PROPERTY, PLANT, AND EQUIPMENT Statement of financial position classification Initial Measurement Land used as a plant site Land held definitely as a future plant site Land held for a currently undetermined use Land held for long-term capital appreciation Land held as a site for a building being constructed or developed for future use as investment property Land leased out under operating lease Land leased out under finance lease Land held for sale in the ordinary course of business Land held for sale under PFRS 5 An item of property, plant, and equipment that qualifies for recognition as an asset shall be measured at its cost. Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction. Components of Cost 1. 2. 3. Purchase price Import duties and nonrefundable purchase taxes Cost of testing whether the asset is functioning properly Amendments to IAS 16. Prohibits deducting from the cost of an item of PPE any proceeds from selling items produced while bringing the asset to the location and condition necessary for it to be capable of operating. The amendment is effective for annual periods beginning on or after January 1, 2022. 4. 5. 6. 7. 8. Cost of site preparation Professional fees of architects and engineers Installation and assembly cost Initial delivery and handling cost Cost of employee benefits arising directly from the construction or acquisition of the item of property, plant, and equipment • • Special assessments – taxes paid by the landowner as a contribution to the cost of public improvements – capitalized Real property tax - tax on real property imposed by the Local Government Unit – expensed as a general rule (1) Unpaid up to the date of acquisition assumed by the buyer – capitalized Inventory Noncurrent asset held for sale – current asset Old building is usable – allocate purchase price to land and building based on relative fair value • Usable but demolished immediately to make room for construction of new building New building is PPE or investment property – allocated cost of old building is recognized as loss New building is inventory – allocated cost of old building is capitalized as cost of new building • a. b. c. Notes: Not reported in the books of the company Old building is unusable (fair value is insignificant) – purchase price is allocated entirely to LAND LAND Purchase price Survey cost Cost to register the land and other cost of transferring the title in the name of the buyer d. Legal fees and other expenditures for establishing clean title e. Commission cost paid to brokers or agents f. Cost of clearing unwanted old structures, less proceeds from salvage excluding demolition cost g. Liabilities on the land assumed by the buyer h. Unpaid real property taxes on the land up to the date of acquisition assumed by the buyer i. Payments to tenants to convince them to vacate the premises j. Cost to relocate or reconstruct property of others occupying the land as to obtain ownership k. Option cost if the the land is acquired l. Earnest money deposit m. Cost of permanent improvement such as draining cost, cost of filling land, cost of grading and leveling, cost of subdividing – not subject to depreciation Investment property Acquisition of Land and Building Asset Retirement Obligation. A legal obligation that is associated with the retirement of a tangible, long-term asset to pay a certain amount for the removal or retirement thereof upon the maturity of the contract. Costs chargeable to land PPE Usable and acquiring entity intends to use it for a while before it is demolished in a future period New building is PPE, investment property, or inventory - allocated cost of old building shall be depreciated over the building’s remaining estimated useful life; any remaining carrying value shall be charged to loss • Net demolition costs = cost of demolishing old building less salvage value New building is PPE, investment property, inventory – capitalize as cost of new building or Land prepared for intended use but not to make room for construction of new building – capitalize as cost of land BUILDING Cost of building when purchased The following expenditures are normally charged to the building account when building is acquired by purchase: a. b. c. d. e. f. Purchase price Legal fees and other expenses incurred in connection with the purchase Unpaid taxes up to date of acquisition Interest, mortgage, liens and other encumbrances on the building assumed by the buyer Payments to tenants to induce them to vacate the building Any renovating or remodeling costs incurred to put a building purchased in a condition suitable for the intended use such as lighting installations, partitions and repairs Cost of building when constructed a. b. c. d. e. f. g. h. i. j. k. Materials used, labor employed and overhead incurred during the construction Building permit or license Architect fee Superintendent fee Cost of excavation Cost of temporary buildings used as construction offices and tools or materials shed Expenditures incurred during the construction period such as interest on construction loans (i.e. borrowing cost) and insurance Expenditures for service equipment and fixtures made a permanent part of the structure Cost of temporary safety fence around construction site and cost of subsequent removal thereof Safety inspection fee Cost of demolishing old building to make room for the construction of new building Notes: • • • • • Permanent fence – land improvement Sidewalks, pavements, parking lot, driveways (1) Part of the blueprint – charged to building account (2) Occassionally made or incurred not in connection with the construction of a new building – land improvements Insurance (1) Taken during construction – charged to building account (2) Payment of claims for damages for injuries sustained during the construction – expensed outright Building fixtures (1) Immovable – charged to building account (2) Movable – charged to furnitures and fixtures Ventilating system, lighting system, elevator (1) Installed during construction – charged to building account (2) Incurred not in connection with the construction of a new building – building improvements MACHINERY Cost of machinery a. b. c. d. e. f. g. h. i. Purchase price Freight, handling, storage and other cost related to the acquisition Insurance while in transit Installation cost, including site preparation and assembling Cost of testing and trial run, and other cost necessary in preparing the machinery for its intended use Initial estimate of cost of dismantling and removing the machinery and restoring the site on which it is located, and for which the entity has a present obligation Fee paid to consultants for advice on the acquisition of the machinery Cost of safety rail and platform surrounding machine Cost of water device to keep machine cool Notes: • • Old and new installation cost Moved to a new location (1) Undepreciated cost of the old installation cost – expensed (2) New installation cost – charged to machinery Removed and retired (1) Undepreciated cost of the old installation cost – expensed (2) New installation cost – charged to machinery (3) Removal cost – expensed • Non-recoverable purchase tax (e.g. VAT) (1) VAT-registered entities – not capitalizable; charged to input tax to be offset against the output tax (2) Non-VAT entities – capitalized Recognition of subsequent cost a. Increase the future service potential – capitalized (1) Extends the life of the property (2) Increases the capacity of the property and quality of output (3) Improves the efficiency and safety of the property b. Maintains the existing level of performance – expensed Statement of financial position classification Building used as a plant site Building being constructed or developed for future use as investment property Building owned by the company and leased out under operating lease Building owned by the company and leased out under operating lease Building held for sale in the ordinary course of business Building held for sale under PFRS 5 PPE Investment property Not reported in the books of the company Inventory Noncurrent asset held for sale – current asset; depreciation is discontinued Fully Depreciated PPE still in use – need not be removed in the statement of financial position and should be disclosed in the notes. However, if the PPE is fully depreciated because the useful life exceeds the economic life as a result of the company’s failure to review the useful life every year, this is an error under PAS 8 and should be accounted retrospectively. Notes: • Patterns and dies (1) Used for the regular products – PPE (2) Used for specially ordered products – included as part of the cost of the special product • Returnable containers (1) Returnable (in big units or great bulk) – PPE (2) Returnable (small and individually involve small amount) – other noncurrent assets (3) Not returnable – expensed Subsequent Cost a. b. c. d. e. Additions (1) Entirely new unit (2) Expansion, enlargement or extension of old asset – depreciated over its useful life of expansion or remaining useful life of asset, whichever is shorter Improvements or betterments – substitution of a better or superior quality Repairs (1) Extraordinary repairs – capitalized (2) Ordinary repairs – expensed when incurred Rearrangement cost – relocation or reinstallation of an asset which proves to be less efficient in the original location Replacements – substitution of an equal or lesser quality (1) Replacement of old asset by a new one – capitalizable as new asset Major replacement (1) Original part of existing asset identification practicable – separately Loss on retirement Accumulated depreciation PPE xxx xxx PPE (at the replacement cost) Cash xxx (2) Original part of existing asset identification not practicable – Loss on retirement Accumulated depreciation PPE (at assumed cost) xxx xxx PPE (at the replacement cost) Cash xxx xxx xxx separate xxx xxx Addendum: • • • • Effective on or after January 1, 2022, any proceeds from selling items produced while bringing the asset to the location and condition necessary is no longer deducted – recognized in P&L Income and related expenses from incidental operations not necessary to bring the asset to the location and condition necessary for it to be capable of operation – recognized in P&L Vehicle registrations fees – expensed The following entities are required to pay VAT: 1. Persons or entities who, in the course of trade or business, sells, exchanges, leases goods or properties or renders services subject to VAT where the aggregate amount of actual gross sales or receipts exceeds Three Million Pesos (Php3,000,000). 2. Individuals or businesses that voluntarily registered as VAT taxpayers, even if they did not meet the VAT aggregate amount of P3,000,000 in gross sales or receipts. 3. Persons or entities that import goods.
