Accounting for Property, Plant and Equipment

(BAS 16)
(Depreciation)

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 Meaning and Definition:

• Every company has some items of property,

plant and equipment.

• BAS 16 defines PPE as tangible items that are-

1) held for use in the production or supply of
goods or services, for rental to others, or for
administrative purposes

2) expected to be used during more than one

accounting period.
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 Meaning and Definition:

Property,
Plant and
Equipment

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 Recognition Criteria of PPE

• The item of PPE can be recognized or

recorded in the books if-

1) It is probable that future economic

benefits associated with the item will flow to
the entity; and

2) The cost of the item can be measured

reliably.

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 THE INITIAL MEASUREMENT OF PPE
(Acquisition cost of tangible assets)
• BAS 16 requires that PPE should initially
be measured at ‘cost’.

• The cost of an item of PPE comprises:

1) the cost of purchase, net of any trade
discounts plus any import duties and non-
refundable sales taxes

2) any costs 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.

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 THE INITIAL MEASUREMENT OF PPE

Directly attributable costs include:

 employee benefits payable to staff installing, constructing, or initially
testing the asset
 site preparation
 professional fees directly associated with the installation,
construction, or initial testing of the asset
 any other overhead costs directly associated with the installation,
construction, or initial testing of the asset.

• These direct costs are capitalised and they form the cost of the PPE

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 Measurement of inventories
e.g. staff
installing
cost
Costs of conversion

• The costs of conversion of inventories include costs directly related

to the units of production, such as direct labour.

• They also include a systematic allocation of fixed and variable

production overheads that are incurred in converting materials into
finished goods.

• More on this in managerial accounting (second year)

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 • If the entity has borrowed
funds specifically to finance
the construction of an
asset, then the amount to
be capitalised is the actual
finance costs (interest)
incurred (BAS23 Borrowing
cost).

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 Treatment of borrowing cost -EXAMPLE

• On 1.1.2017 a company borrows Nu.1.5 million @ 10% p.a. for

construction of a PPE. Construction was completed on 31.10.2017
while the loan term expires on 31 March 2018.
Required:
Calculate the finance cost which will be capitalised. Provide journal

entry for the same.

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 Treatment of borrowing cost -SOLUTION

Loan amount = Nu. 1.5 million

Finance cost (interest) = 10 % (1.5 million)/12 x 10 months
= 125,000
31.12. 2017
Finance cost capitalised = Nu.125,000
Finance cost expensed = Nu. 25,000

31.12. 2017
PPE –building DR Nu.125,000 [portion of interest cost capitalised]
Finance cost DR Nu. 25,000 [portion of interest cost expensed]
To cash/accounts payable Nu.150,000
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 • The cost of the asset will include the best available estimate of
the costs of dismantling and removing the item and restoring the
site on which it is located, where the entity has incurred an
obligation to incur such costs by the date on which the cost is
initially established.

PPE – (BAS16) Dr Calculated as Present

Provision on Restoration etc. (BAS37) Cr Value of future amount

Provision on Restoration Dr
To cash / bank Cr
(payment of restoration cost)
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 Acquisition cost of PPE (e.g. Land)

• The acquisition cost of land includes

o purchase price
o charges such as land surveys, legal fees, title fees, transfer
taxes
o Demolition costs of old structures that must be torn down to
get the land for the intended use

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 Acquisition cost of Land-EXAMPLE

A company purchases a land that is to be used for the construction of a

building for the company office. There is a old building on the land that will
need to be demolished. The following costs were incurred related to the
purchase of the land.
• Purchase price Nu. 900,000
• Legal fees Nu. 15,000
• Transfer prices Nu. 10,000
• Costs of demolition of old buildingNu. 8,000
• Costs of clearing, grading and filling Nu. 20,000
• Assumption of unpaid property taxes Nu.5,000
• Proceeds from the sale of materials salvaged from the old building Nu.
11,000
Required: Ascertain the acquisition cost of the land.
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 Acquisition cost of Land-SOLUTION

• Purchase price Nu. 900,000

• Legal fees Nu. 15,000
• Transfer prices Nu. 10,000
• Costs of demolition of old building Nu. 8,000
• Costs of clearing, grading and filling Nu. 20,000
• Assumption of unpaid property taxes Nu.5,000
• Proceeds from the sale of materials salvaged
from the old building (Nu. 11,000)
Nu. 947,000

Property, Plant and Equipment –land Dr 947,000

Paid in capital /common stock 947,000
(purchase of land in exchange for Nu.947,000 equity shares)
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 Acquisition cost of Building, Plant &
Equipment -EXAMPLE
KT Construction company purchased a Plant & Equipment for the
company use and incurred the following expenses;
• Invoice price Nu. 1,000,000
• Transportation cost Nu. 12,000
• Installation costs Nu. 9,000
• Repair cost prior to use Nu.35,000
• Import duties Nu. 15,000

The vendor offered 5% cash discount on invoice price for 30 days credit
term. The company also paid 10% sales tax.
Required:
Ascertain the cost of acquisition of Plant and Equipment.
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 Acquisition cost of Building, Plant &
Equipment -SOLUTION

• Invoice price Nu. 1,000,000

• 5% cash discount (Nu. 50,000)
• Net invoice price Nu. 950,000
• 10% sales tax Nu.95,000
• Transportation cost Nu. 12,000
• Import duties Nu. 15,000
• Repair cost prior to use Nu.35,000
• Installation costs Nu. 9,000
1,116,000

Property, Plant and Equipment Dr 1,116,000

To Accounts payable 1,116,000
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 Accounting for Land and Building

• According to BAS 16, land and buildings are separable assets and
are accounted for separately, even when they are acquired together.

• Land has an unlimited useful life and, therefore, is not depreciated.

• Buildings have a limited useful life and, therefore, are depreciable

assets.

• An increase in the value of the land on which a building stands does

not affect the determination of the depreciable amount of the building.

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 Acquisition cost of Factory -EXAMPLE

On 1 January 2016, Menjong Manufacturing Company began the construction of a new factory.
Costs relating to the factory, incurred in the year ended 31 December 2017, are as follows:

Purchase of the land 1,000,000

Costs of dismantling existing structures on the site 50000
Purchase of materials to construct the factory 160,000
Employment costs (Note 1)  18000

Production overheads directly related to the construction 

12000
General administrative overheads 6000

Architects’ and consultants’ fees directly related to the construction 4000

Costs relating to the formal opening of the factory 2000

Interest
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ACT101 Introduction factory
Financial (Note 2)
Accounting 12000 18
 Note 1
The factory was constructed in the eight months ended 31 August
2017. It was brought into use on 30 Sept 2017. The employment
costs are for the nine months to 30 Sept 2017.

Note 2
Menjong Company received the loan of NU12m on 1 January 2016.
The loan carries a rate of interest of 10% per annum.
Required:
Compute the initial carrying value of the factory.

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 Acquisition cost of Factory -SOLUTION

Purchase of the land 1,000,000

Costs of dismantling existing structures on the site 50000
Purchase of materials to construct the factory 160,000
Employment costs (Note 1)  18000

Production overheads directly related to the construction 

12000

Architects’ and consultants’ fees directly related to the construction 4000

Costs relating to the formal opening of the factory 2000

12000
Interest on loan to partly finance the construction of the factory (Note 2) 1,258,000

PPE –Factory Dr 1,258,000

To cash 1,258,000
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