PAS 16 Property, Plant and
Equipment
Learning Competencies
State the recognition criteria, initial
measurement, and subsequent measurement
of PPE.
Apply the principles of PAS 16 in basic
computations of a PPE’s cost, depreciation,
carrying amount, and revaluation surplus
as well as the gain or loss on its disposal.
1
Outline of the topics
1. Definition
a. Characteristics
b. Examples
2. Recognition
3. Initial measurement
a. Elements of cost
b. Costs not qualifying for recognition
4. Subsequent measurement
-cost model
-revaluation model
5. Measurement of cost
- cash basis
-account
-installment or deferred payment
-issuance of share capital
-issuance of bonds payable
- exchange
6. Construction
7. Derecognition
8. Fully depreciated property
9. Depreciation
Definition
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, and are expected to be used during more
than one period.
Characteristics of PPE
a. Tangible assets – items of PPE have physical
substance
b. Used in normal operations – items of PPE are
used in the production or supply of goods or
services, for rental, or for administrative
purposes
c. Long-term in nature – items of PPE are expected
to be used from more than a year
Examples of items of PPE
a. Land used in business
b. Land held for future plant site
c. Building used in business
d. Equipment used in the production of goods
e. Equipment held for environmental and safety reasons
f. Equipment held for rentals
g. Major spare parts and long-lived stand-by equipment
h. Furniture and fixture
i. Bearer plants
Recognition
The cost of an item of property, plant and
equipment shall be recognized as an asset only
when:
a. it is probable that future economic benefits
associated with the item will flow to the
entity; and
b. the cost of the item can be measured
reliably.
Initial measurement
An item of PPE is initially measured at its cost.
Elements of Cost
1. Purchase price, including non-refundable
purchase taxes, after deducting trade discounts
and rebates.
2. Costs directly attributable to bringing the asset
to the location and condition necessary for it
to be capable of operating in the manner
intended by the management.
3. Present value of decommissioning and
restoration costs to the extent that they are
recognized as obligation
Examples of directly
attributable costs
a. Costs of employee benefits arising directly from
the construction or acquisition of PPE;
b. Costs of site preparation;
c. Initial delivery and handling costs (e.g., freight
costs);
d. Installation and assembly costs;
e. Testing costs, net of disposal proceeds of samples
generated during testing; and
f. Professional fees.
Costs not qualifying for
recognition
a. Cost of opening a new facility
b. Cost of introducing a new product or service, including cost
of advertising and promotion
c. Cost of conducting business in a new location or with a new
class of customer, including cost of staff training
d. Administration and other general overhead cost
e. Cost incurred while an item capable of operating in the
manner intended by management has yet to be brought into
use or is operated at less than full capacity
f. Initial operating loss
g. Cost of relocating or reorganizing part or all of an entity’s
operations
Cessation of capitalizing costs to PPE
Recognition of costs in the carrying amount of an item
of PPE ceases when the item is in the location and
condition necessary for it to be capable of operating in
the manner intended by management.
Subsequent Measurement
(Measurement after recognition)
Subsequent to initial recognition, an entity shall
choose either:
(a) the cost model or
(b) the revaluation model
as its accounting policy and shall apply that policy
to an entire class of PPE.
Cost Model
After recognition, an item of PPE is
measured at its cost less any
accumulated depreciation and any
accumulated impairment losses.
Revaluation Model
After recognition as an asset, an item of PPE
whose fair value can be measured reliably shall
be carried at a revalued amount, being its
fair value at the date of the revaluation less
any subsequent accumulated depreciation and
subsequent accumulated impairment losses.
Measurement of Cost
Acquisition on a cash basis
The cost of an item of PPE is the cash price equivalent
at the recognition date.
The cost of the asset includes the cash paid plus directly
attributable costs such as freight, installation cost and
other cost necessary in bringing the asset to the location
and condition for the intended use.
Measurement of Cost
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.
Cash discount are generally considered as
reduction
of cost and not as income.
Measurement of Cost
Acquisition on installment basis
If payment is deferred beyond normal credit terms,
the cost is the cash price equivalent.
The difference between the cash price equivalent
and the installment price is recognized as interest to
be amortized over the period of credit unless such
interest is capitalized in accordance with PAS 23
Borrowing Costs.
Measurement of Cost
Issuance of share capital
Philippine GAAP provides that if shares are issued for
consideration other than actual cash, the proceeds shall
be measured by the fair value of the consideration
received.
Accordingly, where PPE is acquired through the issuance of
share capital, PPE shall be measured at an amount equal
to the following in the order of priority:
1. Fair value of the property received
2. Fair value of the share capital
3. Par value or stated value of the share capital
Measurement of Cost
Issuance of bonds payable
PFRS 9, paragraph 5.1.1, provides the asset acquired
by issuing bonds payable is measured in the
following order:
1. Fair value of bonds payable
2. Fair value of asset received
3. Face amount of bonds payable
Measurement of Cost
Acquisition through Exchange
PAS 16, paragraph 24, provides that the cost of an item of
PPE acquired in exchange for a nonmonetary asset or a
combination of monetary and nonmonetary asset is measured
at fair value plus any cash payment.
However, the exchange is recognized at carrying amount if
the exchange transaction lacks commercial substance.
Measurement of Cost
Acquisition through Exchange
Commercial substance – an event or transaction
causing the cash flows of the entity to change
significantly by reason of the exchange.
If the exchange has commercial substance, the asset
received from the exchange is measured using the
following order of priority:
a. Fair value of asset Given up
b. Fair value of asset Received
c. Carrying amount of asset Given up
Construction
The cost of self-constructed property, plant and
equipment includes:
1. Direct cost of materials
2. Direct cost of labor
3. Indirect cost and incremental overhead
specifically identifiable or traceable to the
construction
PAS 16, paragraph 22, provides that the cost of
abnormal amount of wasted material, labor or
overhead incurred in the production of self-
constructed asset is not included in the cost of the
asset.
Derecognition
It means that the cost of the PPE together with the
related accumulated depreciation shall be removed
from the accounts.
The carrying amount of an item or PPE shall
be derecognized:
a. on disposal; or
b. when no future economic benefits are
expected from its use or disposal
The gain or loss from derecognition shall be
included in the profit or loss and treated
as other income.
Fully depreciated property
A property is said to be fully depreciated when the
carrying amount is equal to the residual value.
In such a case, the asset account and the related
accumulated depreciation account are closed and
the residual value is set up in a separate
account.
The cost of fully depreciated asset remaining in
service and the related accumulated depreciation
ordinarily shall not be removed from the accounts.
However, entities are encouraged but not required
to
disclose fully depreciated property.
Depreciation
Depreciation is the systematic allocation of
the depreciable amount of an asset over its
estimated useful life.
When computing for depreciation, each part
of an item of PPE with a cost that is
significant in relation to the total cost of the
item shall be depreciated separately.
Depreciation - continuation
Depreciation begins when the asset is
available for use, i.e., when it is in the
location and condition necessary for it to be
capable of operating in the manner intended
by management.
Depreciation ceases when the asset is
derecognized or when it is classified as
“held for sale” under PFRS 5, whichever
comes earlier.
Factors of depreciation
a. Depreciable amount
b. Residual value
c. Useful life
Factors in determining useful life
d. Expected usage of the asset
e. Expected physical wear and tear
f. Technical or commercial obsolescence
g. Legal limits for the use of the asset, such as the
expiry date of the related lease.
Selection of depreciation method
There are various methods of depreciation.
The entity shall select the method that
most closely reflects the expected
pattern of consumption of the future
economic benefits embodied in the
asset.
However, a depreciation method that is
based on revenue that is generated by an
activity that includes the use of an asset is
not appropriate.
Methods of Depreciation
1. Straight-line method
2. Production method
3. Diminishing balance method
The Straight-line method of Depreciation
Straight line method – depreciation is recognized
evenly over the life of the asset by dividing the
depreciable amount by the estimated useful life.
Depreciation = (Historical cost – Residual value)
÷
Estimated useful life
Production method
Assumes that depreciation is more a function of use rather
than passage of time.
The useful life of the asset is considered in terms of the
output it produces or the number of hours it works.
Thus, depreciation is related to the estimated production
capability of the asset and is expressed in a rate per unit of
output or per hour of use.
Diminishing balance or
accelerated method
These methods provide higher depreciation in the
earlier years and lower depreciation in the later years
of the useful life of the asset.
Thus, these methods result in decreasing depreciation
charge over the useful life, include sum of years’
digits method and double declining balance method.
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Frequency of revaluation
For items with significant and volatile
changes in fair value, annual revaluation
is necessary. For items with insignificant
changes in fair value, revaluation may be
made every 3 or 5 years.
Revaluation applied to all assets
in a class
If an item of PPE is revalued, the entire class
of PPE to which that asset belongs shall be
revalued.
The items within a class of PPE are revalued
simultaneously to avoid selective revaluation
of assets and the reporting of amounts in the
financial statements that are a mixture of
costs and values as at different dates.
Subsequent accounting for revaluation
surplus
Revaluation is initially recognized in other comprehensive income
unless the revaluation represents impairment loss or reversal of
impairment loss, in which case it is recognized in profit or loss.
Subsequently, the revaluation surplus is accounted for as follows:
1. If the revalued asset is non-depreciable, the revaluation surplus
accumulated in equity is transferred directly to retained earnings when the
asset is derecognized.
2. If the revalued asset is depreciable, a portion of the revaluation
surplus may
be transferred periodically to retained earnings as the asset is being used.
PROBLEM SOLVING
Robles Company made the following acquisitions during the year:
• Purchased for P5,400,000, including appraiser fee of P50,000, a warehouse building
and the land on which it is located.
The land had an appraised value of P2,000,000 and original cost of P1,400,000. The
building had an appraised value of P3,000,000 and original cost of P2,800,000.
• Purchased an office building and the land on which it is located for P7,500,000 cash
and assumed an existing P2,500,000 mortgage.
For realty tax purposes, the property is assessed at P9,600,000, 60% of which is
allocated to the building.
1. What is the total cost of the land?
2. What is the total cost of building?
PROBLEM SOLVING
Union Company purchased a new machine on a deferred payment basis.
A downpayment of P100,000 was made and 4 monthly installments of P250,000 are to
be made at the end of each month. The cash equivalent price of the machine was
P950,000. The entity incurred and paid installation costs amounting to P30,000.
What is the amount to be capitalized as cost of the machine?
PROBLEM SOLVING
Grab Company purchased a ten-ton draw press at a cost of P3,600,000 with terms of
5/15, n/45. Payment was made within the discount period.
Shipping cost was P90,000 which included P4,000 for insurance in transit. Installation
cost totaled P240,000 which included P80,000 for taking out a section of a wall and
rebuilding it because the press was too large for the doorway.
What is the capitalized cost of the ten-ton draw press?
END
