construction, these are charged to the BUILDING account
Otherwise, these are charged to the Building Improvements and depreciated over their useful life or remaining life
of the building, whichever is SHORTER.
 DEPRECIATION
Nature and Definition
Depreciation is the systematic allocation of the depreciable amount over its useful life.
It is a matter of cost allocation in recognition of the exhaustion of the life of PPE used in operations.
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.

Factors of Depreciation
Depreciable Amount
Residual Value (or
Salvage Value)
Useful Life
Cost less Residual Value
The estimated amount that the entity would currently obtain from disposal of the
asset, after deducting the estimated cost of disposal if the asset were already of the
age and in the condition expected at the end of its useful life
It is either period over time which an asset is expected to be used by the entity or
number of production or units expected to be obtained from the asset by the entity
The factors that should be considering in determining the useful life of an asset are:
a) Expected usage of the asset
b) Expected physical wear and tear
c) Technical obsolescence
d) Legal limits for the use of the asset
Recognition of Depreciation
GR: Expense
XPN: Product Cost
Starts when the PPE is available for use, in the manner intended by the management
Depreciation DOES NOT cease when the asset becomes idle or is it retired from active use.
Depreciation STOPS when the asset is:
➢ Derecognized
➢ Classified as Held for Sale under IFRS 5
➢ Fully deprecated (i.e., CA = 0 or CA = Residual Value)

Methods of Depreciation
Based on passage of time Based on Usage
a) Straight Line Method a) Output Method
b) Sum-of-the-Years' Digits (SYD)
c) Double Declining (200%)
d) 150% Declining
 Depreciable Depreciation
Cost Rate DEPRECIATION EXPENSE
(n = useful life)
Cost less
(Cost – SV) * SL Rate or
Straight-Line Residual Value Straight-Line
(Cost – SV) ÷ Useful Life
Method (or Salvage Rate = 1 ÷ n
Value)
Cost less
Sum-of-the- (Cost – SV) * (n / SYD)
Residual Value
Years' Digits [n(n+1)] ÷ 2 (ex. (Y1: 5/15, Y2: 4/15…)
(or Salvage
(SYD)
Value)
Double Carrying
Declining Amount, 2÷n Carrying Amount, beg. * (2 / n)
(200%) beginning
Carrying
150% Carrying Amount, beg. * (1.5 / n)
Amount, 1.5 ÷ n
Declining
beginning
[(Cost – RV) ÷
Output Useful life in Actual Output * [(Cost – RV) ÷
Actual Output Useful life in terms of expected
Method terms of
expected output] output]
IAS 16 requires Annual Review of:
➢ Depreciation Method Treated as “Change in Accounting Estimate” – applied prospectively
➢ Residual Value or Salvage Value
➢ Useful Life
Composite or Group Method of Depreciation
Process of averaging the UL of number of units and depreciating the entire classes of assets over a single life, thus
simplifying record keeping of assets and depreciation calculations
Group method is a variation of the composite method. The only difference is that:
➢ Under Composite Method, dissimilar assets are grouped and depreciated as one
➢ Under the Group Method, similar assets are grouped and depreciated as one
Only one Accumulated Depreciation account is used.
No gain or loss is recognized when an asset in the group is derecognized. (Accumulated Depreciation –
squeezed)
When an asset in the group retired –> Accumulated Depreciation = Asset’s Original Cost
When an asset in the group replaced –> Accumulated Depreciation = Replaced Asset’s Original Cost
Cost of Replacement –> added to the total cost of the group
 LEASEHOLD IMPROVEMENTS
Nature and Definition
Modifications made by a tenant to a property leased under an operating lease
Measurement after Initial Recognition – Subsequent Recognition
Cost Model Revaluation Model
Cost (Historical) less Accumulated Depreciation less Fair Value less Subsequent Accumulated
Accumulated Impairment Loss (if necessary) Depreciation less Subsequent Accumulated
Impairment Loss (if necessary)
As a result of revaluation, Asset’s Carrying Amount Treatment
• OCI
• Accumulated in equity – Revaluation Surplus
↑Increased • However, the increase shall be recognized in P/L to the
extent that it reverses a revaluation decrease of the
same asset previously recognized in P/L
• P/L
• Recognized in OCI to the extent of any credit balance
existing in the Revaluation Surplus in respect of that
↓Decreased
asset
• the decrease recognized in OCI reduces the
amount accumulated in Revaluation Surplus
When the revalued asset is derecognized..
The revaluation surplus transferred directly to Retained Earnings – may involve transferring the whole surplus when
the asset is retired or disposed of.

DEPLETION
Nature and Definition
Systematic allocation of the depletion base over the period of extraction
Computed using OUTPUT METHOD

Formula Cost of
Salvage
Depletion Mining
Actual Value
Depletion Rate Property
Output
Est. Recoverable Units
Depreciation of Mining Equipment

Movable Straight-line Method

Mining Property Shorter between:

- Useful life of Prop (SL
Immovable Method)
- Mining Period (Output
Method)