CHAPTER 4

PROPERTY, PLANT
AND EQUIPMENT

Adapted and adjusted from:

Kieso, D.E., Weygandt, J.J., and Warfield, T.D. (2018).
Intermediate Accounting IFRS Edition, 3rd Edition. NJ,
USA: John Wiley & Sons , Inc.

Other source:
Tan L. T., (2017). Financial Accounting & Reporting in
Malaysia, Vol. 1, 6th ed., CCH-Asia, Malaysia

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 LEARNING OBJECTIVES

After studying this chapter, you should be able to:

1. Describe property, plant, and 3. Understand accounting issues related

equipment. to acquiring and valuing plant assets.

2. Identify the costs to include in initial

valuation of property, plant, and
equipment.

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 PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment are assets of a durable

nature. Other terms commonly used are plant assets and
fixed assets. Includes:
 Land,
► “Used in operations” and not for resale.
 Building structures
► Long-term in nature and usually
depreciated. (offices, factories,
warehouses), and
► Possess physical substance.
 Equipment (machinery,
furniture, tools).

MFRS 116 - Property, plant and equipment are tangible items that:

(a) are held for use in the production or supply of goods or services, for
rental to others, or for administrative purposes; and

(b) are expected to be used during more than one period.

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 ACQUISITION OF PROPERTY, PLANT,
AND EQUIPMENT (PP&E)

Historical cost measures the cash or ‘cash equivalent price’

of obtaining the asset and bringing it to the location and
condition necessary for its intended use.

In general, costs include:

1. Purchase price, including import duties and non-refundable
purchase taxes, less trade discounts and rebates.
2. Costs directly attributable to bringing the asset to the
location and condition necessary for it to be used in a
manner intended by the company.

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 ACQUISITION OF PROPERTY, PLANT,
AND EQUIPMENT (PP&E)
Examples of directly attributable costs are:
(a) costs of employee benefits (as defined in MFRS 119 Employee Benefits)
arising directly from the construction or acquisition of the item of
property, plant and equipment;
(b) costs of site preparation
(c) Initial delivery and handling costs
(d) Installation and assembly costs
(e) costs of testing whether the asset is functioning properly, after deducting
the net proceeds from selling any items produced while bringing the asset
to that location and condition (such as samples produced when testing
equipment); and
(f) professional fees.

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 ACQUISITION OF PROPERTY, PLANT,
AND EQUIPMENT (PP&E)
Examples of costs that are NOT costs of an item of property, plant and
equipment are:
(a) costs of opening a new facility;
(b) costs of introducing a new product or service (including costs of
advertising and promotional activities);
(c) costs of conducting business in a new location or with a new class
of customer (including costs of staff training); and
(d) administration and other general overhead costs.

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 ACQUISITION OF PP&E

Cost of Land
All expenditures made to acquire land and ready it for use.
Costs typically include:
(1) purchase price;
(2) closing costs, such as title to the land, attorney’s fees, and
recording fees;
(3) costs of grading, filling, draining, and clearing;
(4) additional land improvements that have an indefinite life
(Ex: drainage system).

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 ACQUISITION OF PP&E

Cost of Land
 Improvements with limited lives, such as private
driveways, walks, fences, and parking lots, are recorded
as Land Improvements and depreciated.
 Land acquired and held for speculation is classified as
an investment.
 Land held by a real estate concern for resale should be
classified as inventory.

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 ACQUISITION OF PP&E

Cost of Buildings
Includes all expenditures related directly to acquisition or
construction. Costs include:

 materials, labor, and overhead costs incurred during

construction and

 professional fees and building permits.

Companies consider all costs incurred, from excavation to

completion, as part of the building costs.

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 ACQUISITION OF PP&E

Cost of Equipment
Include all expenditures incurred in acquiring the equipment
and preparing it for use. Costs include:
 purchase price,
 freight and handling charges,
 insurance on the equipment while in transit,
 cost of special foundations if required,
 assembling and installation costs, and
 costs of conducting trial runs.
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 ACQUISITION OF PP&E

Self-Constructed Assets
Costs include:
 Materials and direct labor
 Overhead can be handled in two ways:
1. Assign no fixed overhead.

2. Assign a portion of all overhead to the construction

process.

Companies use the second method extensively.

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 ACQUISITION OF PP&E

Illustration: The expenditures and receipts below are related to land,

land improvements, and buildings acquired for use in a business
enterprise. Determine how the following should be classified:

a. Money borrowed to pay building contractor a. Notes Payable

(signed a note)
b. Payment for construction from note proceeds b. Buildings
c. Cost of land fill and clearing c. Land
d. Premium on 6-month insurance policy during d. Buildings
construction

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 ACQUISITION OF PP&E

Illustration: Determine how the following should be classified:

e. Architect’s fee on building e. Buildings

f. Cost of real estate purchased as a plant site f. Land
(land €200,000 and building €50,000)
g. Commission fee paid to real estate agency g. Land
h. Cost of razing and removing building h. Land
i. Installation of fences around property i. Land
Improvements

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 ACQUISITION OF PP&E

Illustration: Determine how the following should be classified:

j. Proceeds from residual value of demolished j (Land)

building
k. Cost of parking lots and driveways k. Land
Improvements

l. Cost of trees and shrubbery planted l. Land

(permanent in nature)
m. Excavation costs for new building m. Buildings

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 VALUATION OF PROPERTY, PLANT &
EQUIPMENT

Companies should record property, plant, and equipment:

 at the fair value of what they give up or
 at the fair value of the asset received,

whichever is more clearly evident.

5 issues of valuation:
a) Cash discount
b) Deferred-Payment Contracts
c) Lump-Sum Purchases
d) Issuance of Shares
e) Exchange of non-monetary assets

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 VALUATION OF PPE

Cash Discounts — Discounts for prompt payment.

Common practice-deduct the cash discount whether the discount is taken or not

Example:

An equipment is purchased at a quoted price of RM100,000 on a term of 2/20, n/60. In

this case, the purchase price should be recorded at its ‘cash price equivalent’ of
RM98,000 irrespective of whether the cash discount is taken advantage of.

If paid within 20 days If paid after 20 days

.Dr Equipment 98,000 Dr Equipment 98,000
Cr Ac payable 98,000 Cr Ac payable 98,000

Dr Ac payable 98,000 Dr Ac payable 98,000

Cr Cash 98,000 Dr Cash discount forgone 2,000
Dr Cash
100,000
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 VALUATION OF PPE
Deferred-Payment Contracts — Assets purchased on long-term credit
contracts are valued at the present value of the consideration exchanged.

Example:
An equipment is purchased under an agreement which provides for payment of
five equal yearly installments of RM100,000 each at the end of each of the five
years. The prevailing market rate of interest for obligations of this nature is 10
percent. The present value of the installments at the date of purchase is
RM379,080.

Dr Equipment 379,080
Cr Note payable 379,080

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 VALUATION OF PPE
End of First Year
Dr Interest Expense RM37,908 (10% x RM379,080)
Notes Payable RM62,092 (RM100,000 – RM37,908)
CR Cash RM100,000

End of 2nd Year

Dr Interest Expense RM31,699 (10% x (RM379,080 – RM62,092))
Notes Payable RM68,301 (RM100,000 – RM31,699)
CR Cash RM100,000

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 VALUATION OF PPE
Lump-Sum Purchases — Allocate the total cost among the various assets on
the basis of their relative fair market values.
Example:
Gemilang Bhd decides to purchase several assets of Harapan Bhd which is in
the process of liquidation. The total price of the assets is RM260,000 and the
assets are:

Book value (RM) Fair value (RM)

Inventory 20,000 15,000
Land 60,000 70,000
Building 200,000 215,000
280,000 300,000

How to allocate the cost?

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 VALUATION OF PPE
Book value (RM) Fair value (RM)
Inventory 20,000 15,000
Land 60,000 75,000
Building 200,000 210,000
280,000 300,000

Inventory (15,000/300,000) x 260,000 = 13,000

Land (75,000/300,000) x 260,000 = 65,000
Building (210,000/300,000) x 260,000 = 182,000

Journal entry:
Dr Inventory 13,000
Land 65,000
Building 182,000

Cr Cash 260,000
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 VALUATION OF PPE
Issuance of Shares — Refer MFRS 2 Share-based Payment
The cost of PPE shall be its fair value, or the fair value of the securities issued,
whichever is more clearly evident. If the asset has market value, use its market value to
record the cost of the asset. If there is no market value for the asset, use the market
value of the securities issued.

Example: Melati Bhd purchases an industry building in Shah Alam by issuing

5,000,000 ordinary shares of RM1 each to the vendor. The market value of the building is
RM35,000,000 and the market price of the ordinary share is RM8.80 per share.
Journal entry:
Dr Building 35,000,000
Cr Contributed share capital 35,000,000

If there is no market value for the building:

Dr Building (5 m x 8.80) 44,000,000

Cr Contributed share capital 44,000,000

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 VALUATION OF PPE

Exchanges of Non-Monetary Assets

Ordinarily accounted for on the basis of:
 the fair value of the asset given up or
 the fair value of the asset received,

whichever is clearly more evident.

Companies should recognize immediately any gains or losses on

the exchange when the transaction has commercial substance.

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 Exchanges of Non-Monetary Assets

Meaning of Commercial Substance

Exchange has commercial substance if the future cash flows
change as a result of the transaction. That is, if the two parties’
economic positions change, the transaction has commercial
substance.

Type of Exchange Accounting Guidance

Has commercial substance  Recognize gains and losses immediately

Lacks of commercial substance  Defer gains and losses.

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 Exchanges of Non-Monetary Assets

Exchanges—Loss Situation
Companies recognize a loss immediately when the exchange
has commercial substance .
Rationale: Companies should not value assets at more than their
cash equivalent price; if the loss were deferred, assets would be
overstated.

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 Exchanges of Non-Monetary Assets

Illustration: Information Processing, Inc. trades its used machine for a

new model at Jerrod Business Solutions Inc. The exchange has
commercial substance. The used machine has a book value of €8,000
(original cost €12,000 less €4,000 accumulated depreciation) and a fair
value of €6,000. The new model lists for €16,000. Jerrod gives
Information Processing a trade-in allowance of €9,000 for the used
machine. Information Processing computes the cost of the new asset
as follows.

ILLUSTRATION 10-11
Computation of Cost of
New Machine

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 Exchanges of Non-Monetary Assets

Illustration: Information Processing records this transaction as

follows:

Equipment 13,000
Accumulated Depreciation—Equipment 4,000
Loss on Disposal of Equipment 2,000
Equipment 12,000
Cash 7,000

ILLUSTRATION 10-12
Computation of Loss
Loss on on Disposal of Used
Machine
Disposal

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 Exchanges of Non-Monetary Assets

Exchanges—Gain Situation
Has Commercial Substance. Company usually records the
cost of a non-monetary asset acquired in exchange for
another non-monetary asset at the fair value of the asset
given up, and immediately recognizes a gain.

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 Exchanges of Non-Monetary Assets

Illustration: Interstate Transportation Company exchanged a

number of used trucks plus cash for a semi-truck. The used trucks
have a combined book value of $42,000 (cost $64,000 less $22,000
accumulated depreciation). Interstate’s purchasing agent,
experienced in the secondhand market, indicates that the used
trucks have a fair market value of $49,000. In addition to the trucks,
Interstate must pay $11,000 cash for the semi-truck. Interstate
computes the cost of the semi-truck as follows.

Illustration 10-13
Computation of
Semi-Truck Cost

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 Exchanges of Non-Monetary Assets

Illustration: Interstate records the exchange transaction as follows:

Truck (semi) 60,000

Accumulated Depreciation—Trucks 22,000
Trucks (used) 64,000
Gain on Disposal of Trucks 7,000
Cash 11,000

ILLUSTRATION 10-14
Computation of Gain
Gain on on Disposal of Used
Trucks
Disposal

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 Exchanges of Non-Monetary Assets

Exchanges—Gain Situation
Lacks Commercial Substance. Now assume that
Interstate Transportation Company exchange lacks
commercial substance.

Interstate defers the gain of $7,000 and reduces the basis of

the semi-truck.

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 Exchanges of Non-Monetary Assets

Illustration: Interstate records the exchange transaction as

follows:

Trucks (semi) 53,000

Accumulated Depreciation—Trucks 22,000
Trucks (used) 64,000
Cash 11,000

ILLUSTRATION 10-15
Basis of Semi-Truck—
Fair Value vs. Book Value

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 Exchanges of Non-Monetary Assets

Summary of Gain and Loss Recognition

on Exchanges of Non-Monetary Assets
Compute the total gain or loss on the transaction. This amount is equal to the
difference between the FV of the asset given up and the BV of the asset given
up.
1. If the exchange has commercial substance, recognize the entire gain or
loss.
2. If the exchange lacks commercial substance, no gain or loss is recognize.

Disclosure include
 nature of the transaction(s),
 method of accounting for the assets exchanged, and
 gains or losses recognized on the exchanges.

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 END OF CHAPTER 4

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