Characteristics
Tangible Assets
Used in business (production/supply of goods and services, for rental and for admin purposes)
Expected to be used for more than one year
Bio Assets and Mineral Rights and Reserves are not PPE.
→ apply PAS 16 for PPE used to develop or maintain bio assets and mineral rights & reserves
Recognition
Probable future economic benefits
Cost of the asset can be measured reliably
Cost of PPE
→ cost incurred to acquire/construct PPE
→ cost incurred subsequently to add to, replace part of, or service it
→ Spare parts & Servicing Equipment
Normally carried as inventory and expensed as consumed
If major spare parts and stand-by equipment, qualify as PPE if used for more than one year
→ depreciated over a time period not exceeding the useful life of related asset
→ Safety and Environmental Equipment
Not directly increasing the future economic benefit of any existing PPE
Necessary to obtain the future economic benefit from the asset in EXCESS of what it could
obtain if such equipment had not been acquired
Recognize as PPE
Measurement @ Recognition
→ initially measured at COST
Purchase price including import duties and nonrefundable purchase taxes net of trade discount
& rebates whether taken or not
Cost directly attributable to bringing the assets to the location and condition for it to be capable
of operating
→ cost of employee benefits from construction/acquisition of PPE
→ cost of site preparation
→ initial delivery & handling costs
→ installation and assembly cost
→ professional fees
→ cost of testing whether asset is functioning properly net of proceeds from selling any
items produced during testing (samples)
Initial estimate of costs of dismantling & removing the item & restoring the site on which it is
located
→ the obligation for which the entity incurs when the item is acquired or as a
consequence of having used the item
Modes of Acquisition
Mode Cost of equipment
Acquisition on Cash Basis Cash price equivalent @ recognition date plus directly
attributable costs
Lump sum price Allocate based on relative fair value of assets acquired
Acquisition on Account Invoice price minus discount (whether taken or not)
Acquisition on Installment Basis Cash price equivalent
If there is cash price given @ cash price (if installment price > cash price, recognize as
interest to be amortized over credit period
No available cash price Present value of all payments using implied interest rate
Issuance of Share Capital a. Fair value of asset received
b. Fair value of the share capital
c. Par value/stated value of the share capital
Issuance of Bonds Payable a. Fair value of bonds payable
b. Fair value of asset received
c. Face value of bonds payable
Exchange
→ acquisition in exchange of nonmonetary asset or
combination of monetary and nonmonetary
Cash is involved a. Fair value of asset given plus cash payment (payor)
b. Fair value of asset given minus cash received
(payee)
No commercial substance (no gain/loss) Carrying amount of asset given up +/- cash received/paid
a. Fair value approach Fair value of asset given plus cash payment
b. Trade in value approach (if FV of asset given Trade in value of asset given plus cash payment
can’t be determined)
Donation
From shareholders Fair value of items received (credit to donated capital)
*Expenses related to the donation (registration fees and
legal fees) are added to donated capital
*Expenses directly attributable to the asset is added to
asset account
From nonshareholders
→ if subsidy Fair value of asset/item received (credit to income
account)
→ if not subsidy (with restriction) Fair value of asset/item received (credit to liability account
until restrictions are met where it is transferred to income)
Construction Includes:
1. Direct cost of materials
2. Direct cost of labor
3. Indirect cost traceable to production
→ if not specifically identifiable, allocate overhead
based on direct labor cost/hours
Derecognition
Removal of cost of PPE with related accumulate depreciation
Upon disposal or when it is fully depreciated
Gain/Loss on disposal shall be included in profit or loss
Gain/Loss on disposal = Net disposal proceeds – Carrying amount of asset
Optional Disclosures
CA of temporarily idle PPE
Gross CA of any fully depreciated PPE still in use
CA of PPE retired from active use and classified as held for sale
When cost model is used, the FV of PPE when this is materially different from the CA
Requisites
given by the government
in return for past or future compliance with conditions
Classifications
a. Grant related to asset
→ condition is that the entity shall purchase, construct, or acquire long-term asset
b. Grant related to income
→ grant other than related to asset
If related to asset:
a. Repayment shall be recorded by increasing the carrying amount of the asset
b. Cumulative depreciation that would have been recognized to date in the absence of the grant shall be
recognized immediately as an expense
Depreciation xxx
Accumulated Depreciation xxx
(Cumulative depreciation not recognized)
Building xxx
Cash xxx
Depreciation xxx
Accumulated Depreciation xxx
Government Assistance
→ action by the government to provide economic benefit specific to an entity or range of entities under certain
criteria
→ the essence is that NO VALUE can reasonably be placed upon government assistance such as
a. Free technical or marketing advices
b. Provision of guarantee
c. Government procurement policy that is responsible for a portion of the entity’s sales
Disclosures
a. Accounting policy adopted including method of presentation in FS
b. Nature and extent of grant recognized and indication of other forms of gov’t assistance from which the entity
has directly benefited
c. Unfulfilled conditions and other contingencies attaching to government assistance that has been recognized
Name of the government agency that gave the grant is NOT REQUIRED to be disclosed along with the date of sanction
and date when cash is received.
Types of Borrowing
a. Specific borrowing
→ funds borrowed specifically for the purpose of acquiring a qualifying asset
b. General borrowing
→ funds borrowed are generally AND used for acquiring a qualifying asset
Commencement of capitalization
Capitalize borrowing cost when the following three conditions are present:
a. When the entity incurs expenditures for the asset
b. When the entity incurs borrowing costs
c. When the entity undertakes activities necessary to prepare the asset for the intended use or sale
→ Activities necessary to prepare asset encompass more than physical construction of the asset (includes technical and
administrative work prior to commencement of physical construction such as drawing up plans and obtaining permits)
→ Merely holding the asset for use or development without any associated development activity does NOT QUALIFY
for capitalization
Suspension of Capitalization
→ if due to temporary delay which is a necessary part of the process of getting an asset ready for its intended use,
continue capitalization of borrowing costs (eg. Period of high water levels that delay the construction of a bridge if such
high water level is common during construction period in the geographical region involved.)
Cessation of Capitalization
→ Ceases when substantially all the activities necessary to prepare the asset are complete
Disclosures
a. Amount of borrowing costs capitalized during the year
b. Capitalization rate used
Segregation of qualifying assets from other assets in FS is NOT REQUIRED to be disclosed
Land Account
→ recognize as PPE if:
a. Used as a plant site
b. Held definitely as a future plant site
→ other uses of land not recognized under PPE:
a. For currently undetermined future use (investment property)
b. Held for long term capital appreciation (investment property)
c. Held for current sale by a real estate developer (inventory)
Land Improvements
→ if additions to cost not subject to depreciation, charge to land account
→ if land improvements are depreciable, charge to land improvement such as
a. Fences
b. Water system
c. Drainage system
d. Sidewalks
e. Pavements
f. Cost of trees, shrubs and other landscaping
→ depreciate over their useful life
Building Account
If purchased
a. Purchase price
b. Legal fees and other expenses incurred in connection to the purchase
c. Unpaid taxes up to date of acquisition
d. Interest, mortgage, liens and other encumbrances on the building assumed by buyer
e. Payments to tenants to induce them to vacate building
f. Any renovating or remodeling costs incurred to put a building purchased in a condition suitable for its intended
use
If constructed
a. Materials used, labor employed and overhead incurred during construction
b. Building permit or license
c. Architect fee
d. Superintendent fee
e. Cost of clearing and demolishing unwanted old structures, less proceeds from salvage
f. Payments to tenants to induce them to vacate building
g. Cost of excavation
h. Cost of temporary buildings used as construction offices and tools or materials shed
i. Expenditures incurred during the construction period such as interest on construction loans and insurance
j. Expenditures for service equipment and fixtures made permanent part of the structure
k. Cost of temporary safety fence around construction and cost of subsequent removal thereof (permanent fence
is a land improvement)
l. Safety inspection fee
Building Fixtures
→ immovable shelves, cabinets, and partitions (attached to the building), charge to Building
→ movable shelves, cabinets, and partitions, charge to Furniture and Fixtures (depreciated over its useful life)
2. Old building is demolished immediately to make room for the construction of the new building
a. The allocated carrying amount of the old building is charged to loss if the new building is accounted for as
PPE or investment property
b. The allocated carrying amount of the old building is capitalized as cost of the new building if the latter is
accounted for as inventory
c. The cost of demolition net of salvage value (including payment to tenants to vacate premises) is capitalized
as cost of building
3. If an old building owned by the company is to be demolished to make room for the construction of the new
building
a. The carrying amount of the old building is recognized as loss whether the new building is accounted for as
PPE, investment property, or inventory
b. The cost of demolition net of salvage value is capitalized as cost of the new building
Machinery
Costs chargeable to machinery are as follows:
a. Purchase price
b. Freight, handling, storage, and other cost related to the acquisition
c. Insurance while in transit
d. Installation cost, including site preparation and assembling
e. Cost of testing and trial run, and other costs necessary in preparing the machinery for its intended use
f. 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 (required to be capitalized by law or contract)
g. Fee paid to consultants for advice on the acquisition of the machinery
h. Cost of safety rail and platform surrounding the machine
i. Cost of water device to keep machine cool
→ if machinery is moved to new location, the undepreciated cost of old installation cost is expensed and the new
installation cost is charged to new asset
→ if machinery is remover and retired to make room for the installation of a new one, the removal cost NOT previously
recognized as a provision is charged to expense not capitalizable
→ VAT on the purchase of machinery is not capitalizable but charged to input tax to be offset against output tax. Any
irrevocable purchase tax is capitalized as cost of the asset.
Tools
→ machine tools are those used in connection with the operation of machines
→ hand tools are those not used in operating the machines
→ segregated from the machinery account
Equipment
→ includes delivery equipment, store equipment, office equipment, furniture and fixtures, and similar assets
→ Delivery equipments
Cars
Trucks
Other vehicles used in business operations
Motor vehicle registration fees → expensed outright
→ Store and Office equipment
Computers
Typewriters
Adding machines
Cash registers
Calculators
For selling function → store equipment
→ Furnitures & Fixtures
Showcases
Counters
Shelves
Display Fixtures
Cabinets
Partitions
Safes
Desks
Tables
Returnable containers
→ bottles, boxes, tanks, drums, barrels, and similar items returned to the seller by the buyer when contents are
consumed
→ if containers are in big units or of great bulks (tanks, drums, barrels) → PPE
→ if containers are in small units and individually involve small amounts (bottles and boxes) → Other Noncurrent Assets
→ if not returnable → expense outright
Subsequent Costs
Additions → modifications or alterations which increase the physical
size or capacity of the asset
An entirely new unit → capitalized; depreciated over its useful life
An expansion, enlargement, or extension of the → capitalized; depreciated over its useful life or remaining
old asset life of the asset of which it is a part, whichever is shorter
Improvement or Betterments → modification or alterations which increase the service
life or the capacity of the asset
→ may represent replacement of an asset or a part thereof
with one of a better or superior quality
→ capitalized
→ if it do not involve replacement of parts, simply added
to cost of existing asset
Replacements → substitution but the new asset is not better than the old
asset when acquired
→ replacement is a substitution of an equal or lesser
quality
Depreciation Period
→ begins → when it is available for use (asset is in the location and condition necessary for it to be capable of
operating)
→ ceases → when asset is derecognized
→ temporary idle activity DOES NOT PRECLUDE depreciating the asset
→ if asset is classified as held for sale, discontinue depreciation
Kinds of Depreciation
a. Physical depreciation → related to depreciable asset’s wear and tear and deterioration over a period
→ results to the ultimate retirement of the property or termination of the service of the asset
1. Wear and tear due to frequent use
2. Passage of time due to nonuse
3. Action of the elements such as wind, sunshine, rain or dust
4. Accidents such as fire, flood, earthquake and other natural disaster
5. Disease → physical cause is due to animals and wooden buildings
b. Functional or economic depreciation → arises from obsolescence or inadequacy of the asset to perform
efficiently
1. Obsolescence arise due to the following:
a. When there is no future demand for the product which the depreciable asset produces
b. When a new depreciable asset becomes available and can perform the same function for
substantially lesser cost
2. Inadequacy arises when asset is no longer useful to the firm because of increase in the volume of
operations
Factors of depreciation
a. Depreciable amount
b. Residual value → may be equal to carrying amount where dep’n will be zero until it becomes lower than CA but
never it becomes MORE THAN the carrying amount of the asset
c. Useful life
Methods of Depreciation
a.1 Sum of half years’ digits (eg. 2 ½ years) → multiply life by 2 to get “life” (eg. 2 ½ times 2 = 5 years)
→ use two fractions for 1 year (one fraction = 6 months)
(eg. 5/15 and 4/15)
a.2 Fractional depreciation (eg. acctg period is → compute per years’ depreciation then prorate based on
from March 1 to February 28) calendar period (annual depreciation x 9/12)
a. Inventory or appraisal (assets with small value → Depreciation = Balance of asset account, beginning less
such as tools) Value at the end of the year
b. Retirement method (depreciation only when → Depreciation = Original cost of asset – Salvage Value
retired)
c. Replacement method (depreciation only when → Depreciation = Replacement Value – Salvage Value
retired and replaced)
Revaluation Decrease
Acc. Depreciation xxx
Revaluation Loss xxx
Machinery xxx
If recoverable amount of previously impaired asset turns If asset’s carrying amount is decreased as a result of
out to be higher than the asset’s current carrying amount, revaluation, decrease is an expense
the carrying amount is increased to its new recoverable
amount Rules:
Revaluation decrease should be applied first against any
Rules: revaluation surplus then the excess to
The increase in carrying amount shall not exceed the revaluation/impairment loss
carrying amount that would have been determined had no
impairment loss been recognized in prior years Entries:
Acc. Depreciation xxx
Reversal of impairment loss shall be recognized Revaluation Surplus (if any) xxx
immediately as an income in P&L Revaluation Loss xxx
Machinery xxx
Any impairment loss recognized for goodwill shall not be
reversed in subsequent periods. Reversal of Revaluation Decrease
If asset’s carrying amount is increased as a result of
Entries: revaluation, increase is a revaluation surplus
Acc. Depreciation xxx
Gain on reversal of impairment xxx Rule:
Revaluation increase should be recognized first as
revaluation gain(P&L) to the extent of previously
recognized revaluation loss then the excess to revaluation
surplus
PPE xxx
Acc. Depreciation xxx
Revaluation Gain xxx
Revaluation Surplus xxx
Impairment Loss Revaluation Surplus
Impairment loss is part of income statement as an expense Revaluation surplus is part of other comprehensive income