PROPERTY, PLANT, AND EQUIPMENT MEASUREMENT AT RECOGNITION

- According to IAS 16, paragraph 6, property, plant and equipment are - An item of PPE that qualifies for recognition as an asset shall be
tangible items that: measured at its cost.
a. Held for use in the production or supply of goods or services, for - The cost of an item of PPE comprises:
rentals to others, or for administrative purposes and a. Its purchase price, including import duties and non-refundable
b. Are expected to be used during more than one period purchase taxes, after deducting trade discounts and rebates.
b. Any costs directly attributable to bringing the asset to the
INITIAL RECOGNITION location and condition necessary for it to be capable of
operating in the manner intended by management.
- According to IAS 16, paragraph 7, the cost of an item of PPE shall be c. The initial estimate of the costs of dismantling and removing the
recognized as an asset if, and only if: item and restoring the site on which it is locates, the obligation
a. It is probable that future economic benefits associated with the for which an entity incurs either when the item is acquired or as
item will flow to the entity a consequence of having used the item during a particular
b. The cost of the item can be measured reliably period for purposes other than to produce inventories during
the period.
SPARE PARTS AND OTHER EQUIPMENT
WHAT ARE DIRECTLY ATTRIBUTABLE COSTS?
- According to IAS 16, paragraph 8, items such as spare parts, stand-
by equipment and servicing equipment are recognized in a. Cost of employee benefits arising directly from the construction
accordance with IAS 16 when they meet the definition of PPE. or acquisition of the item of property, plant, and equipment
b. Cost of site preparation
UNIT OF MEASURE FOR RECOGNITION c. Initial delivery and handling costs
d. Installation and assembly cost
- According to IAS 16, paragraph 9, IAS 16 does not prescribe the unit e. Cost of testing whether the asset is functioning properly, after
of measure for recognition, what constitutes an item of property, deducting the net proceeds from selling any items produced
plant, and equipment. Thus, judgement is required in applying the while bringing the asset to that location and condition (such as
recognition criteria to an entity’s specific circumstances. It may be samples produced when testing equipment)
appropriate to aggregate individually insignificant items, such as f. Professional fees
moulds, tools, and dies, and to apply the criteria to the aggregate
value. WHAT ARE NOT PPE COSTS?

a. Cost of opening a new facility

b. Cost of introducing a new product or service (including costs of TYPES OF PPE ACQUISITION
advertising and promotional activities
c. Cost of conducting business in a new location or with a new
1. ACQUISITION BY PURCHASE- most common methods of asset
class of customer (including costs of staff training)
acquisition.
d. Administration and other general overhead costs.
- The cash price equivalent of the PPE is the cost of the item at
recognition date. It includes cash paid plus any other directly
PROBLEM 1
attributable costs like freight and installation.

Asset account xxx

Cash xxx
2. ACQUISITION BY SELF-CONSTRUCTION- entities may opt to
construct their own PPE for administrative and other purposes. The
total construction cost (materials used, labor costs incurred,
overhead) will be the basis for the asset cost.

PROBLEM 1

PROBLEM 2

3. ACQUISITION BY DEFERRED PAYMENTS- when entities opt not to

directly involve direct cash outlay in the acquisition of PPE, the
entity may enter into a deferred payment contract using, for
example, notes payable.
 PROBLEM 2

4. ACQUISITION BY EXCHANGE- an entity may opt to exchange

nonmonetary assets, e.g. old equipment for a new equipment or
one asset for another asset. Exchanges of assets might have PROBLEM 4
commercial substance or no commercial substance.
- An exchange is considered to have commercial substance if future
cashflow (timing and amount of cash flows) change as a result of the
exchange transaction. If the two parties to the exchange experience
changes in economic position, the transaction has commercial
substance.
• If the exchange has commercial substance:
- Gains and losses should be recognized
• If the exchange has no commercial substance, and no cash is
received:
- Defer gains and recognize losses
• If the exchange has no commercial substance, and cash is
received:
- Recognize partial gain and recognize full loss. IAS 23 BORROWING COSTS

- Borrowing costs that are directly attributable to the acquisition,

PROBLEM 3 construction or production of a qualifying asset form part of the cost
of that asset. Other borrowing costs are recognized as an expense.
- A qualifying asset is an asset that necessarily takes a substantial
period of time to get ready for its intended use or sale.
• Manufacturing plant
• Power generation facility
 • Intangible assets
• Investment property

SPECIFIC BORROWING

- To the extent that an entity borrows funds specifically for the

purpose of obtaining a qualifying asset, the entity shall determine
the amount of borrowing costs eligible for capitalization as the
actual borrowing costs incurred on that borrowing during the period
less any investment income on the temporary investment of those
borrowing. (par 12)

PROBLEM 5 PROBLEM 6 WHAT IF?

DEPRECIATION
GENERAL BORROWING
- Systematic allocation of the asset’s depreciable amount over its
- Sometimes, funds are borrowed generally (and not specifically for
useful life.
the asset construction). The amount of capitalizable borrowing cost
- part of manufacturing overhead when PPE is used in relation to the
is equal to the average carrying amount of the asset during the
production of goods.
period multiplied by a capitalization rate or average interest rate.
- Part of operating expense when PPE is used for administrative
The capitalizable borrowing cost, however, shall not exceed the
purposes.
actual interest incurred.
WHEN DO WE DEPRECIATE?
PROBLEM 6
- Depreciation starts when the asset is available for use and stops
when an asset is derecognized
 - If an asset is classified as held for sale, depreciation shall be
stopped.

ITEMS TO CONSIDER IN DEPRECIATION

• USEFUL LIFE- the period of time over which the asset is

expected to be used by the entity. It may also refer to the
number of hours it is expected to work, number of units it is
able to produce.
• RESIDUAL VALUE- the amount expected to be recovered by an
entity after the asset’s useful life.
• DEPRECIABLE AMOUNT- the amount that is being subject to
STRAIGHT-LINE METHOD
depreciation, which is represented by the difference between
the asset cost and residual value.

WHAT AMOUNT SHALL BE PRESENTED IN FS?

Asset cost xxx

Less: accumulated depreciation xxx

Carrying value at the end of the period xxx

DEPRECIATION METHODS

1. Straight-line method, composite and group method

2. Depreciation based on service hours of the asset
3. Depreciation based on output
4. Sum-of-the-years’ digit method
5. Declining balance method STRAIGHT-LINE METHOD
6. Double declining balance method

MAIN PROBLEM
 SUM-OF-THE-YEARS’ DIGIT METHOD

DEPRECIATION BASED ON USEFUL HOURS

DEPRECIATION BASED ON OUTPUT UNITS

 DOUBLE DECLINING METHOD WASTING ASSETS

- Natural resources are assets held by an entity of economic value

produced by nature such as oil and gas reserves and mineral
deposits.
COST OF WASTING ASSESTS
• ACQUISITION COST- price paid for the acquisition of the
property that holds the natural resource
• EXPLORATION COST- amount expended to locate a natural
resource before the extraction of mineral resources
• DEVELOPMENT COST- cost incurred to extract natural resources
• RESTORATION COST- cost to be incurred to restore the property
to its original condition.
COMPOSITE AND GROUP METHOD

- When companies have numerous assets, it will be difficult for them

to calculate asset depreciation one-by-one. With this, entities can
apply either the composite method or the group method.
• COMPOSITE METHOD- items that are dissimilar in nature are
depreciation as a single unit
• GROUP METHOD- items that are similar in nature are
depreciated as single unit
 SUBSEQUENT MEASUREMENT OF PPE - Changes to the asset’s use, including
➢ Asst becoming idle
➢ Plan to discontinue or restructure the operation to which the
• COST MODEL- if an entity chooses the cost model of subsequent
asset belongs
PPE measurement, the PPE shall be presented at cost less
➢ Plan to dispose of the asset before previously expected date
accumulated depreciation and accumulated impairment losses.
➢ Reassessing the useful life as finite rather than infinite
• REVALUATION MODEL- If an entity chooses the revaluation
➢ Poor performance
model of subsequent measurement, the PPE shall be presented
at its revalued amount. Revalued amount is the fair value of the RECOVERABLE AMOUNT
asset at the date of revaluation, less subsequent accumulated
depreciation and subsequent accumulated impairment losses.
- An asset’s recoverable amount is the higher amount between the
asset’s:
ASSET IMPAIRMENT
➢ fair value less cost of disposal
➢ value in use
- An entity should not carry their asset at more than its recoverable
- cost of disposal are costs incurred by an entity to ready the asset for
amount. If the asset’s carrying amount is greater than its
eventual sale. This includes legal costs, stamp duties, and other
recoverable amount, the difference should be recognized as
transaction taxes.
impairment loss.
- Value in use is the calculated present value of estimated future cash
- An assessment by an entity is required if there is an indication of
flows associated in an asset.
asset impairment, which may come from external or internal
sources. CHANGE IN ACCOUNTING ESTIMATE
- When there is a significant change in the pattern of the future
EXTERNAL SOURCES OF ASSET IMPAIRMENT
economic benefits from the asset, an entity may opt to change the
asset’s useful life or depreciation method, whatever is deemed fit.
- Decline in asset value: more so than normal wear and tear - Both changes shall be applied by the entity prospectively—current
- Changes in the entity’s environment; technological, market, and future periods.
economic or legal conditions
- Increase in market interest rate, this will affect the asset’s value in
use. PROBLEM 1
- Carrying amount of net assets: if this is greater than the market
capital of a company, there may be impairment.

INTERNAL SOURCES OF ASSET IMPAIRMENT

- Evidence of obsolescence or physical damage

 PROBLEM 4

PROBLEM 2 PROBLEM 5

PROBLEM 3

PROBLEM 6
 GOVERNMENT GRANT immediate financial support to the entity with no further related
cost shall be recognized as income of the period in which it becomes
receivable.
- IAS 20, paragraph 3, defines government grant as assistance by
5. The benefit from a grant of interest-free loan is the difference
government in the form of transfer of resources to an entity in
between the face value and the present value of the loan.
return for part or future compliance with certain conditions relating
to the operating activities of the entity. Government grant is
sometimes called by other names such as subsidy, subvention or METHODS OF ACCOUNTING FOR
premium. GOVERNMENT GRANT
- IAS 20, paragraph 10, provides that the benefit of a government - Deferred income approach
loan with a NIL or below market rate of interest is treated as a - Reduced to asset approach
government grant.
PROBLEM 1
MEASUREMENT AND CLASSIFICATION

- Government grants are measured at fair value including non-

monetary grants.
• CLASSIFICATION:
1. Grant related to Asset: has the condition to purchase,
construct or acquire long term asset.
2. Grant related to Income: granted for purposes other than
related to acquisition or construction of long term assets.
PROBLEM 2
HOW ARE GOVERNMENT GRANTS
ACCOUNTED FOR?

1. Grant in recognition of specific expenses shall be recognized as

income over the period of the related expenses.
2. Grant related to depreciable asset shall be recognized as income
over the period and in proportion to the depreciation of related
asset.
3. Grant related to non-depreciable asset acquiring fulfillment of
certain conditions shall be recognized as income over the periods
which bear the cost of meeting the conditions.
4. A government grant that becomes receivable as compensation for
PROBLEM 3
expenses or losses already incurred or for the purpose of giving
 REPAYMENT OF GOVERNMENT GRANT

- A government grant that becomes repayable, for example, because

DISCLOSURE ABOUT GOVERNMENT GRANT
conditions of the receipt have not been met, shall be accounted for
as change in accounting estimate.
a. The accounting policy adopted for the government grant, including
- Repayment of grant shall be applied first against any unamortized
the method of presentation adopted in the financial statements.
deferred income and any excess shall be recognized immediately as
b. The nature and extent of government grants recognized in the
expense.
financial statements and an indication of other forms of government
Example: assistance from which the entity has directly benefited.
c. Unfulfilled conditions and other contingencies attaching to
government assistance that has been recognized.

- It is not required to disclose the name of the government agency

that the grant along with the date of sanction of the grant by such
government agency and the date when cash was received in case of
monetary grant.

REPAYMENT OF GOVERNMENT GRANT