PAS 16 Property, Plant and

Equipment

MRS. ROSALIE ROSALES-MAKIL, CPA, LPT, MBA

 INITIAL RECOGNITION
• PAS 16 describes the accounting and
disclosures for the property, plant and
equipment necessary to provide users
information about an entity's
investment in its property, plant and
equipment and the changes in them.
• The principal issues in accounting for
PPE are the recognition of assets, the
determination of their carrying
amounts and the depreciation
charges and impairment losses to be
recognized in relation to them.
PROPERTY, PLANT AND EQUIPMENT ARE
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 period
 CHARACTERISTICS OF PPE

1. Tangible assets
2. Used in normal operations
3. Long-term in nature
Examples of PPE

1. Land used in business

2. Land held for future plant site
3. Building used in business
4. Equipment used in the production
of goods
5. Equipment held for environmental
and safety reasons
6. Equipment rented out
7. Major spare parts and long-lived
stand by equipment
 Not examples of PPE
1. Land held for speculation
2. Land held for undetermined future site
3. Land and or building rented out under
operating lease
4. Land and or building for sale in the ordinary
course of business
5. Land and or building held for sale under
PFRS 5
6. Biological assets related to agricultural
activity
7. Intangible assets
8. Minor spare parts and short-lived stand by
equipment
RECOGNITION

THE cost of an item of Property,

Plant and Equipment shall be
recognized as an asset only if:
1. it is probable that future
economic benefits associated with
the items will flow to the entity
2. the cost of the item can be
measured reliably
 SPARE PARTS AND SERVICING
EQUIPMENT
ITEMS such as spare parts, stand by equipment and
servicing equipment are recognized as PPE when they
meet the definition of property, plant and equipment. For
example MAJOR SPARE PARTS AND EQUIPMENT that
are expected to be used for more than one period are
recognized as PPE. OTHER Items are recognized as
inventory.
 SAFETY AND ENVIRONMENTAL
EQUIPMENT
Safety and environmental equipment, although not directly
increasing the future economic benefits of any particular
existing item of PPE, may be necessary for an entity to
obtain the future economic benefits from its other assets.
Non compliance with government regulations, non
performance of contractual obligations, or simply failure to
satisfy constructive obligations may negatively impact an
entity's operations. Items of safety and environmental
equipment are classified as PPE.
 INITIAL MEASUREMENT
Measured at COST

Cost- is the amount of cash or cash equivalent paid or the

fair value of the other consideration given to acquire an
asset at the time of it acquisition or construction
 ELEMENTS OF COST
a. Purchase price, including import duties and non-refundable purchase taxes
after deducting trade discounts and rebates.
b. 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
the management.
c. The initial estimate of the costs of dismantling and removing the item and
restoring the site on which it is located, the obligation for which an entity incurs
either when the item is acquired or as a consequence of having used the item
during a particular period for purposes other than to produce inventories during
that period. These costs are also called restoration costs or decommissioning
costs. They are included in the PPE and depreciated accordingly. Provided a
corresponding liablity is also recognized.
 DIRECTLY ATTRIBUTABLE COSTS
1. Costs of employee benefits arising directly from the
construction or acquisition of the item of PPE
2. Costs of site preparation
3. Initial delivery and handling costs
4. Installation and assembly costs
5. Costs of testing whether the asset is functioning properly,
after deducting the net proceeds from selling any items
produced while bringing the asset to the location and condition.
6. Professional fees
 Costs charged to expense
• The following costs should not be included in the cost of an
item of PPE but rather charged as an expense when
incurred:
a. costs of opening a new facility
b. costs of introducing a new product or service (including
advertising costs and promotional activities)
c. costs of conducting business in a new location or with a
new class of customer (including costs of staff training)
d. administration and other general overhead costs
 CESSATION OF CAPITALIZING COSTS TO
PPE
Recognition of costs in the carrying amount of an item of
PPE ceases when the item is in the location and condition
necessary for it to be capable of operating in the manner
intended by management. Therefore, costs incurred in
using or redeploying are not included in the carrying amount
of that item
 The following costs are not included in the
carrying amount of an item in the PPE
1. Costs incurred while an item capable of operating in the
manner intended by management has yet to be brought into
the use or is operating at less than full capacity
2. Initial operating losses such as those incurred while
demand for the items output builds up
3. Costs of relocating or reorganizing part or all of an
entity's operations
 Income earned from incidental operations
before an asset is put to use
• Is recognized in profit or loss together with the related expenses
during the period such incidental items arose. These incidental
operations may occur before or during the construction or
development activities.
• For Example, income may be earned by temporary using a building
site as a car park until construction starts. Incidental operations are
not necessary in bringing the asset to the location and
condition necessary for it to be capable of operating in the
manner intended by the management. Thus, income and expenses
incurred from such operations should be recognized in profit or loss
immediately
 Measurement of COST

The cost of an item of PPE is the CASH PRICE

EQUIVALENT at the recognition date. If payment is
DEFERRED beyond normal credit terms, the difference
between the cash price equivalent and the total payment is
recognized as interest over the period of credit unless such
interest is capitalized in accordance with PAS 23 Borrowing
Costs.
 DEPRECIATION
• A reduction in the value of an asset over time
Methods
• Straight-line Method
• Unit of production method
• Double-declining balance method
STRAIGHT-LINE DEPRECIATION METHOD
 UNIT OF PRODUCTION METHOD

Step 1: Calculate per unit depreciation:

Per unit Depreciation = (Asset cost – Residual value) / Useful life in units of production

Step 2: Calculate the total depreciation of actual units produced:

Total Depreciation Expense = Per Unit Depreciation * Units Produced

 UNIT OF PRODUCTION METHOD

Example: ABC company purchases a printing press to print flyers for Php40,000 with a useful life of
180,000 units and a residual value of Php4000. It prints 4000 flyers.

Step 1: Per unit Depreciation = (40,000-4000)/180,000 = Php 0.2

Step 2: Total Depreciation expense = 0.2 * 4000 flyers = Php800

So the total Depreciation expense is Php800 which is accounted for. Once the per-unit depreciation is
found out, it can be applied to future output runs.
 DOUBLE DECLINING METHOD
The formula is:

Depreciation = 2 * Straight line depreciation percent * book value at the beginning of the accounting
period

Book value = Cost of the asset – accumulated depreciation

Accumulated depreciation is the total depreciation of the fixed asset accumulated up to a specified
time.
 DOUBLE DECLINING METHOD
Example: On April 1, 2012, company X purchased a piece of equipment for Php 100,000. This is
expected to have 5 useful life years. The salvage value is Php 14,000. Company X considers
depreciation expenses for the nearest whole month. Calculate the depreciation expenses for 2012,
2013, 2014 using a declining balance method.

Useful life = 5

Straight line depreciation percent = 1/5 = 0.2 or 20% per year

Depreciation rate = 20% * 2 = 40% per year

Depreciation for the year 2012 = 100,000 * 40% * 9/12 = 30,000

Depreciation for the year 2013 = (100,000-30,000) * 40% * 12/12 = 28,000

Depreciation for the year 2014 = (100,000 – 30,000 – 28,000) * 40% * 12/12 = 16,800