Chapter 19 - Property, Plant and Equipment

Cost of Machinery When Purchased (SWAC PIFIT CUD)

1) Nonrefundable Sales tax;
2) Cost of Water device to keep machine cool;
3) Cost of Adjustment to machinery for operational efficiency and to increase capacity;
4) Construction of base (cost of safety rail and platform surrounding machine);
5) Purchase Price;
6) Insurance while in transit;
7) Freight, handling, storage and other cost related to the acquisition;
8) Installation cost, including site preparation and assembling;
9) Cost of Testing and Trial run, and other cost necessary in preparing the machinery for use;
10) Fees paid to Consultants for advice on acquisition of the machinery;
11) Unloading charge;
12) Initial estimate of cost of Dismantling and removing the machinery and restoring the site on which it
is located.
Old and New Installation Cost:
a. The machinery is moved to new location – The undepreciated old installation cost is expensed. New
installation cost is charged to the NEW asset.
b. The machinery is removed and retired – The undepreciated old installation cost is expensed. New
installation cost is charged to the NEW asset. In addition, the removal cost is also charged to expense.
Non-recoverable Purchase Tax (e.g., Value Added Tax)
For VAT-registered entities, the value added tax on the purchase is not capitalizable as part of the cost of
the item acquired but debited to input tax (an asset account) to be offset against the output tax.
However, for Non-VAT entities, the value added tax is non-recoverable. In the event the entity pays VAT
on acquiring an item of PPE, the VAT paid forms part of the capitalized asset.
If the problem does not state whether the entity is VAT or Non-VAT registered, the entity is presumed to
be a VAT registered entity.
Royalty Payment on Machines
Royalty payment on machines purchased should be accounted as follows:
a. If based on units produced – included as part of manufacturing overhead.
b. If based on units produced and sold – reported as a selling expense.
Costs Chargeable to Land
1) Purchase price;
2) Survey cost;
3) Cost to register the land and other cost of transferring the title in the name of the buyer;
4) Legal fees and other expenditures for establishing clean title;
5) Commission cost paid to brokers or agents;
6) Cost of clearing unwanted old structures, less proceeds from salvage excluding demolition cost;
7) Liabilities on the land assumed by the buyer (e.g., mortgages, encumbrances and interest on such
mortgages assumed by buyer.)
8) Unpaid real property taxes on the land up to the date of acquisition assumed by the buyer;
9) Payments to tenants to convince them to vacate the premises;
10) Cost to relocate or reconstruct property of others occupying the land so as to obtain ownership;
11) Option cost of the land acquired. If the land is not acquired, the cost of option is treated as expensed;
Option price – The price to be paid by an investor for an option contract, based upon the security
of the underlying asset and the time left until the option expires.
Earnest Money Deposit - Down payment made by a purchaser of real estate as evidence of good
faith; a deposit or partial payment. Earnest money therefore is capitalizable cost of the asset
acquired.
12) Cost of permanent improvement such as draining cost, cost of filling the land, cost of grading and
leveling;

1. Land improvements
a. Not subject to depreciation – capitalizable cost of the land
b. Depreciable – (i) part of blueprint of the building – building (ii) not part of the blueprint – land
improvement
2. Special assessment - this is capitalizable cost of the land.
3. Real property tax – this should be expensed when incurred. However unpaid real property taxes
accruing as of the date of acquisition assumed by the buyer, should be capitalized.

Land Account
Statement of financial position classification

Items Treatment

1. Land used as a plant site Property, plant and equipment

2. Land held for a currently undetermined Investment property

use
3. Land held for long-term capital Investment property
appreciation
4. Land held as a site for a building being Investment property
constructed or developed for future use as
investment property
5. Land leased out under operating lease Investment property
6. Land leased out under finance lease Not reported in the books of the company.
 7. Land held definitely as a future plant site
8. Land held for sale in the ordinary course
of business
9. Land held for sale under PFRS 5
10. Land related to agricultural activity
Property, plant and equipment
Inventory
Classified as noncurrent asset held for sale,
presented as current asset.
Investment property or property, plant and
equipment

Building Account
Statement of financial position classification

Items Treatment

1. Building used as a plant site Property, plant and equipment

2. Building being constructed ог for future Investment property

use as developed investment property
3. Building owned by the company and Investment property
leased out under operating lease
4. Building owned by the company and Not reported in the books of the company.
leased out under finance lease
5. Building held for sale in the ordinary Inventory
course of business
6. Building held for sale under PFRS 5 Classified as noncurrent asset held for sale,
presented as current asset.

Costs Chargeable to Building when Purchased

Examples of costs chargeable following: to building when purchased include the ff.:
1) Purchase price;
2) Legal fees and other expenses incurred in connection with the purchase;
3) Liabilities on the building assumed by the buyer including unpaid real property taxes on the building
up to the date of acquisition assumed by the buyer;
4) Renovation and remodeling cost on the building to make it suitable for its intended use;
5) Payments to tenants to convince them to vacate the premises.

Cost of Building when Constructed

Examples of costs chargeable to building when constructed include the following:
1) Construction cost (materials, labor employed and overhead incurred during the construction;
2) Building permit and license;
3) Architect fee;
4) Fees paid for supervision;
5) Excavation cost;
6) Expenditures for service equipment and fixtures made a permanent part of the structure;
7) Expenditures incurred during the construction period such as interest on construction loans (i.e.,
borrowing cost) and insurance;
8) Cost of security fences while construction and other temporary buildings to house constructions
materials and tools;
9) Cost of demolishing old building, less proceeds from salvage.

Acquisition of land and old building and the:

a) Old building is to be demolished so as to make room for the construction of the new building during
the same period – treatment of the demolition cost is part of the cost of the new building.
b) Old building is to be demolished but the construction of the new building is to be made next
accounting period – treatment of the demolition cost is part of the cost of the land or included in the
new building using a clearing account.

1) Insurance
(a) Taken during construction - part of the cost of the building
(b) Not taken and there is a claim for damages claims for damages shall be treated as expense
2) Building fixtures (e.g., shelves, cabinets and partitions)
(a) Immovable part of the cost of the building
(b) Movable charged to furniture and fixtures and depreciated over their useful life.
3) Savings or loss on construction not recognized as an addition or deduction to the cost of the self-
constructed asset. If there are savings on construction, the company will eventually benefit through
reduced depreciation expense, conversely if there is loss on construction, the company will eventually
incur additional expense through increased depreciation expense.

ACQUISITION OF LAND AND A BUILDING (PIC Q&A No. 2012-02)

The cost of the property acquired should be allocated to the land and the building at date of acquisition
based on their relative fair values. The specific intention of the acquiring entity to demolish rather than
use a building does not affect its fair value that will be used in the cost allocation.
An entity may acquire a piece of land with one or more existing buildings, with the intention to either
demolish the old building right away in order to construct a new building on its site as part of its planned
redevelopment, or to initially use the old building as an owner-occupied property and then demolish it in a
future period and replace it with a new building. In accounting for the cost or carrying value of the old
building, the following rules should be observed:

Scenario Treatment of the Treatment of other Net demolition cost

purchase price common costs on the
acquisition
1. Old building is unusable Purchase price is Charge to the land New building
AND likely to be allocated entirely to
 demolished right away the land. In other
(i.e., the fair value of the words, the cost of old
building is insignificant) building is included
as part of cost of
land.

2. Old building is usable in

the meantime and the old
building will be classified
as:
a. PPE Allocate the purchase Allocate to the land New building
price to the land and and building based
building based on the on the relative fair
relative fair values. values.

b. Inventories The land and Added to the cost of Added to the cost of
building will be the inventories the inventories
classified as one item
under Inventories.
c. Investment
property:
i. @ The land and Allocate to the land New building as
cost building will be and building based investment property
model classified as two on the relative fair
separate items under values.
Investment Property
at their allocated cost
determined using the
relative fair value
ii. @ fair The land and Added to the cost of New building as
value classified as one item the investment investment property
model building will be property
under Investment
Property

3. Old building is usable but Allocate the purchase
likely to be demolished price to the land and
right away old building using
relative fair values is
(allocated cost of the
building is charged to
loss)
Allocate the New building
purchase price to the
land and old building
using relative fair
values is (allocated
cost of the building
is charged to loss)

Common costs on the acquisition include but not limited to the following:
1. Payment to broker and other real estate agents in order to acquire the properties;
2. Unpaid real property taxes as of the date of acquisition;
3. Liabilities such as mortgage including unpaid interest assumed by the buyer;
4. Option cost of the properties acquired;
5. Payments to tenants to vacate the premises;
6. Escrow fees on the properties acquired.

Other Items and Their Treatment

1) Patterns and dies
a. Used for regular products of the company – PPE and depreciated over their useful life
b. Used for specially ordered products – Included as part of the cost of the special product.
2) Containers
a. Returnable (big in units or great bulk) – PPE or other noncurrent assets
b. Returnable (small and involve small amounts) – Other noncurrent assets
c. Not returnable – Expensed outright

ACQUISITION OF PROPERTY
ACQUISITION ON CASH BASIS
If the asset was acquired on a cash basis, the amount to be capitalized is equal to the cash price or cash
equivalents paid at the acquisition date plus incidental costs such as freight, installation cost and other
cost necessary in bringing the asset to working condition for its intended use.
ACQUISITION ON ACCOUNT
If a PPE was acquired, the cost is equal to the invoice price less discount whether taken or not. Two
methods may be used in recording:
a. Gross Method - on the acquisition date, the property, plant, and equipment is recorded at invoice price
before deducting the cash discount. On the payment date, the cash discount is deducted from the
invoice price by a credit to the property, plant, and equipment.
b. Net Method - on the acquisition date, the property, plant and equipment is recorded at invoice price
net of the cash discount. This is preferable approach since PAS 16 requires recording of the property,
plant, and equipment at the cash price equivalent at the recognition date (i.e., acquisition date).

ACQUISITION ON DEFERRED SETTLEMENT TERMS

If PPE acquisition wherein payment is deferred beyond normal credit terms, the cost of the asset is equal
to the:
1) If there is available cash price - cash price or cash equivalent paid at the acquisition date. The
difference between the cash price equivalent and the total payment is recognized as interest expense
over the period of credit unless such interest is recognized in the carrying amount of the item in
accordance with PAS 23.
2) No available cash price - present value of all payments using an imputed interest rate.

ISSUANCE OF SHARES OF STOCK

The cost of the property, plant and equipment when issuing shares is recorded in the following order:
(RII)
1) Fair market value of the property Received (Gain on exchange is credited to Share Premium while
loss is debited to Share Discount)
2) Fair market value of the capital stock Issued (Gain on exchange is credited to Share Premium while
loss is debited to Share Discount)
3) Par value of the Shares Issued (No gain or loss)
This is in accordance with paragraph 10 of PFRS 2 which provides that, "for equity-settled share-based
payment transactions, the entity shall measure the goods or services received, and the corresponding
increase in equity, directly, at the fair value of the goods or services received, unless that fair value cannot
be estimated reliably. If the entity cannot estimate reliably the fair value of the goods or services received,
the entity shall measure their value, and the corresponding increase in equity, indirectly, by reference to
the fair value of the equity instruments granted."

ISSUANCE OF BONDS PAYABLE

According to paragraph 23 of PAS 16, “the cost of an item of property, plant and equipment is the cash
price equivalent at the recognition date.” However, a question arises on how to measure the property,
plant and equipment acquired through issuance of debt securities (i.e., bonds payable).
According to paragraph B5.1.2A of PFRS 9, "the fair value of a financial instrument at initial recognition
is normally the transaction price (i.e., the fair value of the consideration given or received). However, if
part of the consideration given or received is for something other than the financial instrument, an entity
shall measure the fair value of the financial instrument."
Transaction price is the price paid to acquire the asset or received to assume the liability (an entry price).
In contrast, the fair value of the asset or liability is the price that would be received to sell the asset or
paid to transfer the liability (an exit price). [PFRS 13.57]
As can be gleaned from the above-mentioned provision of the PFRSs, it is therefore right to conclude that
the asset must be recorded in the following
order of priority: (IRI)
1. Fair value of the bonds payable Issued
2. Fair value of the property Received
3. Face value of the bonds payable Issued

EXCHANGE TRANSACTION
One or more items of property, plant and equipment may be acquired in exchange for a non-monetary
asset or assets, or a combination of monetary and non-monetary assets. The cost of such an item of
property, plant and equipment is measured at fair value unless (a) the exchange transaction lacks
commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably
measured. [PAS 16.24]
Le.. bonds
tair value of a financial ansaction price
(Le. the However, if part of the
other than the financial value of the financial
he asset or received to fair value
of the asset or ell the asset or paid to
ision of the PFRSs, it is
ecorded in the following
nery with fair value of
nds. Principal is due an
at the end of each year.
strument on January 1
flows from the bonds
the acquisition of the
126,776
may be acquired in n of monetary ant and
29
Chapter 19 - Property, Plant and Equipment
Exchange with Commercial Substance No cash is involved
Cash is involved
Record the asset at:
Record the asset at: (GREG)
1. Fair market value of the property given
Payor: Fair value of the asset given plus cash payment (in effect, this is the fair value of the asset
received)
2. Fair market value of the property received
Recipient of cash: Fair value of the asset given minus cash payment (in effect, this is the fair value of the
asset received)
3. Cost or book value of the property given.
Gain or loss is fully recognized
Commercial substance
Exchange transaction has commercial substance when: a) The configuration (risk, timing and amount) of
the cash flows of the
asset received differ from the configuration of cash flows of the asset transferred and the difference is
significant relative to the fair value of the asset exchanged, or b) The entity-specific value of the portion
of the entity's operations
affected by the transaction changes as a result of the exchange and the change is significant relative to the
fair value of the asset exchanged. Entity-specific value is the present value of the cash flows that an entity
expects to arise from continuing use of an asset and from its disposal at the end of its useful life.
ILLUSTRATION: Exchange with Commercial Substance
Tenorio Company and Jason Company exchanged equipment. The following data are available on the
exchange:
Equipment (cost)
Fair value of equipment
Accumulated depreciation
Cash paid by Tenorio to Jason
Tenorio
Jason
P 500,000 P
300,000
50,000
180,000
40,000
40,000
The configuration (risk, timing and amount) of the cash flows of the equipment is determined to be
significantly different.
Required:
1) How much should Tenorio record the asset? 2) How
is the gain or loss on exchange of Tenorio?
on in the books of Tenorio.

Exchange with No Commercial Substance

The cost of PPE acquired through an exchange with no commercial substance (with or without cash
involve) is measured at the carrying amount of the asset given up. Accordingly, no gain or loss is
recognized. In other words, the following rules should be observed:
1) Payor - book value of the asset given up plus cash paid (if any).
2) Recipient book value of the asset given up minus cash received (if any).

30
following order of priority: When an asset is acquired through trade-in, the new asset is recorded in the
Requirement No. 6
Equipment - new
Accumulated depreciation
50,000
Cash
50,000
Equipment - old
TRADE-IN
The
the
The
Cas
Less
Tra
is computed as follows: 1) Fair value of the asset given plus cash payment. Gain or loss on trade-in
Les
Co
Le
Fair value of the asset given
Los
Gain or loss (fully recognized)
Less: Book value of the asset given
XX
XX
The
Trade in value of the asset given
Less: Book value of the asset given
Gain or loss (fully recognized)
Cash price without trade-in (or list price)
Less: Cash price with trade in
Trade-in value or allowance
2) Trade in value of the asset given plus cash payment (in effect, this is the fair value of the asset
received). The gain or loss on trade-in is computed as follows:
XX
Ma
Acc
Los
M
C
Computation of the trade-in value of the old asset:
XX
XX
XX
DO
Wh
dor
XX
XX
XX
con
1)
DONATION
When an item of property, plant and equipment is received through donation, the asset is recorded at the
fair value when received or receivable considering the source of donated asset:
1) Shareholder - the fair value should be credited to share premium or donated capital. Incurrence or
payment of direct expenses like payment for transfer of title to the corporation, real estate taxes in arrears
and transfer taxes shall be deducted from donated capital.
2) Non-shareholder either credit to subsidies (if not restrictions imposed) or liability account until the
restrictions are met. If the restrictions have already been lifted or met, then the liability shall then be
transferred to income, or less desirably, to donated capital. Incurrence or payment of direct expenses like
payment for transfer of title to the corporation, real estate taxes in arrears and transfer taxes shall be added
to the cost of the assets received.

Cash
Note: This donation is considered a donation from a shareholder, since the Corporation Code provides
that a president of a corporation should have at least one share.
GOVERNMENT GRANTS (PAS 20)
32 Government grants are assistance by government in the form of transfers of resources to an entity in
return for past or future compliance with certain conditions relating to the operating activities of the
entity. They exclude those forms of government assistance which cannot reasonably have a value placed
upon them and transactions with government which cannot be distinguished from the normal trading
transactions of the entity.
Government refers to government, government agencies and similar bodies whether local, national or
international.
Classification of government grants
231) Grants related to assets are government grants whose primary condition is that an entity qualifying
for them should purchase, construct or otherwise acquire long-term assets. Subsidiary conditions may also
be attached restricting the type or location of the assets or the periods during which they are to be
acquired or held.
2) Grants related to income are government grants other than those related to assets.
24 Recognition and measurement of government grants Government grants, including non-monetary
grants at fair value, shall not
be recognized until there is reasonable assurance that:
(a) the entity will comply with the conditions attaching to them; and
(b) the grants will be received.
Receipt of the grant does not in itself provide conclusive evidence that the conditions attaching to the
grant have been or will be fulfilled.
35 Accounting for government grants
Government grants shall be recognized in profit or loss on a systematic basis over the periods in which
the entity recognizes as expenses the related costs for which the grants are intended to compensate. They
shall not be
Ove transac
80,000
900.000
80,000
sidered a donation from a shareholder, in
that a president of a corporation should hav
(PAS 20)
Chapter 19 - Property, Plant and Equipment
istance by government in the form of tra
eturn for past or future compliance with cen
operating activities of the entity They endo
assistance which cannot reasonably have an
ansactions with government which caut
mal trading transactions of the entity
overnment, government agencies and
mal or international
credited directly to shareholders' interests. [PAS 20.12] In accounting for government grants, the
following rules should be observed:
1) Grants in recognition of specific expenses should be recognized as income over the period of the
related expense.
2) A government grant that becomes receivable as compensation for expenses or losses already incurred
or for the purpose of giving immediate financial support to the entity with no future related costs shall be
recognized in profit or loss of the period in which it becomes receivable. [PAS 20.20]
3) Grants related to depreciable assets are usually recognized in profit or loss over the periods and in the
proportions in which depreciation expense on those assets is recognized. [PAS 20.17]
4) Grants related to nondepreciable assets should be recognized in profit or loss over the periods that bear
the cost of meeting the obligations. As an example, a grant of land may be conditional upon the erection
of a building on the site and it may be appropriate to recognize the grant in profit or loss over the life of
the building. [PAS 20.18]
Presentation of grants related to assets
Government grants related to assets, including non-monetary grants at fair value, shall be presented in the
statement of financial position either
1) By setting up the grant as deferred income (liability) or gross method
ent grants
ssets are government grants whose p
entity qualifying for them should pur
acquire long-term assets. Subsidiary o
estricting the type or location of the asets
ney are to be acquired or held
come are government grants other tha
ment of government grants
ng non-monetary grants at fair value
reasonable assurance that
with the conditions attaching to them, and
eived.
endence an
itself provide
heen or will be fulfile
theme
IMA
This method recognizes the grant as deferred income and is recognized in profit or loss on a systematic
basis over the useful life of the asset. The journal entry to record the government grant as deferred income
is:
Cash
XX
XX
Deferred income-government grant
Depreciation of the related asset shall be provided normally.
2) By deducting the grant in arriving at the carrying amount of the asset or net method
This method deducts the grant in calculating the carrying amount of the asset. The grant is recognized in
profit or loss over the life of a depreciable asset as a reduced depreciation expense. The journal entry to
record the government grant as deduction from the cost of the asset is:
Cash
Equipment
XX
XX
Depreciation shall be based on the amount net of the government grant. (i.e., cost less salvage value less
government grant.)
756
Assertions
Transack

Presentation of grants related to income

Grants related to income are sometimes presented as a credit in the statement of comprehensive income,
either
1) Separately or under a general heading such as 'Other income'; or
2) Deducted in reporting the related expense.

*p. 761 wla nasali

Repayment of a grant related to an asset Repayment of a grant related to an asset shall be recognized by
increasing
the carrying amount of the asset or reducing the deferred income balance by the amount repayable. The
cumulative additional depreciation that would have been recognized in profit or loss to date in the
absence of the grant shall be recognized immediately in profit or loss (i.e., Loss on repayment of
government grant.)
39
Chapter 19 Property, Plant and Equipment
Deferred income approach or Gross Method:
The journal entry to record the repayment of government grant is: Deferred income-government grant
(remaining or unamortized
Cash
Loss on repayment of government grant (to be presented as a separate line item) balance)
XX
XX
as follows:
SOLUTION:
Requiremen
Under the Gr
Required.
Gross me
XX
The loss on repayment of government grant is the cumulative additional depreciation that would have
been recognized in profit or loss to date in the absence of the grant which may be computed as follows:
Loss on repayment =
=Accumulated amortization of government grant (e.g., straight line method of depreciation) OR =
Government grant/original life x age of the asset)
Deduction from asset approach or Net Method: 4 The following steps are needed:
1. Add back the amount repaid to the asset's carrying amount.
2. Calculate the reduced depreciation expense to date because of the grant,
which is computed as follows:
=Accumulated amortization of government grant (e.g., straight line method of depreciation) OR
Reduced
depreciation
expense
= Government grant /original life x age of the asset)
The amount calculated is recognized in the profit or loss as an additional depreciation expense to be
recognized during the period of repayment.
The journal entry on the repayment date is as follows: Asset (amount repaid)
Depreciation expense
Cash (amount repaid)
Accumulated depreciation
XX
XX
XX
XX
The additional depreciation expense during the year is the same as the loss on repayment of govt. grant
under the gross method.
ILLUSTRATION; Renavn of Go
12/31/202
12/31/202
Total
Gross Meth
Deferred inc
(25M-1.25
Loss on repa
Cash
Requireme
Under the M
follows:
12/31/20
12/31/20
Total
Net Metho
Building (t
Depreciati
(25M x 2/
Cash (to
Accumu
FORGIVA
Forgivable
of under c
The bene
Treated
FORGIVABLE LOAN
Forgivable loans are loans which the lender undertakes to waive repayment of under certain prescribed
conditions.
The benefit of a government loan at a below-market rate of interest is treated as a government grant. The
loan shall be recognized and measured in accordance with PFRS 9 Financial Instruments. The benefit of
the below- market rate of interest shall be measured as the difference between the initial carrying value of
the loan determined in accordance with PFRS 9 and the proceeds received.
ILLUSTRATION: Forgivable Loan
On January 1, 2021, the local government of Baguio waived the collection of the loans payable of
Danigan Co. because of commendable prompt and
764
ear is the same as the las
od.