PROPERTY, PLANT, AND EQUIPMENT Learning objectives: 1. State the initial and subsequent measurement of items of PPE of government entities. 2. Describe the following and state their peculiar accounting requirements: Heritage Assets, Infrastructure Assets, and Reforestation Projects. 3. Describe the procedures in the receipt and disposition of PPE by a government entity. Property, plant, and equipment are: o Tangible assets. o Held for use in the production or supply of goods, services, or program outputs, for rental to others, or for administrative purposes, and not intended for resale in the ordinary course of operations; and o Expected to be used for more than one reporting period RECOGNITION o An item of PPE is recognized if it meets the definition of PPE and the recognition criteria for assets, as well as the capitalization threshold of P15,000. o The threshold is applied on a per item basis, except as follows: o Individual items with values below the threshold but work together as a group of assets are recognized as PPE if the total cost of the asset as a group is P15,000 or more o Bulk acquisitions of small items of PPE like library books, computer peripherals and small items of equipment are recognized as PPE if their aggregate cost is P15,000 or more INITIAL MEASUREMENT PPE are initially measured at cost. The initial cost comprises the following: o Purchase Price o Direct Cost of bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management o Present value of Decommissioning and Restoration costs Examples of directly attributable costs: o Costs of employee benefits arising directly from the construction or acquisition of PPE; o Costs of site preparation; o Initial delivery and handling costs; o Installation and assembly costs; o Testing costs, net of disposal proceeds of samples generated during testing; and o Professional fees. Examples of costs that are expensed outright: o Costs of opening a new facility; o Costs of introducing a new product or service; o Costs of conducting business in a new location or with a new class of customers; o Administration and other general overhead costs ILLUSTRATION Entity A acquires a scientific equipment on January 1, 2021. Information on costs is as follows: Purchase Price, net of trade discounts 1,000,000 Freight Costs 20,000 Testing Costs 30,000 Net disposal proceeds of samples generated during testing 5,000 Estimated costs of dismantling the equipment at the end of its 5-year useful life 10,000 The current market rate of interest on acquisition date is 10%. Required: o Compute for the initial cost of the equipment. Initial Costs Purchase Price Freight costs Testing costs 30,000 Net disposal proceeds – Testing (5,000) PV of Dismantling Cost [10,000 (1 + 10%) ^ -5] Total Initial Cost 1,000,000 20,000 25,000 6.209.20 1,051,209.20 o The entry to record the acquisition of PPE. Technical and Scientific Equipment 1,051,209.20 Cash-MDS, Regular (1M+20K+25K) Other Provisions 1,045,000 6,209.20 Account Title Technical and Scientific Equipment Account Number I -06-05-140 Normal Balance Debit Description This account is used to recognize the cost incurred in the purchase or assembly or fair value, if acquired through donation or transfers without cost of technical and scientific equipment for use in government operations, such as survey equipment (telescopes. laser distance meters). weather tracking equipment, cartographic, photographic, and reprographic equipment, and other specialized equipment. (i.e., musical instrument), and the like. Credit this account for derecognition of the carrying amount of the replaced parts in major repairs, or disposal. Account Title Other Provisions Account Number 2-06-01-990 Normal Balance Credit Description This account is used to recognize liabilities of uncertain timing or amount. This includes provisions for litigation and other legal claims, warranty provisions, decommissioning provisions, or environmental provisions, among others. Debit this account upon payment/settlement of the liability. o Compute the monthly depreciation using the straight-line method (residual value is 5%) Initial Cost - Residual Value (1,051,209.20 x 5%) Depreciable Value Divide by estimated Useful Life Annual Depreciation Divided by Monthly Depreciation 1,051,209.20 52,560.46 998,648.74 5 199.729.75 12 16,644.15 MODES OF ACQUISITION o Acquisition by Purchase - Acquisition of PPE through purchase are classified as Capital Outlay in the budget registries. - Cash discounts, whether taken or not, are excluded from the initial measurement of an item of PPE. A cash discount not taken is recognized as “Other Losses”. - A PPE purchased under installment basis is initially measured at the cash price equivalent. - Promotional items acquired in conjunction with the purchase of PPE are accounted for as follows: - If the promotional item is the same as those purchased, the total acquisition cost is allocated to all the items acquired including the promotional item. - If the promotional item is different from the other items acquired, the initial cost of the promotional item is its fair value. The purchase price, net of the fair value of the promotional item, is allocated to the other assets acquired. Example: Entity A acquires 10 pick-up trucks for a total price of P15M. Case 1: The supplier provides Entity A one additional pick-up truck, which is the same as the other pick-up trucks purchased, as promotional item. 15M 11 = 1, 363, 636 Case 2: The supplier provides Entity A one car as promotional item. The car has a fair value of P500,000. 15M – 500,000 10 = 1,450,000 o The individual costs of items of PPE acquired at a “lump sum price” are determined by allocating the “lump sum price” based on the relative values of items acquired. ✓ Example: Entity A acquires land and building for a lump sum price of P15M. The land has a fair value of P4M while the building has a fair value of P12M. Fair Value 4,000,00 12,000,000 16,000,000 Land Building Total Journal Entry: Land Building Accounts Payable Allocation 25% 75% 100% Initial Measurement 3,750,000 11,250,000 15,000,000 3,750,000 11,250,000 15,000,000 o If the individual costs of items of PPE acquired at a “lump sum price” are indicated in the invoice, the items shall be recognized at their individual costs as indicated in the invoice. ✓ Example: Entity A acquires a laptop computer and a printer for P100,000. The invoice indicates the following individual costs: P70,000 for the laptop and P30,000 for the printer. o Acquisition by Construction - Acquisitions through Construction Contracts awarded to contractors – the cost of PPE is the contract price. - Construction by Administration (Self-Construction) – the cost of a self-constructed PPE includes the costs of direct materials, labor, and other construction overheads. o Acquisition through Donation - The asset is initially measured at its fair value at the acquisition date - Those received without condition are recognized immediately as asset and income. - Those with condition are initially recognized as liability and subsequently recognized as income when the condition is met. - ADD INFO: with condition journal entry – Asset • • xxx Liability xxx with condition – offset if the condition is meet. with condition – if the condition is not met = REVERSE JOURNAL ENTRY Liability Asset o xxx xxx Acquisition through Intra-agency or Inter-agency Transfers - The asset is measured at the carrying amount of the asset received. ✓ Example: The Regional Office of Entity A receives equipment from the Central Office. The acquisition cost of the equipment is P100,000 and the accumulated depreciation is P4,750 in the Central Office’s books. ✓Journal Entry: Equipment Accumulated Depreciation Account Payable 95,250 4,750 100,000 • Subsequent expenditures on recognized PPE o Repairs and Maintenance – these are classified into: - Minor repairs – cost of day-to-day servicing of an item of PPE, necessary to maintain its operating capability. These are charged as expenses. - Major repairs – are considered ‘betterments’ and are capitalized. - - - o Replacement costs the cost of replacing a part of an item of PPE is capitalized the carrying amount of the replaced part is derecognized and recognized as loss on derecognition. o Spare parts and servicing equipment Minor spare parts are recognized as inventory and charged as expense when consumed. Major spare parts and stand-by equipment are recognized as PPE when they meet the recognition criteria, e.g., they are expected to be used over more than one period. Spare parts and servicing equipment that can only be used in conjunction with an item of PPE are accounted for as PPE. o Betterments – are enhancements to the future economic benefits or service potential of a PPE, such as: An increase in the previously assessed physical output or service capacity; A reduction in associated operating costs; An extension of estimated useful life; or An improvement in the quality of output. o Additions and Rearrangements Additions are modifications which increase the physical size or function of the PPE. Rearrangement is the relocation or reinstallation of an asset which proves to be less efficient in its original location. SUBSEQUENT MEASUREMENT - PPE are subsequently measured using the cost model. Under this model, an item of PPE is measured at its cost less any accumulated depreciation and any accumulated impairment losses. Guidelines in depreciating items of PPE: - The three factors considered when determining depreciation are: initial cost, useful life, and residual value. - All items of PPE shall be depreciated, except land and heritage assets. Depreciation begins when the asset is available for its intended use. For simplicity if a PPE becomes available for its intended use: • • On or before the 15th of the month – depreciation is computed at the beginning of that month. After the 15th of the month – depreciation is computed at the beginning of the following month. - Depreciation ceases when the asset is derecognized or fully depreciated. Depreciation does not cease when the asset becomes idle or retired from active use and held for disposal. - The straight-line method of depreciation shall be used unless another method is appropriate. The estimation of the useful life of an asset is a matter of judgement, based on the entity’s experience with similar assets. As a guideline, PPE shall be depreciated over the following life spans: ▪ ▪ ▪ ▪ ▪ Infrastructure Projects – 20 to 50 years Buildings and Other Structures – 30 to 50 years Machinery and Equipment – 5 to 15 years Transportation Equipment – 5 to 25 years Furniture and Fixtures – 2 to 15 years - Residual value shall be at least 5% of cost, unless an entity determines a more appropriate estimate, subject to the approval of COA. - The residual value and the useful life of an asset shall be reviewed at least at each annual reporting date and, if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate - Depreciation shall be recognized on a monthly basis. Illustration: Entity A acquires a motor vehicle on July 26, 2021, for P1,500,000. The estimated useful life is 5 years. The motor vehicle is available for its intended use as the date of acquisition. ✓ Depreciation starts on August 1, 2021, because the vehicle is acquired after July 15. ✓ The monthly depreciation is P23,750. Acquisition Cost - Residual Value (1,500,000 x 5%) Depreciable Value Divided by estimated Useful Life Annual Depreciation Divided by Monthly Depreciation 1,500,000 75,000 1,425,000 5 285,000 12 23,750 • - - • - - • - Heritage assets Heritage assets are those which have historical, cultural, and environmental significance, and are intended to be preserved for future generations. Examples include historical buildings and monuments, statues, museum and gallery collections, archeological sites, national archives, ruins, conservation areas, nature reserves, and works of arts. Heritage assets are measured at cost. If acquired through donation, the cost is the fair value at the acquisition date. Heritage assets are not depreciated, but subject to impairment. Infrastructure assets Infrastructure assets include road networks (including facilities, such as traffic lights and road signage), flood control, water and power supply systems, communications networks, railways, seaports, airports, and the like. Infrastructure assets are accounted for similar to other items of PPE, i.e., they are initially measured at cost and subsequently depreciated. Generally, infrastructure assets have no residual value. In cases where a part of an infrastructure asset has a residual value, it shall be at least 5% of the cost of that part. Reforestation projects Reforestation refers to the renewal of a forest cover by planting seeds or young trees. Reforestation projects are recorded as land improvements in the books of accounts of the Department of Environment and Natural Resources (DENR) or other entity concerned. The initial costs of reforestation projects include the following: - - Survey, mapping, and planning Nursery operation and seedling production/procurement Plantation establishment Subsequent costs on reforestation projects are accounted for as follows: - Maintenance and protection costs incurred within the duration of the project, such as construction of fire lines, strip brushing, replanting, pest control, and patrolling, are capitalized. - Maintenance and protection costs incurred after the turn-over of the project are charged as repairs and maintenance expense. - The cost of replacing trees is expensed where small numbers of trees are being replaced in any one area. Reforestation projects are not depreciated but subject to impairment. Impairment loss is recognized when a reforestation project is destroyed by a force majeure or fortuitous event beyond the control of man (e.g., typhoon, flood, landslide, earthquake, etc.) Receipt and disposition of PPE The following are the forms/reports necessary to account for PPE: o Purchase Request – this form shall be used by the requisitioner to request for the purchase of PPEs items not available on stock. It shall be the basis of preparing the Purchase Order (PO). o Purchase Order – this form shall be prepared by the Supply and/or Property Division/Unit to support the purchase of PPE, supplies and materials, etc. It serves as the contract between the entity and the supplier for the delivery of specified items based on the stipulations stated which was agreed upon during the procurement process. o Inspection and Acceptance Report – this form shall be used to report the result of the inspection made by the Authorized Inspector on the deliveries and the status of the accepted items by the Supply and/or Property Custodian. This form shall also be used for the inspection of repairs, infrastructures, and reforestation projects. o Property Card – this card shall be used by the Supply and/or Property Division/Unit to record the description, acquisition, transfer, disposal, and other information about the PPE. It shall be kept for each class of PPE. o Property, Plant and Equipment Ledger Card – this card shall be used for each class of PPE to record the acquisition, description, custody, estimated life, depreciation, impairment, disposal, transfer/adjustment, repair history and other information about the property. It shall be kept and maintained by the Accounting Office/Unit. o Property Acknowledgement Receipt –This form shall be used by the Supply and/or Property Division/Unit to report the issuance of PPE and the acknowledgement of the end-user. o Report on the Physical Count of Property, Plant and Equipment – this form shall be used to report the physical count and condition of PPE by type as at a given date, including those which are unrecorded and those which could not be accounted for. It shows the balance of PPE per property cards and per count and the shortage/overage, if any. It shall be rendered by the Inventory Committee, on its yearly physical count of properties owned by the entity. o Inventory and Inspection Report for Unserviceable Property – this report shall be used to account for all unserviceable property of an entity which is subject to disposal. It also serves as the basis in derecognizing the unserviceable properties carried in the PPE accounts. o Report of Lost, Stolen, Damaged or Destroyed Property – this form shall be used by the accountable officer/employee to report or notify the concerned officials of the lost, stolen, damaged or destroyed property. o Property Transfer Report – this form shall be used every time there will be transfer of property from an outgoing officer to his successor or from one accountable officer/employee to another of the same or another entity.
