LAND, BUILDING AND MACHINERY

LAND

Land classified as property, plant and equipment (PPE)

• Used as plant site or has determined its usage upon acquisition

Land classified as investment property

• Held for currently undetermined use.
• Held for long-term capital appreciation

Land classified as inventory

• Held for current sale by a real estate developer (i.e., subdivision lots)

Land Improvements
• Not depreciated if: Charged to Land account, which includes the following costs
a. Surveying d. Subdividing
b. Clearing e. Other permanent improvement
c. Grading, leveling and
landfill

• Depreciated if: Charged to Land Improvements account, which includes the following:
a. Fences e. Pavements
b. Water systems f. Trees, shrubs and
c. Drainage other landscaping
systems
d. Sidewalk

Special Assessments – taxes paid by landowners as contribution to the cost of public

improvements and treated as cost of the land, as it increases the value of the land.

Real Property Taxes – treated as outright expense unless, assumed by buyer in acquiring the land

BUILDING

Cost chargeable by construction:

1. Materials used, labor employed and overhead incurred during the construction
2. Building permit or license
3. Architect fee
4. Superintendent fee
5. Excavation
6. Temporary buildings used as construction office and tools or materials shed
7. Costs incurred during the construction period such as interest on construction loans and insurance
8. Expenditures for service equipment and fixtures made a permanent part of the structure
9. Temporary safety fence around the construction site and subsequent
removal thereof. Permanent fence after building completion is land improvement
10. Safety inspection fee
Cost chargeable by purchase:
PURCHASE OF: LAND BUILDING
1 Purchase price ✓ ✓
Legal fees and fees for establishing clean title/ in
2 ✓ ✓
connection with the purchase
3 Broker or agent commission ✓ ×
4 Escrow fees ✓ ×
5 Registration and transfer of title ✓ ×
Relocation or reconstruction of property belonging to
6 ✓ ×
others to acquire possession
Mortgages, encumbrances and assumed interest by
✓ ✓
7 the buyer
Unpaid taxes up to acquisition date assumed by
✓ ✓
8 buyer
Survey ✓ ×
9
Payments to tenants to vacate the land and prepare
✓ ✓
10 for intended use
Option to buy the acquired land. If not acquired,
✓ ×
11 option is expensed.
Renovating or remodeling costs incurred to put the
building in a condition suitable for intended use × ✓
12 (lighting, partitions and repairs)

Sidewalks, pavements, parking lot, driveways - Land improvements or building?

1. If part of blueprint for the construction of a new building, then charged to Building
2. Otherwise, if occasionally made or not part of the blueprint, charged to land improvement

Claims for damages

Cost of insurance is charged to Building if taken during construction. Otherwise, payment of
claims shall be expensed outright as it represents management failure or negligence in
procuring insurance.

Building Fixtures – Building or Furniture & Fixtures?

Shelves, cabinets and partitions may be charged to building if immovable and attached to the
building in a manner that the removal thereof may destroy the building. Otherwise, it shall
be charged to furniture and fixtures.

Ventilating system, lighting system, elevator

1. Charged to building if installed during construction
2. Otherwise, charged to building improvements and depreciated over their estimated
useful life or the building, whichever is shorter
 PIC INTERPRETATION ON LAND AND BUILDING

1. Land an old building are purchased at a single cost

a. If the old building is usable, the single cost is allocated to land and building based on
relative fair value.
b. If the old building is unusable, the single cost is allocated to land only.

2. The old building is demolished immediately to make for construction of a new building:
a. Any allocated carrying amount of the usable old building is recognized as a loss
if the new building is accounted for as property, plant and equipment or
investment property.
b. Any allocated carrying amount of the usable old building is capitalized as cost
of the new building if the new building is accounted for as inventory.
c. The demolition cost minus salvage value is capitalized as cost of the new
building whether the new building is accounted for as property, plant and
equipment, investment property or inventory.
d. Net demolition cost is capitalized as cost of the land if the old building is
demolished to prepare the land for the intended use but not to make room for
the construction of new building.

3. A building is acquired and used in a prior period but demolished in the current period
to make room for construction of a new building:
a. The carrying amount of the old building is recognized as a loss, whether the new
building is property, plant and equipment, investment property or inventory.
b. The net demolition cost is capitalized as cost of the new building whether the
new building is accounted for as property, plant and equipment, investment
property or inventory.
c. If the old building is subject to a contract of lease, any payments to tenants to
induce them to vacate the old building shall be charged to the cost of the new
building.

MACHINERY
Chargeable cost:
1. Purchase price
2. Freight, handling, storage and other cost related to the acquisition
3. Insurance while in transit
4. Installation cost, including site preparation and assembling
5. Cost of testing and trial run, and other cost necessary in preparing the machinery for
its intended use.
6. 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 a present obligation.
7. Fee paid to consultants for advice on the acquisition of the machinery.
8. Cost of safety rail and platform surrounding machine
9. Cost of water device to keep machine cool.

• 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.
• Any irrecoverable or nonrefundable purchase tax is capitalized as cost of the machinery
Tools
Are classified as machine tools and hand tools. Machine tools include drills and punches.
Hand tools include hammer and saws. Tools should be segregated from the machinery
account.

Patterns and dies

Patterns and dies are used in designing or forging out a particular product. Patterns and dies
used for the regular product are recorded as assets. Patterns and dies are depreciated over
the useful life. However, patterns and dies used for specially ordered product form part of
the of the special product.

Equipment
The term "equipment" includes delivery equipment, store equipment, office equipment and
furniture and fixtures. The cost of such equipment includes the purchase price, freight and
other handling charges, insurance while in transit, installation and other costs necessary in
preparing them for the intended use.

• Delivery equipment includes cars, trucks and other vehicles in business operations.
Motor vehicle registration should be expensed
• Store and office equipment include computers, typewriters, adding machines, cash
register and calculator. Assets identified with the selling function are classified as store
equipment. Otherwise, the assets are charged to office equipment.
• Furniture and fixtures include showcases, counters, shelves, display fixtures,
partitions, safes, desks and tables. In a broad sense, furniture and fixtures may include
store and office equipment

Returnable Containers
Include bottles, boxes, tanks, drums and which are returned to the seller by the buyer when
the contents are consumed or used. Containers in big units or of great bulk as in the case of
tanks, drums and barrels are classified as property, plant and equipment.

On the other hand, containers that are small and individually small amount as in the case of
bottles and boxes are classified as other noncurrent assets.

Needless to say, containers that are not returnable are charged outright to expense.

Capital expenditure and Revenue expenditure

An expenditure that benefits only the current period is a revenue expenditure and therefore
reported as an expense. While expenditure that benefits the current period and future periods
is a capital expenditure and therefore reported as an asset.

Recognition of subsequent cost

The recognition of subsequent cost is subject to the same recognition criteria for the initial
cost of property, plant and equipment. Accordingly, the subsequent cost incurred shall
recognized as an asset when:
a. It is probable that future economic associated with the subsequent cost will
flow to the entity.
b. The subsequent cost measured reliably.
Future economic benefit
In general, subsequent cost on an item of property, plant and equipment will benefit future
periods or increase the future service potential of an asset when:
a. The expenditure extends the life of the property.
b. The expenditure increases the capacity of the property quality of output, for
example, by upgrading machine parts
c. The expenditure improves the efficiency and safety of the property, for
example, by adopting a new production process leading to large reduction in
operating cost.

Subsequent cost
Generally, the following expenditures are incurred during ownership of existing property,
plant and Equipment:
a. Additions d. Repairs
b. Improvements or e. Rearrangement cost
betterments
c. Replacements

Additions
Additions are modifications or alterations which increase the physical size or capacity of the
asset. Such expenditures are of two types, namely:
a. An entirely new unit
b. An expansion, enlargement or extension of the old asset

The construction of a new building is an addition of the first type but the addition of
a wing to a building or the construction of a third-storey on a two-storey building is an
addition of the second type. In either case, the cost is capitalized in the usual manner.

The cost of an addition which is a new unit is depreciated over the useful life. But the cost of
an expansion should over the useful life of the expansion or remaining useful life of the asset
of which, it is part, whichever is shorter.

Improvements or betterments
Are modifications or alternations which increase the service life or the capacity of the asset.
Improvements may represent replacement of an asset or part thereof with one of a better or
superior quality. Such expenditures are normally capitalized.

Examples of improvements are:

a. A tile roof is substituted for wooden shingles
b. A shatter proof glass is substituted for ordinary glass
c. An old motor in a machine is replaced by a new and powerful one
d. Galvanized iron roofing is substituted for nipa roofing
e. Replacement of wooden by concrete flooring

Replacements
Replacements also involve substitution but the new asset is not better than the old asset when
acquired. The basic difference between an improvement and replacement is that an
improvement is a substitution of a better or superior quality whereas a replacement is a of
an equal or lesser quality.
Replacements may be classified into three categories:
a. Replacement of the old asset by a new one. This is the replacement contemplated.
For example, an old truck is replaced by a new one. This replacement is
surely capitalizable as a new asset.
b. Replacement of major parts or extraordinary repairs.
c. Replacement of minor parts or ordinary repairs

Repairs
Repairs are those expenditures used to restore assets to good operating condition upon their
breakdown or replacement of broken parts. Repairs may be classified as extraordinary repairs
and ordinary repairs.

Extraordinary repairs are material replacement of parts, involving large sums and normally
extend the useful life of the asset and are usually capitalized.

Ordinary repairs are minor replacement of parts, involving small sums and are frequently
encountered. Ordinary repairs are normally charged to expense when incurred.

Repair and maintenance

Repair is different from maintenance in that repair restores the asset in good operating
condition while maintenance keeps the asset in condition. Repair is restorative or curative
while maintenance is preventive.

Rearrangement cost
Is the relocation or redeployment of an existing property, plant and equipment.

PAS 16.20 provides that recognition of costs in the carrying amount of property, plant and
equipment ceases when the asset is in the location and condition for the intended use.
Therefore, cost of relocating or reorganizing part or all of entity’s operations is expensed.

Rearrangement merely maintains the existing level of performance of the asset.

Accounting for major replacement

If separate identification is practicable, the major replacement is debited to the asset account.
The cost of the part eliminated and the related accumulated depreciation are removed from
the accounts and the remaining carrying amount of the old part is treated as a loss.

If it is not practicable for an entity to determine the carrying amount of the replaced part, it
may use the cost of the replacement as an indication of the "likely original cost” of the replaced
part at the time it was acquired or constructed. However, the current replacement shall be
discounted.

Illustration: A building having a useful life of 20 years is constructed at a total cost of

P5,000,000. After 10 years, the wooden roof is with concreted roofing costing P500,000

A study of the original construction records reveals that P400,000 is an accurate estimate of
the original cost of the wooden roof.
 JOURNAL
ENTRIES

SEPARATE IDENTIFICATION IS PRACTICABLE SEPARATE IDENTIFICATION IS NOT PRACTICABLE

1. To eliminate the original cost of the wooden 1. To eliminate the original cost of the wooden
roof roof

Loss on retirement of building 200,000 Loss on retirement of building 140,000

Accumulated depreciation 200,000 Accumulated depreciation 140,000
Building 400,000 Building 280,000
*6% discount rate for P500,000 replacement
cost. PV of 1 for 10 periods is 0.56 (500,000 x
0.56 = 280,000)

2. To record replacement 2. To record replacement

Building 500,000 Building 500,000

Cash 500,000 Cash 500,000

3. To record subsequent annual 3. To record subsequent annual

depreciation depreciation

Depreciation expense 280,000 Depreciation expense 286,000

Accumulated depreciation 280,000 Accumulated depreciation 286,000

Building (5M - 400,000 + 500,000) 5,100,000 Building (5M - 280,000 + 500,000) 5,220,000
Accumulated depreciation (2.5M - - Accumulated depreciation (2.5M - -
200,000) 2,300,000 140,000) 2,360,000
Carrying amount 2,800,000 Carrying amount 2,860,000

Annual depreciation (2.8M / 10 years Annual depreciation (2.8M / 10 years

remaining) 280,000 remaining) 286,000