PROPERTY, PLANT AND EQUIPMENT (PPE)
(IAS 16)
Definition
1. Tangible assets
2. Used in business
3. Expected to be used over a period of more than 1 year
Recognition
1. It is probable that future economic benefits associated with the asset will flow to the entity.
2. The cost of the asset can be measured reliably
Spare parts and servicing equipment
1. Generally, inventory and expense when consumed
If major spare parts and stand-by equipment qualify as PPE when the entity expects to use them
during MORE THAN ONE PERIOD
Purpose of the spare parts
Are spare parts consumed in a production process (whether to produce goods or render
services) or held as merchandise for resale?
If yes, then it might indicate they are inventories.
If not, then spare parts might be considered PPE.
Time aspect
Do you need spare parts to operate some other asset during more than one period? Do you plan
to use these items during more than 1 period?
If yes, then they might be PPE.
If not, then they are inventories.
Measurement at recognition
1. Measured at COST
Cost = cash or cash equivalent paid + fair value of the other consideration given to acquire
an asset at the time of acquisition or construction
Elements of cost
1. Purchase price (+import duties and non-refundable purchase taxes, - trade discounts and
rebates)
2. Cost directly attributable
3. Initial estimate of the cost if dismantling and removing the item and restoring the site on which
it is located, the obligation for which an entity incurs.
Directly attributable cost
1. Cost of employee benefits (directly)
2. Cost of site preparation
3. Initial delivery and handling cost
4. Installation and assembly cost
5. Professional fees
6. Cost of testing whether the asset is functioning properly
Cost not qualifying for recognition
1. Cost of opening new facility
2. Cost of introducing a new product or service,
3. Cost of conducting business in a new location or with a new class of customer
4. Administration and other general overhead cost
5. Cost incurred while item is operating less than full capacity
6. Initial operating losses
7. Cost of relocating or reorganizing
Measurement after recognition
1. Either COST MODEL or REVALUATION MODEL (as accounting policy – shall apply to entire class)
Cost model – at cost less any accumulated depreciation and any accumulated impairment loss
Revaluation Model – at revalued carrying amount (Fv at the date of revaluation less any
subsequent accumulated depreciation and subsequent impairment loss.
Acquisition of Property
1. Cash basis - cost = cash price equivalent at the recognition date
Cash paid + directly attributable cost (freight, installation and other necessary
cost)
IF “basket price or lumpsum price” – apportion on the basis of FV
2. Acquisition on account – cost = invoice price minus discount (regardless whether taken or not)
If discount not taken =charged to “purchase discount lost” EXPENSE account
CASH DISCOUNT = reduction of cost and not as income
Journal Entry recording (gross method or net method)
3. Acquisition on installment basis
If beyond normal credit terms – cost = cash price equivalent
Excess of installment price = interest to be amortized over the credit period
If NO available cash price
Recorded at amount equal to present value of all payments using an implied
interest rate
4. Issuance of share capital
(GAAP) If shares are issued for consideration other than actual cash, the proceeds shall
be measured at the FV of the consideration RECEIVED.
Property shall be measured at (Hierarchy):
a. FV of the property received
b. FV of the share capital
c. PAR VALUE or stated value of the share capital
5. Issuance of bonds payable (PFRS 9)
Shall measure financial liability at fair value plus transaction cost that are directly
attributable to the issuance of the financial liability
Property shall be measured at (Hierarchy):
a. Fair value of the bonds payable
b. Fair value of the asset received
c. Face amount of bonds payable
6. Exchange (PAS 16)
PPE in exchange of non monetary asset or combination of monetary and nonmonetary is
measured at FAIR VALUE.
However, exchanged is measured at CA under the following circumstances
1. The exchange transaction lacks commercial substance
2. The FV of asset given or FV of asset received is not reliably measurable.
EXCHANGE WITH COMMERCIAL SUBSTANCE
Property shall be measured at (Hierarchy):
1. FV of the asset given plus any cash payment (on the part of the payor)
2. FV of the asset given minus any cash received (on the part of recipient)
EXCHANGE – NO COMMERCIAL SUBSTANCE
Measure at CA of the asset given plus cash payment (on the part of the payor)
Less cash received (on the part of recipient)
No gain or loss is recognized

TRADE IN – a form of exchange
- Involves a nondealer acquiring asset from a dealer
- Involves a significant amount of cash and therefore, has COMMERCIAL
SUBSTANCE
- New asset is measured at (order of priority)
1. Fair value of the asset given plus cash payment
2. Trade in value of asset given plus cash payment (this is the fv of the
asset received)
7. Donation
- IFRS does not address donation or contribution, but addresses government
grant
- PH GAAP – contributions received from shareholders shall be recorded at
the FV with the credit going to donated capital. Any expenses incurred with
the donation shall be charged to donated capital account. BUT IF DIRECTLY
ATTRIBUTABLE should be capitalized
- If from nonshareholders, “capital gifts o grants” recognized as income, if
not subsidies (with condition) charge to liability account until the initial
restrictions are met, then transfer to income
8. Construction
- Same principle as acquired
- Includes : DIRECT COST OF MATERIALS, LABOR AND OVERHEAD specifically
identifiable or traceable to the construction
- SAVINGS OR LOSS ON CONSTRUCTION
Actual cost < Price if purchased = savings (record @actual)
Actual cost > Price if purchased = not loss (record @actual
-
But if actual cost is MATERIALLY EXCESSIVE (due to construction
inefficiencies) shall be treated as loss chargeable against management
(abnormal loss not cost)
INTERVENING OPERATIONS – recognized in profit or loss
DERECOGNITION – PAS 16, CA shall be derecognized, gain or loss shall be included in P/L
FULLY DEPRECIATED PROPERTY – CA = ZERO
- ENCOURAGED but not required to disclose fully depreciated property.
PROPERTY CLASSIFIED AS HELD FOR SALE – PFRS 5
- Is asset is available for immediate sale in the present condition within ONE
YEAR from the date of classification as held for sale.
- Excluded from PPE but presented separately as Current Asset
- @ LOWER OF CA OR FV LESS COST OF DISPOSAL
- Any writedown treated as impairment loss
- Not depreciated
IDLE OR ABANDONED PROPERTY – PFRS 5
- Should not be classified as NCA held for sale
- Can be recovered principally through continuing use
OPTIONAL DISCLOSURES
- Entities are encouraged to disclosed the following:
1. CA of temporarily idle PPE
2. The gross CA of any fully depreciated PPE still in use
3. The CA of PPE retired from active use and classified as held for sale
4. When cost model is used, the FV of PPE when this is materially different
from the CA