CHAPTER 23 – PROPERTY, PLANT, AND
EQUIPMENT – IAS 16
IAS 16 applie s to the accounting for property, pla nt and eq uipment, except where another sta ndard req uires or permits differi ng accounting treatments, for example:
The sta ndard doe s
IAS 16, paragraph 6, property, plant, and
equipment are tangible assets that are:
- Held for use in production or supply
of goods or services, for rental to
others or for administrative purposes
- Expected to be used for more than
one period
Major characteristics of PPE:
- Tangible assets – physical substance
- Used in business – production or
supply
- Expected to be use for more than
one year
Examples of PPE:
a. Land
b. Land improvements
c. Building
d. Machinery
e. Ship
f. Aircraft
g. Motor vehicle
h. Furniture and fixtures
i. Office equipment
j. Patterns, molds, and dies
k. Tools
l. Bearer plants – living plant used in
the production of agricultural
produce. It is itself a PPE but its
produce is not.
Recognition of PPE
- benefits associated with the asset
will flow to the entity
- Cost of the asset can be measured
reliably (paragraph 7)
- It is up to the management to decide
whether the item should be
recognized as a PPE if it meets the
criteria because IAS 16 does not
prescribe the unit of measure for
recognition. It does not prescribe
what constitutes an item of PPE.
(Paragraph 19)
Spare parts and servicing equipment
- Most spare parts are usually carried
as inventory and recognized as an
expense when consumed.
- However, major spare parts and
stand-by equipment qualify as PPE
when the entity expects to use them
for more than one period.
Measurement at recognition
- Measured initially at cost (paragraph
15)
- Cost is the amount of cash and cash
equivalent paid and the fair value of
the other consideration given to
acquire an asset at the time of
acquisition or construction.
Elements of cost
- Purchase price, including import
duties and non-refundable purchase
taxes, after deducting trade
discounts and rebates
- Cost directly attributable to bringing
the asset to the location and
condition necessary for it to be
capable of operating in the manner
intended by management
- Initial estimate of the cost of
dismantling and removing the asset
and restoring the site on which it is
located and for which an entity has a
present obligation as required by
law or contract. (paragraph 15)
Directly attributable costs
- Cost of employee benefits arising
directly from the acquisition of PPE
- Cost of site preparation
- Initial delivery and handling cost
- Installation and assembly cost
- Professional fees
- Costs of testing whether the asset is
functioning properly
Proceeds from samples
PAS 16 has been amended such that
proceeds from selling samples produced
and the cost of such samples shall be
included in profit or loss.
-
Proceeds are no longer deducted
from the cost of PPE. If not yet sold,
the samples are accounted for as an
inventory.
Costs not qualifying for recognition
- Costs of opening a new facility
- Costs of introducing a new product
or service (advertising and
promotion)
- Costs of conducting business in new
location, costs of staff training
- Admin and other general OH costs
- Costs incurred while an item capable
of operating has yet to be brought
into use or is operated at less than
full capacity
- Initial operating losses
- Costs of relocating or reorganizing
Measurement after recognition
After initial recognition, an entity shall
choose either the cost model or the
revaluation model as accounting policy.
- Entity shall apply the accounting
policy to an entire class of PPE.
- Cost model – PPE is carried at cost
less any accumulated depreciation
and any accumulated impairment
loss. (paragraph 30)
- If the company’s investment
properties uses cost model, then it
should also be applied in the
company’s PPE
-
-
-
Revaluation model – PPE is carried
at revalued carrying amount. It is the
fair value at the date of revaluation
less any subsequent accumulated
depreciation and subsequent
accumulated impairment losses.
(paragraph 31)
If an item of PPE is revalued, the
entire class of PPE should be
revalued as well. Dapat sabay sabay
din daw nirerevalue.
If an asset’s carrying amount is
increased due to the result of the
revaluation, which means the FV
now is higher than previous carrying
amount or FV of that property, the
increase should be recognize in
other comprehensive income and
the accumulated equity shall be
recognized as the revaluation
surplus. However, it shall be
recognized in profit or loss.
Acquisition of property
- Each way of acquisition presents a
costing problem for accounting
purposes:
1. Acquisition on a cash basis
The cost of an item of PPE is the cash price
equivalent at the recognition date.
Cost of asset acquired on cash basis
includes:
a. Cash paid plus
b. Directly attributable costs (freight.
Installation cost, and other costs
necessary in bringing the asset to
the location and condition for
intended use.)
-
When several assets are acquired at
a “basket price” or a “lump sum
price”, it is necessary to apportion
the single price to the assets
acquired on the basis of relative fair
value.
For example, a land and building is acquired
at a single cost of 5,500,000. At the time of
acquisition, the fair value of the land is
1,000,000 and the building, 4,000,000.
FV
% Allocated cost
Land
1,000,000 1/5 1,100,000
Building 4,000,000 4/5 4,400,000
5,000,000
5,500,000
2. Acquisition on account
When an asset is acquired on account
subject to a cash discount, the cost of the
asset is equal to the invoice price minus the
discount, regardless of whether the
discount is taken or not.
- If discount is not taken, the same is
charged on the purchase discount
loss account which is shown as other
expense.
-
-
The reason is that a wise
management would take advantage
of all discounts
Cash discounts are considered as
reduction of costs and not as
income.
For example. An equipment is purchased at
100,000, 2/10, n/30.
Cost = purchase price less cash discount
whether taken or not
-
To record acquisition of equipment
PPE
Accounts payable
-
-
For example. A machinery is purchased at
an installment price of 350,000. Down
payment of 50,000 is necessary and the
balance will be payable in three equal
annual installments. Cash price is 290,000.
Promissory note issued for the balance of
300,000.
98,000
98,000
-
To record acquisition of machinery
Machinery
Discount on NP
N/P
Cash
290,000
60,000
300,000
50,000
3rd
100,000
Total 600,000
1/6
10,000
60,000
The fraction is derived from the N/P
outstanding each and year and multiplied
by the discount of 60,000 to arrive at the
annual interest expense.
-
If there’s no available cash price, the
asset is recorded at an amount equal
to present value of all payments
using an implied interest rate.
For example:
Machinery installment price = 700,000
Down payment = 100,000
N/P = 600,000 – payable in three equal
annual installments
Implied interest rate = 10%
Present value of an ordinary annuity of 1 is
2.487 for three periods
98,000
-
-
If an asset is offered at cash price
and at installment price, the cost of
the asset purchased at installment
price shall be recorded at cash price.
Installment price – Cash price =
excess -> Interest expense to be
amortized over the credit period.
98,000
To record payment within the
discount period
Accounts payable
Cash
-
To record payment beyond the
discount period
Accounts payable
98,000
Purch. Discount loss
2,000
Cash
100,000
3. Acquisition on installment basis
When payment of PPE is deferred beyond
normal credit terms, the cost is the cash
price equivalent.
To record first installment payment
Note payable
Cash
-
100,000
497,400
597,400
To amortize the discount on N/P
Interest expense
Discount on N/P
1st
2nd
100,000
100,000
Solution:
Down payment
Add: Present value of N/P
(200,000 x 2.487)
Total cost of machinery
30,000
N/P
fraction
300,000 3/6
200,000 2/6
30,000
Interest exp.
30,000
20,000
Note Payable
Present value of N/P
Implied interest
-
600,000
(497,400)
102,600
to record acquisition of machinery
Machinery
597,400
Discount on N/P
Cash
Note Payable
102,600
100,000
600,000
of land is 1,600,000 and share is 90 per
share.
-
-
to record first installment payment
Note Payable
Cash
-
200,000
200,000
to amortize the discount on N/P
Interest expense
Discount on N/P
49,740
49,740
The effective interest method is used in
amortizing the discount on note payable as
interest expense.
4. Issuance of share capital
- the Philippine GAAP provides that is
shares are issued for consideration
other than actual cash, the proceeds
shall be measured at the fair value
of the consideration received.
- Where a property is acquired
through the issuance of share
capital, the property shall be
measured at an amount equal to the
following in the order of priority:
A. Fair value of the property received
B. Fair value of the share capital
C. Par value or stated value of the
share capital
Illustration: A piece of land is acquired by
issuing 20K shares with par value of 50. FV
To record acquisition. FV of land is
used.
PPE
1,600,000
Share capital (20K x 50)
1,000,000
Share premium
600,000
-
FV of share capital is used.
Land (20K x 90)
Share capital
Share premium
-
1,800,000
1,000,000
800,000
Par value of share capital is used.
Land (20K x 50)
Share capital
1,000,000
1,000,000
*The measurement of the land using fair
value of the land is preferable.
5. Issuance of bonds payable
When an entity acquires an asset by issuing
bonds payable, PFRS 9, paragraph 5.1.1
provides that the entity shall measure the
financial liability at fair value plus
transaction costs that are directly
attributable to the issue of the financial
liability. Measured in the ff order:
A. FV of bonds payable
B. FV of asset received
C. Face amount of bonds payable
Illustration: A building is acquired by issuing
bonds payable with face amount of
5,000,000. FV of building is 6,000,000 and
bonds is 5,800,000.
-
To record acquisition using FV of
bonds payable.
Building
5,800,000
Bonds payable
5,000,000
(based to sa face value + transaction costs
pero since wala nun, based lang sa face
amount)
Premium on B/P
800,000
-
Using FV of the building received.
Building
Bonds payable
Premium on B/p
-
6,000,000
5,000,000
1,000,000
Using face amount of bonds payable
Building
Bonds payable
5,000,000
5,000,000
*The measurement of the building using the
fair value of bonds payable is preferable.
6. Exchange
PAS 16, paragraph 24, PPE that is acquired
in exchange for a nonmonetary asset or a
combination of monetary and nonmonetary
asset is measured at FV.
Exchange is recognized at carrying amount
under the ff:
a. The exchange transaction lacks
commercial substance
b. The FV of the asset given or FV of
the asset received is not reliably
measured.
Commercial substance – new notion and is
defined as the event or transaction causing
the cash flow of the entity to change
significantly by reason of the exchange.
- The exchange transaction has
commercial substance when the
cash flows of the asset received
differ significantly from the cash
flows of the asset transferred.
b. FV of the asset given minus any cash
received – on the part of the
recipient.
-
Payor’s books
-
-
Recipient’s books
Entity-specific value – present value of the
cash flows an entity expects to arise from
the continuing use of an asset and from the
disposal at the end of useful life.
Property is acquired by exchanging
another property as part payment
and balance payable in cash
Involves nondealer acquiring the
asset from a dealer.
Involves significant amount of cash,
therefore transaction has
commercial substance.
New asset is recorded at the ff order:
a. FV of the asset given plus cash
payment
b. Trade in value of the asset given plus
cash payment (in effect, it is the fair
value of the asset received.)
- Trade in value approach is used if
the FV of the asset given is not
clearly determinable.
Note: the list price is often bloated to
permit the seller to increase the trade in
value for a used asset. The cash price of the
new asset is believed to be the FV.
Exchange with no commercial substance –
the acquired PPE is measured at the
carrying amount of the asset given. (No gain
or loss is recognized)
- Any cash involved is added to the
carrying amount on the part of the
payor and deducted on the part of
the recipient.
Exchange with commercial substance –
cost of property is equal to the ff:
a. FV of the asset given plus any cash
payment – on the part of the payor
-
7. Trade in
- Form of exchange
8. Donation
Cost = Fair Value of the Property
The IFRS does not address donation or
contribution. However, they explicitly
address government grant.
The Philippine GAAP provides that
contributions received from shareholders
shall be recorded at FV with the credit going
to donated capital.
Expense incurred in connection with the
donation (registration fees) shall be charged
to the donated capital account. This is
because such expenses do not increase or
enhance the value of the asset.
But, directly attributable costs such as
installation fees and testing costs shall be
capitalized.
Capital gifts or grants shall be recorded at
FV when receive pr receivable.
Capital gifts or grants are generally
subsidies and therefore recognized as
income.
In rare case when capital gifts are not
subsidies, the offsetting credit is a liability
account until the initial restrictions are met.
When they are met, the liability is
transferred to income.
9. Construction
The cost of a self-constructed asset is
determined using the same principles as for
an acquired asset. The cost of a selfconstructed asset shall include:
a. Direct cost of materials +
b. Direct cost of labor +
c. Indirect cost and incremental OH
specifically identifiable or traceable
to construction.
*if incremental OH is not identifiable,
allocation of OH may be done on the basis
of DL cost or DL hours.
Saving or loss on construction
If actual cost of construction is < the price of
the constructed asset when purchased
outside, the difference is not income but
saving. (it shall not be recognized in the
financial statements) Any internal profit is
eliminated in arriving at the cost of selfconstructed asset.
If actual cost of constructed asset is > the
price of outside constructed asset, the
constructed asset shall still be recorded at
actual costs. This is because there is no
assurance that the asset of bought outside
is the same as that constructed.
But if there is evidence that the actual cost
is materially excessive, it is believed that the
excess shall be treated as loss chargeable to
the management.
PAS 16, paragraph 22, cost of abnormal
amount of wasted material, labor, or OH
incurred in the production of selfconstructed asset is not included in the cost
of the asset.
Derecognition – means the cost of PPE
together with the related accumulated
depreciation shall be removed from the
accounts.
PAS 16, paragraph 67, carrying amount of
PPE shall be derecognized (a) on disposal or
(b) when no future economic benefits are
expected from the use or disposal.
The gain or loss from the derecognition
shall be included in profit or loss. (It shall be
a separate line item when recorded such as
Gain from Disposal of PPE) It shall be
determined as the difference between net
disposal proceeds and the carrying amount
of the item.
Fully depreciated property – when the
carrying amount is equal to zero or equal to
the residual value.
The asset account and related accumulated
depreciation is closed, and the residual
value is set up in a separate account.
However, it is not uncommon for an entity
to continue to use an asset after it has been
fully depreciated.
The cost of fully depreciated asset
remaining in service and the related
accumulated depreciation shall not be
removed from the accounts.
However, entities are encouraged but not
required to disclose fully depreciated
property.
Property classified as held for sale
PFRS 5, paragraph 7, PPE is classified as held
for sale if the asset is available for
immediate sale in the present condition
w/in 1 year from the date of classification as
held for sale.
- Such asset shall be excluded from
PPE and presented separately as
current asset.
PFRS 5, paragraph 15, noncurrent asset
classified as held for sale (shall not be
depreciated – paragraph 25) shall be
measured at the lower between the
carrying amount and FV less cost of
disposal.
- If the FV less cost of disposal is >
than the carrying amount of the ppe
held for sale, then there would be a
decline and it would be reported as
an impairment loss.
The writedown to FV less cost pf disposal is
treated as impairment loss.
Idle or abandoned property
PFRS 5, paragraph 13, an entity shall not
classify as held for sale a noncurrent asset
that is to be abandoned. This is because the
carrying amount would be recovered
principally through continuing use.
Temporary idle activity or abandonment
does not preclude depreciating the asset
because future benefits are also consumed
through wear and tear and obsolescence.
Optional disclosures
Entities are encouraged to disclose the ff
information: (paragraph 79)
a. Carrying amount of temporarily idle
PPE
b. Gross carrying amount of any fully
depreciated PPE still in use
c. Carrying amount of PPE retired from
active use and is held for sale
d. When cost model is used, the FV of
the PPE when this is materially
different from the carrying amount.
(paragraph 73) Financial statements shall
disclose for each PPE:
- Measurement bases used for
determining the gross carrying
amount
- Depreciation methods used
- Useful lives or the depreciation rates
used
-
Gross carrying amount and the
accumulated depreciation
- Reconciliation of the carrying
amount at the beginning and end of
the period showing:
a. Additions
b. Assets classified as held for sale