PAS 16: PROPERTY, PLANT, AND EQUIPMENT
removing the item and restoring the site on
PPE: Tangible assets that are held for use in
production or supply of goods or services for rental to
others or for administrative purposes and are
expected to be used during one period.
Major Characteristics
● Tangible assets
● Used in business
● Expected to be used over a period of more
than one year.
Recognition
● Has future economic benefits
● Cost of asset can be measured reliably
Subsequent Recognition of Indirect Cost
Day to day servicing: An entity does not recognize in
the carrying amount of an item of property, plant and
equipment the costs of the day-to-day servicing of
the item.
Replacement parts: an entity recognizes in the
carrying amount of an item of property, plant and
equipment the cost of replacing part of such an item
when that cost is incurred provided that the
recognition criteria are met.
Major inspections: Costs incurred for major
inspections for faults regardless of whether parts of
the item are replaced are recognized to the carrying
amount of the item.
- Any remaining carrying amount of the cost of
the previous inspection (as distinct from
physical parts) is derecognized.
Measurement at Recognition
● An item of PPE that qualifies for recognition as
an asset shall be measured at cost.
Cost is the amount of cash or cash equivalent paid and
the fair value of the other consideration given to
acquire an asset at the time of acquisition or
construction
Elements of Cost
● Purchase Price
● Cost 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.
● Initial estimate of the cost of dismantling and
which it is located for which an entity has a
present obligation.
Directly Attributable Cost
Examples of DAC that qualify for recognition:
a. Cost of employee benefit arising directly from
the construction of acquisition of the item of
PPE.
b. Cost of site preparation.
c. Initial delivery of handling cost.
d. Instalment and assembly cost.
e. Professional fee.
f. Costs of testing whether the asset is
functioning properly
Cost not qualifying for recognition
Examples of costs that are expensed rather than
recognized as element of cost of PPE:
a. Cost of opening a new facility.
b. Cost of introducing a new product of service,
including cost of advertising and promotion.
c. Cost of conducting business in a new location
or with a new class of customer, including
cost of staff training.
d. Admission and other general overhead cost.
e. Cost incurred while an item capable of
operating in the manner intended by
management has yet to be brought into use or
is operated at less than full capacity.
f. Initial operating loss.
g. Cost of relocation or recognizing part or all of
an entity's operations.
Measurement after Recognition
Cost model: means that PPE are carried at cost less
any accumulated depreciation and any accumulated
impairment loss.
Revaluation model: means that PPE are carried at
revalued carrying amount.
The revalued carrying amount is the fair value at the
date of revaluation less any subsequent accumulated
depreciation and subsequent accumulated
impairment loss.
Mode of Acquisition
Acquisition on a cash basis: The cost of an item of PPE
is the cost price equivalent at the recognition date.
 - The cost of asset acquired on a cash basis
simply includes the cash paid plus directly
attributable costs.
Acquisition on account (subject to a cash discount):
the cost of the asset is equal to the invoice price minus
the discount, regardless of whether the discount is
taken or not.
- Cash discounts are generally considered as
reduction of cost and not as income.
Acquisition on instalment basis: if an asset is offered
at a cash price and at an instalment price and is
purchased at the instalment price, the asset shall be
recorded at the cash price.
Issuance of share capital
● Philippine GAAP provides that if shares are
issued for consideration other than actual
cash, the proceeds shall be measured by the
fair value of the consideration received.
● Accordingly, where a property is acquired
through the issuance of share capital, the
property shall be measured at an amount
equal to the following order of priority:
1. Fair value of the property received
2. Fair value of the share capital
3. Par value or stated value of the share
capital
Issuance of bonds payable
1. Fair value of bonds payable
2. Fair value of asset received
3. Face amount of bonds payable
Exchange
PAS 16, paragraph 24, provides that the cost of an item
of PPE acquired in exchange for a nonmonetary asset
or a combination of monetary and nonmonetary asset
is measured at fair value plus any cash payment.
Construction
The cost of self-constructed asset is determined using
the same principles as for an acquired asset.
The cost of self-constructed PPE includes:
1. Direct cost of materials
2. Direct cost of labor
3. Indirect cost and incremental overhead
specifically identifiable or traceable to
construction.
Derecognition
- Means that the cost of PPE together with the
related accumulated depreciation shall be
removed from the statement of financial
position.
Fully depreciated property
- A property is said to be fully depreciated
when the carrying amount is equal to zero, or
the carrying amount is equal to the residual
value.
Concept of Depreciation
- Depreciation is defined as the systematic
allocation of the depreciable amount of an
asset over the useful life.
Depreciation in the FS
- The depreciation charges for each period shall
be recognized as expense unless it is included
in the carrying amount of another asset.
Depreciation period
- The depreciable amount of an asset shall be
allocated on a systematic basis over the useful
life.
- Depreciation of an asset begins when it is
available for use.
Factors of Depreciation
1. Depreciable Amount: the cost of an asset of
other amount substituted for cost, less than
the residual value.
2. Residual Value: the estimated net amount
currently obtainable of the asset is a the end
of the useful life.
3. Useful Life: either the period over which an
asset is expected to be available for use by the
entity, or the number of production or similar
units expected to be obtained from the asset
by the entity.
Factors in determining useful life:
a. Expected usage of the asset
b. Expected physical wear and tear
c. Technical or commercial obsolescence
d. Legal limits for the usage of asset
Depreciation Method
- Depreciation method shall reflect at the
pattern in which the future economic benefits
form the asset are expected to be consumed
by the entity.
1. Straight line method: the annual depreciation
charge is calculated by allocating the
depreciable amount equally over the number
of years of useful life.
2. Production method: d assumes that
depreciation is more a function of use rather
than a passage of time.
3. Diminishing balance or accelerated methods:
provide higher depreciation in the earlier
years and lower depreciation in the later years
of the useful life of the asset, result in
decreasing depreciation charge over the
useful life