Property, Plant and Equipment, Investment Property, Intangible Assets:

Utilization and Impairment

Lecture Notes

🔖 Disclaimer from VOB: These practice problems are for foundational knowledge only—practice
solving related problems found in your textbook. Take the responsibility for honing your skills.

OVERVIEW
Non-current and Non-Financial Assets Categories:
Types of Assets classified as noncurrent revenue-producing assets are categorized:

● Property, Plant, and Equipment (IAS 16) - Assets in this category

include land, buildings, equipment, machinery, autos, and trucks. These
assets are held for use in the production or supply of goods or services, for
rental to others, or for administrative purposes. They are expected to be
used for more than one financial period.

● Investment Property (IAS 40) - This category of property comprises land

and buildings held to earn rental income and/or for capital appreciation over
time. It excludes property for use in the production or supply of goods or
services, administrative purposes, or sale in the ordinary course of business.
Property occupied by a business itself for use in the production or supply of
goods or services or administrative purposes (e.g., as office space) is
considered as part of property, plant, and equipment, while property held for
sale in the ordinary course of a business is essentially part of the inventory.

● Intangible Assets (IAS 38) - Unlike property, plant, equipment, and

investment property, these lack physical substance, and the extent and
timing of their future benefits are typically highly uncertain. They include
patents, copyrights, trademarks, franchises, and goodwill.

INITIAL MEASUREMENT:
● Cost plus direct cost necessary to bring the assets to its intended use and
location (Ref. Lecture notes 1).
SUBSEQUENT MEASUREMENT
● Property, Plant, and Equipment
○ Cost Model (Cost less Accumulated Depreciation)
○ Revaluation Model
● Investment Property
○ Cost Model
○ Fair Value Model

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 ● Intangible Assets
○ Cost Model (Cost less Accumulated Amortization)
○ Revaluation Model

LO1: Explain the concept of cost allocation as it pertains to property, plant,

and equipment; investment property; and intangible assets.

COST ALLOCATION - is the process of distributing the cost of an asset over its
useful life. It ensures that the expense of acquiring the asset is matched with the
revenue it generates over time, following the matching principle in accounting.

Property, Plant, and Equipment

Depreciation - The primary method of allocating the cost of tangible assets.

Factors in Depreciation:
1. Cost of the Asset: Purchase price plus any costs to bring the asset to a
usable state.
2. Useful Life: Estimated time the asset will be productive.
3. Residual Value: Estimated value of the asset at the end of its useful life.

Methods of Depreciation:
1. Straight-Line Method: Allocates an equal amount of depreciation each year.
2. Accelerated Depreciation Methods (e.g., Declining Balance, SYD): Higher
depreciation costs in earlier years.
3. Units of Production: Based on usage or output.

Investment Property
💡 If the cost model is used, depreciation is calculated similarly to PPE.
❗️Unlike PPE, investment properties are usually not depreciated if they are
measured using the fair value model.

Intangible Assets
Amortization - the process of allocating the cost of an intangible asset over its
useful life.

Factors Influencing Amortization:

1. Cost of Asset: Purchase price plus any direct costs to secure the asset.
2. Useful Life: Can be finite or indefinite.
3. Amortization Method: Often straight-line, reflecting a consistent expense over
time.
❗️Impairment tests should be performed at least annually to ensure the carrying
amount does not exceed the recoverable amount.

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Impairment of Assets
- Occurs when the carrying amount of an asset exceeds its recoverable value.
- Carrying Amount vs Recoverable Amount
Impairment Process:
- Identification: Regular review to identify any indication of impairment.
- Measurement: Determine the recoverable amount and recognize any
impairment loss.

LO2: Determine periodic depreciation using both time-based and

activity-based.
Time-Based Depreciation Methods
A. Straight-Line Method - Allocates an equal amount of depreciation each year.

Annual Depreciation Expense = (Cost of Asset - Residual Value) / Useful Life.

B. Declining Balance Method- Accelerated depreciation method, higher expense

in earlier years.

Annual Depreciation Expense = Book Value at the beginning of Year ×

Declining Rate*.
*Declining Rate is often a multiple of the straight-line rate.

C. Sum-of-the-Years'-Digits (SYD) Method - Accelerated depreciation method,

decreasing expense over time.

Annual Depreciation = (Remaining Life / Sum of the Years' Digits*) × (Cost -

Residual Value).

💡
*Sum of the Years' Digits is calculated by summing the years of the asset's life.
n(n+1) / 2

Activity-Based Depreciation Method

A. Units of Production Method*- Depreciation based on the actual usage or
output of the asset.

Annual Depreciation Expense = (Cost - Residual Value) / Total Estimated

Production × Actual Production.
*Suitable for assets whose wear and tear depend more on usage than on the passage
of time.

✍️PRACTICAL EXAMPLES AND APPLICATIONS:

The Hogan Manufacturing Company purchased a machine for P250,000. The
company expects the service life of the machine to be five years. During that time,
it is expected that the machine will produce 140,000 units. The anticipated residual

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value is P40,000. The machine was disposed of after five years of use. Actual
production during the five years of the asset's life was:
Year Actual Units Produced

1 24,000

2 36,000

3 46,000

4 8,000

5 16,000

Total 130,000

Requirements: Compute the (a) annual depreciation and the (b) carrying value of
the asset at the end of the year using the following methods:
1. Straight-Line Method
2. Sum-of-the-years-digit method
3. Double declining method
4. 1.5 declining method
5. Units of production method
6. What is the depreciation for the current year if the asset was acquired on
March 31 of the current year?

LO3: Calculate the periodic amortization of an intangible asset.

Purpose of Amortization:
- To match the cost of the intangible asset with the revenue it generates over
time.
- To reflect the consumption or expiry of the asset's economic benefits.

❗Useful Life of Intangible Assets can be finite or indefinite.

- Finite life: Amortized over its useful life.
- Indefinite life: Not amortized but tested annually for impairment.

Amortization Methods for Intangible Assets:

A. Straight-Line Method- Allocates an equal amount of amortization each year.

Annual Amortization Expense = (Cost of Asset - Residual Value) / Useful Life.

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 B. Activity-Based Method - Rarely used but applicable if the pattern of economic
benefits can be reliably determined. Based on actual usage or output similar
to the units of production method for depreciation.

✍️PRACTICAL EXAMPLES AND APPLICATIONS:

On October 1, 2023, Advanced Micro Circuits Company completed the purchase of
Zotec Corporation for P200 million. Included in the allocation of the purchase price
were the following identifiable intangible assets (P in millions), along with the fair
values and estimated useful lives:

Intangible Asset Fair Value Useful Life

(in Years)

Patent P10 5

Developed technology 50 4

Customer list 10 2

In addition, the fair value of acquired tangible assets was P100 million. Goodwill
was valued at P30 million. Straight-line amortization is used for all purchased
intangibles.

During 2023, Advanced finished work on a software development project.

Development costs incurred after technological feasibility was achieved and before
the product release date totaled P2 million. The software was available for release
to the general public on September 29, 2023. During the last 3 months of the year,
revenue from the sale of the software was P4 million. The company estimates that
the software will generate an additional P36 million in revenue over the next 45
months.

Required: Compute amortization for purchased intangibles and software

development costs for 2023.

LO4: Explain the appropriate accounting treatment required when a change

is made in the service life, residual value, depreciation or amortization
method of property, plant, and equipment; investment property; and
intangible assets.

Changes in service life, residual value, and depreciation/amortization methods are

considered changes in accounting estimates. It reflects the current condition and
future use of the asset and ensures accurate financial reporting.

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Change in Service Life or Residual Value
● Revision of the estimated period an asset is expected to be used or the
expected residual value at the end of its life. The reasons for change include
wear and tear, technological advancements, and market changes.

❗️Accounting Treatment:
- Prospectively adjust the depreciation or amortization calculation.
- No retrospective restatement of prior periods.
- Disclose the nature and effect of the change in financial statements.

Change in Depreciation or Amortization Method

● A change that results in a more systematic and rational allocation of the
depreciable amount.

❗️Accounting Treatment:
- Apply the new method prospectively as a change in accounting estimate.
- Recalculate depreciation or amortization for current and future periods.
- No adjustment to prior periods' financial statements.
- Disclose the change and its effect in the notes to the financial statements.

✍️PRACTICAL EXAMPLES AND APPLICATIONS:

(A) Change in service life and residual value:
On January 1, 2021, the Hagon Manufacturing Company purchased a machine for
P250,000. The company expects the service life of the machine to be five years and
its anticipated residual value to be P40,000.

The company's financial year-end is December 31 and the straight-line depreciation

method is used for all depreciable assets. During 2023, the company revised its
estimate of service life from five to eight years and also revised estimated residual
value to P22,000.

Required: Determine the depreciation expense and the journal entry to record the
depreciation for 2023.

(B) Change in Depreciation or Amortization Method

On January 1, 2021, the Hegan Manufacturing Company purchased a machine for
P250,000. The company expects the service life of the machine to be five years and
its anticipated residual value to be P30,000. The company's financial year-end is
December 31, and the double-declining-balance (DDB) depreciation method is

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used. During 2023, the company switched from the DDB to the straight-line
method.

Required: Determine the adjusting entry to record the depreciation in 2023.

LO5: Explain the appropriate treatment required when an error in

accounting for property, plant, and equipment; investment property; and
intangible assets is discovered.

Error - Unintentional misstatements or omissions in financial statements. Common

errors occur in recognition, measurement, presentation, or disclosure of financial
information.

Common Types of Errors in Assets:

- Incorrect asset classification.
- Mistakes in calculating depreciation or amortization.
- Incorrect determination of carrying amount or residual value.

Correcting the Errors (IAS 8 -Accounting Policies, Changes in Accounting Estimates

and Errors):

Prior Period Errors:

- Errors are corrected retrospectively in the financial statements.
- Restate comparative amounts for the prior period(s) in which the error
occurred.
Disclosure:
- Nature of the error.
- The impact on financial statements.
- Adjustments made to correct the error.

✍️PRACTICAL EXAMPLES AND APPLICATIONS:

In 2023, the controller of the Corporation discovered an error in recording P300,000
in legal fees to successfully defend a patent infringement suit in 2021. The
P300,000 was charged to legal fee expense but should have been capitalized and
amortized over the five-year remaining life of the patent. Straight-line amortization
is used by Hathaway for all intangibles.

Required: Prepare the adjusting journal entry to correct the error in 2023.

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LO6: Explain the appropriate accounting treatment required when there is
a subsequent change in the fair value (including significant impairment) of
tangible and intangible assets.

Basic Principle:
After initial recognition, IRFS allows a company to choose either the cost model or
the revaluation model to account for property, plan, and equipment, and
intangible assets. For investment property, a company can choose either the cost
model or the fair value model.

REVALUATION MODEL (For PPE and Intangible Assets only)

- The revaluation model is an alternative to the cost model that allows assets
to be carried at their fair value. It aims to reflect the current market value of
assets.
- Mainly used for property, plant, and equipment (PPE) and some intangible
assets.
Revaluation Process:
- Regularly, to ensure that the carrying amount does not differ significantly
from fair value. Fair value is usually determined by appraisal from qualified
valuers.

Accounting Treatment:
A. Increase in Value:
- An increase is recognized in other comprehensive income and
accumulated in equity under a “revaluation surplus.”
- The “Revaluation Surplus” account is not distributable as dividends and
can be transferred directly to retained earnings when the asset is
derecognized or used.
B. Decrease in Value:
- A decrease is first offset against any revaluation surplus for the same
asset; any excess is recognized as an expense in the income
statement.
C. Depreciation of Revalued Assets:
- Based on the revalued amount and adjusted for any changes in
estimated useful life.
D. Impairment of Revalued Assets:
- Follows the standard impairment rules, considering the revalued
amount as the new carrying amount.

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FAIR VALUE MODEL (For Investment Property only)
- The fair value model is a method of accounting where the investment
property is revalued at each reporting date to its fair value. It provides a
more current valuation of investment properties and reflects market
conditions.

Accounting Treatment:
A. Recognition of Fair Value Changes:
- Increases or decreases in fair value are recognized in profit or loss for
the period.
B. No Depreciation:
- Investment properties under the fair value model are not
depreciated.

IMPAIRMENT OF ASSETS
Indicators of impairment include market decline, adverse changes in use or legal
factors, and asset obsolescence.

Impairment Testing
- Compare the carrying amount of the asset to its recoverable amount (the
higher of fair value less costs of disposal and value in use).
- If carrying amount exceeds recoverable amount, an impairment loss is
recognized.

Accounting Treatment for Impairment

A. Tangible Assets (PPE and IP)
- Recognize an impairment loss in the income statement.
- Reduce the carrying amount of the asset to its recoverable amount.
B. Intangible Assets:
- Similar treatment as tangible assets for impairment.
- For assets with indefinite lives (e.g., goodwill), impairment testing is
done annually.

Reversal of Impairment Losses

An increase in the recoverable amount due to changes in market conditions or
economic performance.

Accounting Treatment
- Reversal is recognized in the income statement.

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 - The carrying amount of the asset is increased, not exceeding the carrying
amount that would have been determined had no impairment loss been
recognized.
-
💡 Impairment loss of cash-generating unit (CGU) is first allocated to acquired (not
internal) goodwill, the excess will be allocated to identifiable assets.

✍️PRACTICAL EXAMPLES AND APPLICATIONS:

(A) Revaluation Model
At the beginning of its 2023 financial year, Candless Corporation purchased
equipment for P100,000. The equipment is expected to have a five-year useful life
with no residual value. At the end of the year, the company chooses to revalue the
equipment. Assuming the fair value of the equipment at the end of 2023 is
P84,000.

Required:
1. Prepare to record the depreciation expense in 2023.
2. Prepare the journal entries to record the 2023 revaluation using the following
method:
a. Elimination Method
b. Proportionate Method
3. After the 2023 revaluation, record the 2024 depreciation expense.
4. Assume that there will be a revaluation in 2024 and the fair value is P57,000,
record the revaluation at the end of 2024 using the following method:
a. Elimination Method
b. Proportionate Method
5. Assume that Candless Corporation disposes of the equipment for P70,000 on
June 30, 2024. If Candless uses the elimination method, record the
appropriate journal entries to record the disposal.
6. Refer to #5, assume the company uses the proportional method, record the
appropriate journal entries to record the disposal.
7. Assume that there is no significant difference in the carrying value and fair
value at the end of 2024, record the realization of the revaluation surplus.

(B) Fair Value Model

Kapal Mukha Company acquires a 20-year leasehold retail shop for P1,500,000 on
April 1, 2023. Professional and legal fees incurred on acquisition of the shop
amounted to P55,000 which is payable on May 1, 2023. Kapal pays a further
P35,000 to paint the shop and replace some of the existing fixtures. The shop has
no residual value at the end of its lease. The shop is rented out to an unrelated

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party at P10,000 per month from June 1, 2023, which is payable at the end of each
month. Kapal incurs repair and maintenance costs of P12,000 on the shop during
2024. The estimated fair values of the shop by an independent appraiser are
P1,400,000 and P1,600,000 as at December 31, 2023, and December 31, 2024,
respectively.

Required: Prepare the necessary journal entries to record the transactions.

(C) Impairment of Assets

The Dakota Corporation operates several factories that manufacture medical

equipment. Near the end of the company's 2023 financial year, a change in
business climate related to a competitor's innovative products Indicated to
management that the P170 million book value original cost of P300 million less
accumulated depreciation of P130 million) of the assets of one of Dakota's factories
(identified as a cash-generating unit) may not be recoverable.

Management is able to identify cash flows from this factory and estimates that the
present value of future cash flows over the remaining useful life of the factory
(discounted at 5% per annum) will be P150 million. The fair value of the factory's
assets is estimated to be P136 million and directly attributable disposal costs are
estimated to be P1 million.

Required: Determine the impairment loss and prepare the necessary journal entry.

LO7: Explain the appropriate accounting treatment required when there is

a change in use of a property (i.e., transfer between investment property
and property, plant, and equipment).

Change in Use of Property - Occurs when there is a shift in how an asset is used,
leading to its reclassification (e.g., from investment property to PPE or vice versa).

Transfers from Investment Property to PPE

- When the use of a property changes from earning rentals/capital appreciation
to business use.

Accounting Treatment:
● The property’s fair value at the date of change becomes its new carrying
amount.
● If the property was previously carried at fair value under IAS 40, this value is
treated as the cost for subsequent accounting under IAS 16.

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Transfers from PPE to Investment Property
- When the asset previously used in operations is now held for rental income or
capital appreciation.

Accounting Treatment:
● If previously accounted under the cost model, the carrying amount at the
date of transfer is retained.
● If the fair value model is adopted post-transfer, the property is revalued to its
fair value, which becomes the new carrying amount.

Reclassification and Financial Statement Impact

A. Income Statement:
- Subsequent gains or losses from fair value changes (if fair value model
is used) are recognized in profit or loss.
B. Balance Sheet:
- Reflects the new classification and carrying amount of the asset.
C. Depreciation:
- Adjustments may be needed for depreciation calculation if transferred
to or from PPE.

✍️PRACTICAL EXAMPLES AND APPLICATIONS:

Capital Company acquired an office building with a useful life of 20 years on July 1,
2023, for P11,250,000 (inclusive of directly attributable acquisition costs) with the
intention of holding it for capital appreciation. The building has no expected residual
value at the end of its useful life. The building is valued at P13 million and P12.5
million at the end of 2023 and 2024, respectively. At the end of 2023, Capital
Company decided to use the building for its own purpose. On January 2, 2024, the
company started occupying the building. Capital Company depreciates all its
property, plant, and equipment on a straight-line basis where applicable.

Required: Under the following circumstances, prepare the necessary journal

entries:
1. Capital Company uses the cost model for all its investment property and
property, plant, and equipment [IP-Cost to PPE-Cost].
2. Capital Company uses the cost model for all its investment property and the
revaluation model for its property, plant, and equipment [IP-Cost to
PPE-revaluation].
3. Capital Company uses the fair value model for all its investment property and
the cost model for all its property, plant, and equipment [IP-Fair Value to
PPE-Cost].

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 LO 8: Discuss the accounting treatment of repairs and maintenance,
additions, improvements, and rearrangements to property, plant, and
equipment; investment property; and intangible assets.

Types Conditions Treatment

Repairs and Maintenance Regular upkeep to Generally expensed as

maintain the asset in incurred.
working condition.

Additions Expansion or addition to Capitalized, as they

the existing asset, provide future economic
increasing its capacity or benefits.
efficiency.
- Treated as a
separate asset or
added to the
carrying amount of
the existing asset.

Improvements Enhancements that Capitalized, as they

increase an asset’s extend the asset's useful
economic benefits beyond life, increase capacity, or
its original standard. improve efficiency.
- The original asset's
carrying amount is
adjusted, or the
improvement is
accounted as a
separate asset

Rearrangements and Relocating or reorganizing Typically expensed as

Reinstallations assets without increasing incurred.
their future economic
benefits. *Capitalized only if they
bring significant
improvements to the
asset.

Depreciation and Amortization of Additional Costs

Adjustments to Depreciation/Amortization:
- If costs are capitalized, adjust the depreciation or amortization schedules.
- Reflect the change in the asset’s value and useful life.

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 **Nothing Follows**

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