Property, Plant and Equipment

rental to others

held for use in

the production
administrative
or supply of
purposes
goods or
services

are
tangible
items

These are expected to be used during

more than one period.
 Property, Plant and Equipment

property ordinarily not

subject to depreciation or property subject to
depletion depletion

property subject to
depreciation or
amortization

Recognition

it is probable that
future economic
benefits associated
Property, plant and
with the item
equipment shall be
recognized as an
asset if, and only if: the cost of the item
can be measured
reliably.
Initial Measurement

COST

Directly attributable cost may include…

❖ costs of employee benefits (as defined in IAS 19) arising directly from the construction
or acquisition of the item of property, plant and equipment
❖ costs of site preparation

❖ initial delivery and handling costs

❖ installation and assembly costs

❖ costs of testing whether the asset is functioning properly, after deducting the net
proceeds from selling any items produced while bringing the asset to that location and
condition (such as samples produced when testing equipment)

❖ professional fees
E/amples of Directly Attributable Costs

Brokers’ fees and

Buildings
Land

Land Improvements
Water system

Parking lots

Architect’s fees

E/amples of Directly Attributable Costs

Natural Resources
Machinery and Equipment

Installation charges
Costs of trial runs restoration costs
Not part of the cost…
❖ Cost of opening a new facility

❖ Cost of introducing a new product or service (including cost of advertising and

promotional activities)

❖ Cost of conducting business in a new location or with a new class of customers

(including cost of staff training)

❖ Administration and other general overhead costs.

Acquisition and Related Cost of

Property, Plant and Equipment

Right-of-use assets acquired

self-construction
 Assets purchased for cash
❖ The cost of an item of property, plant and equipment is the cash price
equivalent at the recognition date.
❖ The purchase price of a PPE, including import duties and non-
refundable purchase taxes, after deducting trade discounts and rebates.
Example: Assume that Park Seo-joon Inc., a VAT registered entity,
purchased a machine with an invoice price of P150,000 (inclusive of VAT).
The entry to record the purchase is:
Machinery (P150,000 ÷ 1.12) 133,928.57
Input tax 16,071.43
Cash 150,000

11

Assets purchased at lump-sum price

❖ Allocate the purchase price based on the relative fair value of each component.
❖ Frequently, insurance appraisals, property tax assessments, and other appraisals can be
used.
Example: Park Min-young company purchases land and building together for a total price
of P1,700,000. The most recent property tax assessment from the local government
indicated that the building’s assessed value was P1,200,000 and the land’s assessed value
was P300,000. The total purchase price of the components would be allocated as follows:
Assessed value Computation of Allocation Allocated Value
Building P1,200,000 P1,700,000 x (P1,200,000 ÷ P1,500,000) P1,360,000
Land 300,000 P1,700,000 x (P300,000 ÷ P1,500,000) 340,000
P1,500,000 P1,700,000

Building 1,360,000
Land 340,000
Cash 1,700,000
Philippine Interpretations Committee (PIC)
Interpretation Q&A 2012 – 02
❖ Demolition costs are costs incurred in the demolition (or the physical tearing down) of the
old building to give way for the construction of the replacement building.
❖ Demolition costs of the old building can be considered as part of costs of site preparation
and, therefore, may be capitalized.
❖ It is preferable to capitalize the demolition costs as part of the cost of the new building since
the demolition of the old building is a direct result of the decision to construct the new
building.
❖ Payment to tenants for the sake of demolition will be treated the same way with the
demolition costs.
❖ Any amount from the sale of salvaged materials shall be
deducted from the cost.
❖ The carrying amount of the old building is recognized as a
loss.

Assets purchased under a deferred

payment arrangement
❖ Companies frequently purchase fixed assets on a deferred payment arrangement,
using notes, mortgages, or loans.

❖ To properly reflect cost, companies account for assets purchased on a deferred

payment arrangement at:
➢ fair value of the asset, or
➢ the present value of the consideration exchanged between the contracting parties at the date
of the transaction.

❖ The difference between the cash price equivalent and the total payment is recognized as
interest over the period of credit unless such interest is capitalized in accordance with IAS 23.

7
 EXAMPLES: Assets purchased under a
deferred payment arrangement
❖ Example 1: Suppose a machine is acquired by Lee Tae-hwan Inc. on September 1, 2020
for P150,000 and signs a two-year note requiring the payment of P150,000 plus interest of
10% per annum. The interest rate is realistic. The transaction recorded as follows:
Machinery 150,000
Notes Payable 150,000

❖ Example 2: On January 2, 2020, the Lee Tae-hwan Inc. purchased an industrial equipment.
In payment, the company signed a noninterest-bearing note requiring P250,000 to be
paid on December 31, 2022 (two years later). If the company had borrowed cash to buy
the equipment, the bank would have required an interest rate of 10%. The equipment has no
available fair value at the date of purchase. The entry to record the transaction is
Equipment (P250,000 x 0.8264) 206,600
Discount on Notes Payable 43,400
Notes Payable 250,000

EXAMPLES: Assets purchased under a

deferred payment arrangement
❖ Example 3: On January 2, 2020, the Lee Tae-hwan Inc. purchased an industrial equipment.
In payment, the company signed a noninterest-bearing note requiring P250,000 to be
paid on December 31, 2022 (two years later). The equipment has a fair value of P199,300
at the date of purchase. The entry to record the transaction is
Equipment 199,300
Discount on Notes Payable 50,700
Notes Payable 250,000

We can determine the interest rate that is implicit in the agreement as follows:
P199,300 (present value) = P250,000 (face amount) × PV factor
P199,300 ÷ P250,000 = 0.7972
The PV factor of .7972 when check with the PV table for single payment at 2 years will give us
an implicit rate of interest 12%.

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Assets purchased in e/change of shares

❖ The entity shall measure the goods or services received, and the corresponding
increase in equity, directly, at the fair value of the goods or services received,
unless that fair value cannot be estimated reliably (IFRS 2 par. 10)
❖ If the fair value of the asset is not clearly determinable and the trading of the
stock is active, the market price of the stock issued is a fair indication of the
cost of the property acquired.

EXAMPLE: Assets purchased in e/change

of shares
❖ Example 1: Kang Ki-young Co. decides to purchase some adjacent land for
expansion of its business operation. Instead of paying cash for the land, the
company issues to Yumyeoun Group 5,000 ordinary shares (par value P100)
that have a fair value of P120 per share. The fair value of the land is said to be
P900,000. The entry to record the transaction is
Land 900,000
Ordinary share capital (5,000 x P100) 500,000
Ordinary share premium 400,000
 EXAMPLE: Assets purchased in e/change
of shares
❖ Example 2: Kang Ki-young Co. decides to purchase some adjacent land for
expansion of its business operation. Instead of paying cash for the land, the
company issues to Yumyeoun Group 5,000 ordinary shares (par value P100)
that have a fair value of P120 per share. The fair value of the land is not clearly
determinable. The entry to record the transaction is
Land (5,000 x P120) 600,000
Ordinary share capital (5,000 x P100) 500,000
Ordinary share premium 100,000

Assets acquired by donation of shareholders

❖ In this case, the asset shall be recorded at the fair value on the date of donation.

Example 1: A shareholder of What’s Wrong with Secretary Kim Company donated a

land with a value of P1,000,000. The company should record the transaction as:
Land 1,000,000
Donated capital 1,000,000

Example 2: A shareholder of What’s Wrong with Secretary Kim Company donated a

land with a value of P1,000,000. The company paid P15,000 transfer fee for the title.
The company should record the transaction as:
Land 1,000,000
Donated capital 985,000
Cash 15,000

10
 -

Assets acquired by non-governmental unit

❖ If the asset is received from a non-governmental unit other than a shareholder, a
revenue or gain is recognized at an amount equal to the fair value of the donated
asset.
Example 1: Busan Company, a non-governmental organization, donated a land to
Seoul Corp. with a value of P1,000,000. The company should record the transaction
as:
Land 1,000,000
Income from donation 1,000,000

Assets acquired through government grants

❖ Governments (refer to as government, government agencies and similar
bodies whether local, national or international) will at times create
programs that provide direct assistance to businesses.

❖ Government grants, including non-monetary grants, are recorded at fair

value at the date of grant.

❖ However, it shall not be recognized until there is reasonable assurance

that:
➢ the entity will comply with the conditions attaching to them
➢ the grants will be received

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Assets acquired through government grants

❖ Receipt of a grant does not of itself provide conclusive evidence that the
conditions attaching to the grant have been or will be fulfilled.

❖ Government grants shall be recognized in profit or loss on a systematic

basis over the periods in which the entity recognizes as expenses the
related costs for which the grants are intended to compensate. (IAS 20
par. 12)

Assets acquired through government grants

Example 1. The Local Government of Pangasinan gives Dolnam Hospital Inc. a
large tract of land. The condition attached to this government grant is to construct
a hospital facility on the site to provide employment opportunity to its residents.
The fair value of the land at the date of grant is determined to be at P3,300,000.
The entry to record the transaction is:
Land 3,300,000
Unearned income from government grants 3,300,000

On the other hand, if the condition of constructing a hospital facility was met,
then the entry to record the income is:
Unearned income from government grants 3,300,000
Income from government grants 3,300,000

12
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Assets acquired through government grants

Example 2. The Local Government of Pangasinan gives Dolnam Hospital Inc. a
large tract of land. There is no condition attached to the land. The fair value of the
land at the date of grant is determined to be at P3,300,000. The entry to record
the transaction is:

Land 3,300,000
Income from government grants 3,300,000

Right-of-use assets acquired through lease

❖ Lease is a contract, or part of a contract, that conveys the right to use an
asset (the underlying asset) for a period of time in exchange for
consideration.
❖ The lessee is an entity that obtains the right to use an underlying asset
for a period of time in exchange for consideration.
❖ The lessee is to record the right-of-use asset (which can be classified
under IAS 16) and a related liability.
❖ At the commencement date of the lease, a lessee shall measure the
right-of-use asset at cost (IFRS 16 par. 23)

26

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Right-of-use assets acquired through lease

❖ The cost of the right-of-use asset shall comprise:
➢ the amount of the initial measurement of the lease liability.
➢ any lease payments made at or before the commencement date, less
any lease incentives received
➢ any initial direct costs incurred by the lessee
➢ an estimate of costs to be incurred by the lessee in dismantling and
removing the underlying asset, restoring the site on which it is located
or restoring the underlying asset to the condition required by the
terms and conditions of the lease, unless those costs are incurred to
produce inventories.

Right-of-use assets acquired through lease

Example: Example: On January 1, 2020,
Master Kim Inc. leased two automobiles for
executive use. The lease requires Master
Kim to make five annual payments of
P260,000 beginning January 1, 2020. At the
end of the lease term, December 31, 2024,
Master Kim guarantees that the residual
value of the automobiles will total P200,000.
The property reverts to the lessor at the end Right-of-use automobiles 1,232,302
of the lease term. The estimated useful life Lease liability 972,302
of the automobiles is 6 years and Master
Kim uses straight-line method for all its
Cash 260,000
assets. Master Kim’ incremental borrowing
rate is 10%. The interest rate implicit in the
lease which is known to Master Kim Inc. is
9%.

28

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Bearer Plants
❖ These are living plant that are
➢ used in the production or supply of agricultural produce
➢ expected to bear produce for more than one period
➢ has a remote likelihood of being sold as agricultural produce, except
for incidental scrap sales.

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Asset Acquired in E/change for

Non-cash Assets
❖ When assets are acquired though exchange with other non-
monetary assets or a combination of monetary and non-monetary
assets, the asset acquired should be valued at the fair value of
either the assets given up or the fair value of the assets
received.
❖ If an entity is able to measure reliably the fair value of either the
asset received or the asset given up, then the fair value of the
asset given up is used to measure the cost of the asset received
unless the fair value of the asset received is more clearly evident
(IAS 16 par. 26).

Asset Acquired in E/change for

Non-cash Assets
❖ The cost could not be recorded at fair value if
(a) the exchange transaction lacks commercial substance or
(b) the fair value of neither the asset received, nor the asset given
up is reliably measurable.
❖ If the acquired item is not measured at fair value, its cost is measured at
the carrying amount of the asset given up.
❖ An entity determines whether an exchange transaction has commercial
substance by considering the extent to which its future cash flows are
expected to change as a result of the transaction.

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Asset Acquired in E/change for

Non-cash Assets
❖ An exchange transaction has commercial substance if:
a. the configuration (risk, timing and amount) of the cash flows of the
asset received differs from the configuration of the cash flows of
the asset transferred; or
b. the entity-specific value of the portion of the entity’s operations
affected by the transaction changes as a result of the exchange; and
c. the difference in (a) or (b) is significant relative to the fair value of
the assets exchanged.

With Commercial Substance

❖ Fair value is the basis for measuring an asset acquired in a nonmonetary

exchange if the transaction has commercial substance.
❖ Fair value of asset given up = Fair value of the asset + Cash paid or – Cash
received
❖ Companies should recognize immediately any gains or losses on the
exchange.
❖ The gain or loss on exchange can be computed by deducting the book
value from the fair value of the asset.
❖ Book value asset given up > Fair value of asset given up = Loss
❖ Book value asset given up < Fair value of asset given up = Gain

Noel A. Bergonia, CPA, MBA

34

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With Commercial Substance

Without Commercial Substance

❖ If a transaction does not meet the criteria for commercial substance, then it
will be treated without commercial substance.
❖ The asset is measured at the carrying amount of the asset given up.
❖ Carrying value of the asset given up = Carrying value of the asset + Cash
paid – Cash received
❖ There will no gain or loss to be recorded for transactions without
commercial substance.

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Without Commercial Substance

Example: Ji Sung Co. is to exchange
its machine use in operations to an
equipment of Lee Se-young Corp.
The exchange lacks commercial
substance.

EXAMPLE
Cup Co. and Noodles Co. had an exchange of a. the exchange lacks commercial substance
productive assets. Cup exchanged a piece of
equipment for Noodle’s equipment. The Cup Co.
following information is available:
Equipment- new 360,000
Cup Co. Noodles Co. Accumulated depreciation 540,000
Cost of asset exchanged P900,000 P800,000
Equipment- old 900,000
Accumulated depreciation 540,000 320,000
Fair value of asset exchanged 400,000 350,000

Noodles Co.
Required:
Prepare the journal entries to record exchange
Equipment- new 480,000
in both books if: Accumulated depreciation 320,000
a. the exchange lacks commercial substance Equipment- old 800,000
b. the exchange has a commercial substance,
and Cup will receive P50,000 from Noodles.

19
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EXAMPLE
b. the exchange has a commercial substance, and Cup will
receive P50,000 from Noodles.
Cup Co.
Cup Co. and Noodles Co. had an exchange of
productive assets. Cup exchanged a piece of Equipment- new (P400,000 – P50,000) 350,000
equipment for Noodle’s equipment. The
following information is available: Cash 50,000
Accumulated depreciation 540,000
Cup Co. Noodles Co.
Cost of asset exchanged P900,000 P800,000
Equipment- old 900,000
Accumulated depreciation 540,000 320,000 Gain on exchange 40,000
Fair value of asset exchanged 400,000 350,000
Noodles Co.
Required:
Equipment- new (P350,000 + P50,000) 400,000
Prepare the journal entries to record exchange
Accumulated depreciation 320,000
in both books if:
Loss on exchange 130,000
a. the exchange lacks commercial substance
Equipment- old 800,000
b. the exchange has a commercial substance,
and Cup will receive P50,000 from Noodles. Cash 50,000

39

40

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Assets acquired through self-construction

❖ The cost of a self constructed asset includes all costs of materials,
labor and overhead directly associated with the construction as
well as interest cost on borrowings actually incurred during the
construction period.
❖ Profit on self-construction is not allowed to be recognized in the
accounts.

41

Allocation of Overhead
❖ Overhead is the costs incurred during the manufacturing process,
not including the costs of direct labor and direct materials.
❖ Allocation of manufacturing overhead may be equivalent to
➢ its fair share, using the same basis of allocation for manufactured
inventory
➢ the incremental amount of indirect manufacturing overhead.

42

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E/ample 1: Allocation of Overhead

The Doctor John Manufacturing Company is
producing machineries. In 2020, it created a
machine that is to be used in its operations. Below
are the data related to the cost of the other
produced machines and the machine to be used in
the operation:
Inventories Machinery for use
Direct Materials P4,000,000 P150,000
Direct Labor 4,200,000 120,000
Factory overhead P5,000,000
Direct labor hours 15,000 200

Assuming that the factory overhead is allocated to

inventories at 115% of direct labor cost and the
excess will be for the machinery, how much is the
cost of the machinery?

43

E/ample 2: Allocation of Overhead

The Doctor John Manufacturing Company is
producing machineries. In 2020, it created a
machine that is to be used in its operations. Below
are the data related to the cost of the other Inventories Machinery for use
produced machines and the machine to be used in Direct Materials P4,000,000 P150,000
the operation: Direct Labor 4,200,000 120,000
Factory overhead
Inventories Machinery for use
Direct Materials P4,000,000 P150,000
P5,000,000 x 15,000/15,200 4,934,211
Direct Labor 4,200,000 120,000 P5,000,000 x 200/15,200 65,789
Factory overhead P5,000,000 Total cost P13,134,211 P335,789
Direct labor hours 15,000 200

Assuming that the factory overhead is allocated

using the direct labor hours, how much is the cost
of the machinery?

Noel A. Bergonia, CPA, MBA

44

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Noel A. Bergonia, CPA, MBA

44

22
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Interest Capitalization
❖ Borrowing costs are interest and other costs that an entity incurs in
connection with the borrowing of funds.
❖ A qualifying asset is an asset that necessarily takes a substantial period
of time to get ready for its intended use or sale.
❖ An entity shall capitalize borrowing costs that are directly attributable to
the acquisition, construction or production of a qualifying asset as part
of the cost of that asset.
❖ There are two types of borrowings to finance the qualifying assets:
➢ specific borrowings
➢ general borrowings

45

Interest Capitalization
❖ An entity shall begin capitalizing borrowing costs as part of the cost of a qualifying
asset on the commencement date.
❖ The commencement date for capitalization is the date when the entity first meets all
of the following conditions:
➢ it incurs expenditures for the asset
➢ it incurs borrowing costs
➢ it undertakes activities that are necessary to prepare the asset for its intended use
or sale
❖ An entity shall suspend capitalization of borrowing costs during extended periods in
which it suspends active development of a qualifying asset.
❖ An entity shall cease capitalizing borrowing costs when substantially all the activities
necessary to prepare the qualifying asset for its intended use or sale are complete.

Noel A. Bergonia, CPA, MBA

46

23
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Interest Capitalization
Charge to Charge to
expense expense

Payment of the

Capitalization
period

47

Specific Borrowings
❖ Entities borrows money specifically for the construction of the qualifying
asset.
❖ 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 borrowings.

Borrowing cost eligible for capitalization XX

Interest earned for temporary investment (XX)
Capitalizable interest XX

Noel A. Bergonia, CPA, MBA

48

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E/ample: Specific Borrowings

Samgyupsal Inc. is constructing its building to be used as a site for its operations.
The entity does not have enough funds and has borrowed P4,000,000, 12% loan
from a financing company. Some amount of the loan, while waiting for the time it
will be spent, was temporarily invested to a treasury bills and earned P10,000
interest. The construction of the building starts on April 1, 2020 and was
completed on December 31, 2020. The expenditures related to the materials,
labors and overhead totaled to P5,100,000. The capitalizable interest related to
the building is:

Actual interest cost (P4,000,000 x 12% x 9/12) P360,000

Interest earned (10,000)
Capitalizable interest P350,000

The total cost of the constructed building is P5,450,000 (P5,100,000 + P350,000).

49

General Borrowings
❖ To the extent that an entity borrows funds generally and uses them for the
purpose of obtaining a qualifying asset, the entity shall determine the
amount of borrowing costs eligible for capitalization by applying a
capitalization rate to the expenditures on that asset.
❖ The capitalization rate shall be the weighted average of the borrowing costs
applicable to all borrowings of the entity that are outstanding during the
period.
❖ An entity shall exclude from this calculation borrowing costs applicable to
specific borrowings.
❖ The amount of borrowing costs that an entity capitalizes during a period
shall not exceed the actual amount of borrowing costs it incurred during
that period.

Noel A. Bergonia, CPA, MBA

50

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E/ample: General
Borrowings

Average interest = P990,000 x 9.18% = 90,882

51

Specific Borrowing and General Borrowing

❖ When the entity uses both specific borrowing and general borrowings, the
expenditures shall be first covered by the specific borrowings and the excess
will only be attributed to general borrowings.
❖ If the specific borrowing is already enough to cover the expenditure for the
construction, then there is no need to include the interest cost related to the
general borrowing.
❖ The manner of computing the capitalizable interest will be the same with
the example for specific borrowings.
❖ For the general borrowings, deduct the specific borrowings from the WAAE.

Noel A. Bergonia, CPA, MBA

52

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E/ample:
Specific Borrowing
and General
Borrowing

53

E/ample:
Specific Borrowing
and General
Borrowing Average interest cost of the general borrowing is
= P975,000 x 9.42%
= P91,845

Noel A. Bergonia, CPA, MBA

54

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55

CHANGE IN ACCOUNTING ESTIMATES AND

EXPENDITURES AFTER INITIAL RECOGNITION

Rationale for the change in Accounting

Estimates
❖ The use of reasonable estimates is an essential part of the
preparation of financial statements and does not undermine their
reliability (IAS 8 par. 32).
❖ An estimate may need revision if changes occur in the circumstances
on which the estimate was based or as a result of new information or
more experience (IAS 8 par. 34).
❖ By its nature, the revision of an estimate does not relate to prior
periods and is not the correction of an error.

Noel A. Bergonia, CPA, MBA

56

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Treatment of Change in Accounting

Estimates
❖ The effect of a change in an accounting estimate shall be
recognized prospectively by including it in profit or loss in:
✓ the period of the change, if the change affects that period only; or
✓ the period of the change and future periods, if the change affects
both.
❖ No adjustments should be made amounts reported in prior
periods.

57

CHANGES IN SALVAGE VALUE, USEFUL

LIFE AND DEPRECIATION METHOD
❖ The residual value and the useful life of an asset shall be reviewed
at least at each financial year-end and, if expectations differ from
previous estimates, the change(s) shall be accounted for as a
change in an accounting estimate (IAS 16 par. 51)
❖ Changes in Salvage Value, useful life and depreciation method are
considered as change in accounting estimates.
❖ No adjustments should be made to depreciation amounts reported
in prior periods.

Noel A. Bergonia, CPA, MBA

58

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E/ample
Prior to the revision (2020 and 2021), the
depreciation expense is P40,000 per year
On January 1, 2020, the Myeong-dong [(P250,000-P50,000) ÷ 5] or P80,000 for the two
Manufacturing Company purchased a years.
machine for P250,000. At the time of
purchase, the company estimated that the
useful life of the machine is five years and a Accumulated depreciation for 2020 and 2021
salvage value of P50,000. On January 1, 2022, (P40,000 x 2) ( 80,000)
the company revised its estimates on which P170,000
the useful life should have been eight years.
The company uses straight-line method to Revised depreciable base
depreciate all assets and the company uses
calendar period.

How much is the revised depreciation expense

for 2022?

59

Example ❖

[(P250,000-P50,000) ÷ 4] or P100,000 for the two

On January 1, 2020, the Namsan Seoul years.
Company purchased a machine for P250,000. ❖
At the time of purchase, the company P150,000.
estimated that the useful life of the machine is
four years and a salvage value of P50,000. On
Cost P250,000
January 1, 2022, the company revised its
Accumulated depreciation for 2020 and 2021
estimates on which the remaining useful life (P50,000 x 2) (100,000)
will be four years and the salvage value to Book value on January 1, 2022 P150,000
P22,000. The company uses straight-line Less: Salvage value 22,000
method to depreciate all assets and the Revised depreciable base P128,000
company uses calendar period. Estimated remaining useful life ÷ 4
Revised depreciation expense P32,000

How much is the revised depreciation expense

for 2022?
 Example

On January 1, 2020, the Busan Company

purchased a machine for P250,000. At the time
of purchase, the company estimated that the
useful life of the machine is four years and a
salvage value of P50,000. The company uses 3 (3 + 1)
SYD=
straight-line method to depreciate the machine.
On January 1, 2022, the company revised its
estimates on which the remaining useful life will
be three years, the salvage value to P22,000 and
Depreciation
the depreciation method be sum-of-the-year’s
Year Computation Expense
digit method. The company uses calendar
period. 2022 P128,000 x 3/6 P64,000
2023 P128,000 x 2/6 42,667
How much is the revised depreciation expense 2024 P128,000 x 1/6 21,333
for 2022?

61

EXPENDITURES AFTER INTIAL RECOGNITION

❖ An entity does not recognise in the carrying amount of an item of
property, plant and equipment the costs of the day-to-day servicing of
the item (IAS 16 par. 12).

❖ Costs of day-to-day servicing are primarily the costs of labor and

consumables and may include the cost of small parts.

❖ Entities capitalize expenditures that are expected to produce benefits

beyond the current fiscal year.
 EXPENDITURES AFTER INITIAL RECOGNITION
❖ Expenditures associated to assets can increase future benefits when:
✓ they extend the useful life of the asset;
✓ they increase the operating efficiency and capacity of the asset
resulting in either an increase in the quantity of goods or services
produced or a decrease in future operating costs; or
✓ they increase the quality of the goods or services produced by the
asset.

63

Example 4

On January 1, 2020, the Bukchon Hanok Village

Inc. has a carrying value of one of its
equipment (which has a salvage value of
P10,000) amounting to P100,000, annual
depreciation of P45,000 and a remaining useful Depreciation expense is still P45,000.
life of two years. On the same date, the
company spend P50,000 to maintain the
operations of the equipment.

How much is the revised depreciation expense?

 E/AMple 5

On January 1, 2020, the Nami Island Corp. the

carrying value of one of its equipment (which Carrying value, Jan. 1, 2020
has a salvage value of P10,000) is P100,000
and a remaining useful life of two years. On the
same date, the company spend P50,000
related to the equipment which increase the
remaining useful life of the asset to four years.
How much is the revised depreciation expense?

65

EXPENDITURES AFTER INITIAL RECOGNITION

❖ Parts of some items of property, plant and equipment may require replacement at
regular intervals.
❖ An entity recognizes in the carrying amount of an item of property, plant and
equipment the cost of replacing part of such an item when that cost is incurred if
the recognition criteria are met.
❖ If the criteria are met, the entity shall derecognize the carrying amount of the
replaced part regardless of whether the replaced part had been depreciated
separately.
❖ If it is not practicable for an entity to determine the carrying amount of the
replaced part, it may use the cost of the replacement as an indication of what the
cost of the replaced part was at the time it was acquired or constructed (IAS 16
par. 70)
❖ The gain or loss arising from the derecognition of an item of property, plant and
equipment shall be determined as the difference between the net disposal
proceeds, if any, and the carrying amount of the item.

Noel A. Bergonia, CPA, MBA

66

33
 E/AMPLE January 1, 2021
Accumulated depreciation 24,000
Loss on disposal of machine parts 18,000
Machine 42,000
On January 1, 2021, the factory machine of
P42,000 x 4/7 = 24,000
Cheongsando Island Corp. experienced an
engine failure. The asset was purchased on
Machine 50,000
January 1, 2017 with a cost of P364,000 and
have a useful life of 7 years. The engine was Cash 50,000
replaced with a similar item that cost the December 31, 2021
company P50,000. The replaced part has an Depreciation expense 62,667
original cost of P42,000.
Accumulated Depreciation 62,667
Revised cost
(P364,000 - P42,000 + 50,000) 372,000
Prepare the entries in 2021.
Accumulated depreciation
(P364,000 x 4/7= P208,000 - P24,000) (184,000)
Revised carrying value 188,000
Divided by: remaining useful life 3
Revised depreciation expense 62,667

67

E/AMPLE C January 1, 2021

Accumulated depreciation 28,000
Loss on disposal of machine parts 21,000
Machine 49,000
On January 1, 2021, the factory machine of
P49,000 x 4/7 = 28,000
Joseon Corp. experienced an engine failure.
The asset was purchased on January 1, 2017 Machine 49,000
with a cost of P364,000 and have a useful life of
7 years. The engine was replaced with a similar Cash 49,000
item that cost the company P49,000. The cost December 31, 2021
of the replaced part is not separately Depreciation expense 61,333
identifiable.
Accumulated Depreciation 61,333
Revised cost
(P364,000 - P49,000 + 49,000) 364,000
Prepare the entries in 2021. Accumulated depreciation
(P364,000 x 4/7= P208,000 - P28,000) (180,000)
Revised carrying value 184,000
Divided by: remaining useful life 3
 17/04/2022

69

Depletion

Mining Life Cycle

Prospecting Exploration Evaluation Development

Closure and Production

restoration
 E/plortion for And EvAluAtion of

MinerAl Resources
❖ Exploration for and evaluation of mineral resources means the
search for mineral resources, including minerals, oil, natural gas
and similar non-regenerative resources after the entity has
obtained legal rights to explore in a specific area, as well as the
determination of the technical feasibility and commercial viability
of extracting the mineral resource (IFRS 6 Appendix A).

71

E/plorAtion And evAluAtion e/penditures

❖ These are expenditures incurred by an entity in connection with the

exploration for and evaluation of mineral resources before the
technical feasibility and commercial viability of extracting a mineral
resource are demonstrable.
❖ Expenditures related to the development of mineral resources shall
not be recognized as exploration and evaluation assets (IFRS 6 par.
10)
 Recognition of e/plorAtion And
evAluAtion Assets
❖ Exploration and evaluation expenditures recognized an asset in
accordance with the entity’s accounting policy.

73

MeQsureyent of e/plorQtion Qnd

evQluQtion Qssets
❖ Initial recognition:
✓ Exploration and evaluation assets shall be measured at cost.

❖ Subsequent recognition:
✓ After recognition, an entity shall apply either the cost model or the
revaluation model to the exploration and evaluation assets.
 17/04/2022

Eleyents of cost of e/plorAtion And

evAluAtion Assets (IFRS & pAr. 9)
The following are examples of expenditures that might be included in
the initial measurement of exploration and evaluation assets (the list is
not exhaustive):
❖ acquisition of rights to explore
❖ topographical, geological, geochemical and geophysical studies
❖ exploratory drilling
❖ trenching
❖ sampling
❖ activities in relation to evaluating the technical feasibility and
commercial viability of extracting a mineral resource

75

ClAssificAtion of e/plorAtion And

evAluAtion Assets
❖ An entity shall classify exploration and evaluation assets as tangible
or intangible according to the nature of the assets acquired and
apply the classification consistently.
❖ Some exploration and evaluation assets are treated as intangible
(e.g., drilling rights), whereas others are tangible (e.g., vehicles and
drilling rigs).

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WAsting Assets
❖ These are assets that are from natural resources.
❖ They are only replace by an act of nature.

77

CQtegories of Cost of WQsting Assets

❖ Purchase price including directly attributable cost.
❖ Exploration cost- are expenditures incurred before technical
feasibility and commercial viability of the mineral resources are
demonstrated.
❖ Development cost- are costs incurred to exploit or extract the natural
resources that has been located through successful exploration.
✓ For all the transportation and heavy equipment needed to extract
the resource and get it ready to market, they are capitalized and
depreciate separately.
✓ The drilling costs, tunnels, shafts and wells are capitalized as part of
the natural resource.
❖ Restoration cost (at its present value)
 Depletion
❖ It is a systematic allocation of depletion base of the natural
resource over the period the natural resource is extracted.

❖ It is normally computed using output method.

79

Depletion
Purchase price XX
Exploration cost, to the extent capitalized XX
Development cost XX
Present value of restoration cost XX
Residual value (XX)
Total Depletable Cost XX

Total depletable cost

Depletion rate per unit =
Total estimated recoverable units

Depletion charge = depletion rate per unit x actual units of production

 Depletion
If additional expenditures are incurred or estimates are revised, the
new depletion rate is calculated using:
Carrying value (including additional capitalizable cost) - residual value
Depletion rate per unit =
Remaining units at the beginning of the year

❖ Depletion charge is considered as an inventoriable cost or

product cost.
Cost of Goods Sold
(for sold units)

Inventory
(for unsold units)

81

DepreciAtion of Assets Used in Mining

Activities
❖ Assets used in mining activities shall be depreciated using the
shorter between the useful life of the asset and the expected
mining period.
❖ If expected mining period is shorter than the useful life of the
assets, the depreciation method is computed based on the unit of
output method.

82

41
 DepreciAtion during Shutdown
❖ In case of shutdown, output method cannot be used.
❖ Depreciation in the year of shutdown is based on the remaining
life of the equipment following the straight-line method.
❖ The remaining carrying amount of the equipment is divided by
the remaining life of the equipment to arrive at the depreciation in
the year of the shutdown.
❖ Upon resumption, a new depreciation rate per unit is computed
by dividing the remaining carrying amount by the remaining
revised estimate of deposits.

83

ExAMPLe ł
In 2020, Cooky Mining Company purchased property with
natural resources for P12,400,000. The property was relatively
2020: No depletion.
close to a large city and had an expected residual value of
P1,800,000.

▪
▪ 2021:
Purchase price 12,400,000
▪ Development cost, 2020 800,000
Development cost, 2021 600,000
Estimated Tons
Year Tons Extracted Remaining Total cost 13,800,000
2020 0 5,000,000 Residual value (1,800,000)
2021 1,500,000 3,500,000 Depletable cost 12,000,000
2022 1,800,000 2,000,000 Divided by: Est. Tons 1/1/2021 5,000,000
2023 1,700,000 900,000
Depletion per unit, 2021 2.40
2024 900,000 0
Multiply by: Units extracted 1,500,000
Total depletion, 2021 3,600,000

84

42
Example 2022:
Total Cost 13,800,000

Carrying value, 1/1/2022 10,200,000

In 2020, Cooky Mining Company purchased property with Residual value (1,800,000)
natural resources for P12,400,000. The property was relatively Revised depletable cost 8,400,000
close to a large city and had an expected residual value of Divided by: Est. Tons 1/1/2022 3,800,000
P1,800,000.
The following information relates to the use of the property: Depletion per unit, 2022 2.21
▪
▪
2023:
▪
2020-2024 are as follows:
Estimated Tons
Year Tons Extracted
Remaining
2020 0 5,000,000
2021 1,500,000 3,500,000
2022 1,800,000 2,000,000
2023 1,700,000 900,000
2024 900,000 0

85

Example
In 2020, Cooky Mining Company purchased property with
natural resources for P12,400,000. The property was relatively
close to a large city and had an expected residual value of
P1,800,000.

▪
▪ 2024:

▪
(11,522,000
3,878,000
Estimated Tons
Year Tons Extracted (1,800,000)
Remaining
2020 0 5,000,000
2021 1,500,000 3,500,000
2022 1,800,000 2,000,000
2023 1,700,000 900,000
2024 900,000 0

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Example

Purchase price 24,600,00

PV of restoration
(2,000,000 x .56)
On October 1, 2020, Tata Company, a calendar-year company,
Total cost
purchased the right to a mine. The total purchase price was
P24,600,000. The restoration cost to be paid after the mining Divided by: Es
period will be P2,000,000. The discount rate of the restoration Depletio
cost is 10%. Estimated reserve were 3,600,000 tons. The
company expected to extract and sell 50,000 tons per month. Estimated mining period (3,600,000 ÷ 50,000 = 72 months ÷ 12) = 6 years

On the same date, the company purchased a new equipment

to be used in the mine for P5,000,000. The estimated useful 2020:
life of 8 years and has a residual value of P300,000. This
Depletion= P7.14 x (50,000 x 3)
equipment would be of no use after all the resources is
removed from the mining site. = P1,071,000

Determine the depletion and depreciation for 2020 and 2021.

(use 2 decimal places for the PV factor) 2021:
Depletion= P7.14 x (50,000 x 12)
= P4,284,000

87

Example Useful life= 8 years

Estimated mining period (3,600,000 ÷ 50,000 = 72 months ÷ 12) = 6 years

Cost 5,000,000
On October 1, 2020, Tata Company, a calendar-year company,
purchased the right to a mine. The total purchase price was Residual value (300,000)
P24,600,000. The restoration cost to be paid after the mining Depreciable cost 4,700,000
period will be P2,000,000. The discount rate of the restoration
Divided by: Est. Tons 3,600,000
cost is 10%. Estimated reserve were 3,600,000 tons. The
company expected to extract and sell 50,000 tons per month. Depreciation per unit 1.31

On the same date, the company purchased a new equipment

to be used in the mine for P5,000,000. The estimated useful 2020:
life of 8 years and has a residual value of P300,000. This Depreciation expense
equipment would be of no use after all the resources is = P1.31 x (50,000 x 3)
removed from the mining site. = P196,500
Determine the depletion and depreciation for 2020 and 2021.
(use 2 decimal places for the PV factor)
2021:
Depreciation expense
= P1.31 x (50,000 x 12)
= P786,000

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44
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Useful life= 15 years

E/Qyple 4 Mining period (1,500,000 ÷ 125,000) = 12 years
9,750,000

6.50
Chimmy Mining constructed a building costing P9,750,000 on
a mine property. The building has an estimated useful life of Year 1
fifteen years with no residual value. After all resources were 6.50
removed, the building will be of no use and will be
demolished by the entity. The estimated recoverable output
from the mine is 1,500,000 tons.
9,750,000
During the first two years, the company extracted 125,000
tons per year. Changes in the surrounding environment
forced the entity to shutdown for the succeeding two years.
Thus, there were no extraction during the third and fourth Year 2
year. In the fifth year, the company resume extractions and
produced 150,000 tons. With improvements in the production 6.50
process, the company will extract 200,000 tons per year.

Determine the depreciation expense from the first to fifth year.

9,750,000

89

Shutdown Periods
Example Year 3

Chimmy Mining constructed a building costing P9,750,000 on

a mine property. The building has an estimated useful life of
fifteen years with no residual value. After all resources were
removed, the building will be of no use and will be Year 4
demolished by the entity. The estimated recoverable output
from the mine is 1,500,000 tons.

During the first two years, the company extracted 125,000 9,750,000
tons per year. Changes in the surrounding environment
forced the entity to shutdown for the succeeding two years.
Thus, there were no extraction during the third and fourth
year. In the fifth year, the company resume extractions and Resume Operations
produced 150,000 tons. With improvements in the production
process, the company will extract 200,000 tons per year for Year 5
the remaining years. Remaining est. tons = 200,000 x 8 years = 1,600,000 tons

Determine the depreciation expense from the first to fifth year. Revised depreciation rate = P6,875,000 ÷ 1,600,000
= P4.30 per ton

Depreciation expense = 150,000 tons x P4.30

P645,000
-

90

45
 17/04/2022

E/Qyple 4 Depletion rate per ton =

8,000,000 + 800,000 - 400,000
2,800,000
= P3

On July 1, 2020, Koya Mining Company purchased a coal 600,000 - 40,000

mine for P8,000,000. The estimated capacity of the mine was Depreciation per ton =
2,800,000 tons. During 2020, the company mines 40,000 tons 2,800,000
of coal per month and sells 36,000 tons of coal per month.
The selling price is P120 per ton and the production costs
= P0.20
(excluding depletion and depreciation) are P16 per ton. At
the end of the mine’s life, it is expected that the present value
of restoration today is P800,000 after which it can be sold for
P400,000.

The company also purchased temporary housing for the

miners at a cost of P600,000. The housing has an expected
life of 10 years, but it is expected to be sold at P40,000 at the
end of the mine’s life.
36,000 units x 6 months 216,000
How much is the cost of ending inventory and cost of goods Multiply by: production cost per unit 19.20 Cost
sold for 2020? of goods sold for 2020 4,147,200

91

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Measuremnt After InitiAl Recognition

▪ An entity shall choose either the cost model or the revaluation

model as its accounting policy and shall apply that policy to an entire
class of property, plant and equipment. (IAS 16 par. 29)

93

ClAsses of Property, PlAnt And Equipment

▪ A class of property, plant and equipment is a grouping of assets of
a similar nature and use in an entity’s operations.
▪ The following are examples of separate classes:
✓ Land
✓ Land and buildings
✓ Machinery
✓ Ships
✓ Aircraft
✓ Motor vehicles
✓ Furniture and fixtures
✓ Office equipment
✓ Bearer plants
-

94
47
 17/04/2022

Cost Model
▪ After recognition as an asset, an item of property, plant and
equipment shall be carried at its cost less any accumulated
depreciation and any accumulated impairment losses. (IAS 16 par.
30)

95

RevAluAtion Model
▪ After recognition as an asset, an item of property, plant and equipment
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 (IAS 16 par. 31).
▪ If an item of property, plant and equipment is revalued, the entire
class of property, plant and equipment to which that asset belongs
shall be revalued (IAS 16 par. 36).
 Frequency of RevQluQtion
▪ The frequency of revaluations depends upon the changes in fair
values of the items of property, plant and equipment being revalued.
▪ Some items of property, plant and equipment experience significant
and volatile changes in fair value, thus necessitating annual
revaluation.
▪ Such frequent revaluations are unnecessary for items of property,
plant and equipment with only insignificant changes in fair value.
Instead, it may be necessary to revalue the item only every three or
five years.

97

Accounting Procedures for RevQluQtion

At the date of the revaluation, the asset is treated in one of the
following ways:
➢ Proportional method. The gross carrying amount is adjusted in a
manner that is consistent with the revaluation of the carrying amount of
the asset.
➢ Elimination method. The accumulated depreciation is eliminated
against the gross carrying amount of the asset.
 Accounting Procedures for RevAluAtion

▪ If an asset’s carrying amount is increased as a result of a revaluation,

the increase shall be recognized in other comprehensive income and
accumulated in equity under the heading of revaluation surplus.
▪ However, the increase shall be recognized in profit or loss to the
extent that it reverses a revaluation decrease of the same asset
previously recognized in profit or loss.

99

Accounting Procedures for RevAluAtion

▪ If an asset’s carrying amount is decreased as a result of a revaluation,

the decrease shall be recognized in profit or loss.
▪ However, the decrease shall be recognized in other comprehensive
income to the extent of any credit balance existing in the revaluation
surplus in respect of that asset.
▪ The decrease recognized in other comprehensive income reduces the
amount accumulated in equity under the heading of revaluation
surplus.

100

50
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TrAnsfer of RevAluAtion Surplus to RetAined

EQrnings
▪ The revaluation surplus included in equity in respect of an item of
property, plant and equipment may be transferred directly to retained
earnings when the asset is derecognized.
▪ However, some of the surplus may be transferred as the asset is used by
an entity.
➢ The amount of the surplus transferred would be the difference
between depreciation based on the revalued carrying amount of
the asset and depreciation based on the asset’s original cost.
▪ Transfers from revaluation surplus to retained earnings are not made
through profit or loss.

101

Example 3,000,000 4,500,000 1,500,000

On December 31, 2018, Ice Cream Corp. has an only Accum. Dep. (1,200,000) (1,800,000) ( 600,000)
item of machine with cost of P3,000,000 and Carrying value 1,800,000 2,700,000 900,000

December 31, 2018

Machine 1,500,000
Accumulated depreciation 600,000
Revaluation surplus 900,000

December 31, 2019

Depreciation expense 450,000

Accumulated depreciation 450,000
2,700,000 ÷ 6 = 450,000

Revaluation surplus 150,000

Retained earnings 150,000
900,000 ÷ 6 = 150,000

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December 31, 2019

Example Cost 4,500,000

Accum. Dep.
On December 31, 2018, Ice Cream Corp. has an only
(1,800,000 + 450,000) (2,250,000)
item of machine with cost of P3,000,000 and
CV, 12/31/2019 2,250,000
accumulated depreciation of P1,200,000 was revalued
to a market value of P2,700,000 and a remaining Revaluation surplus = P900,000 – P150,000 = P750,000
useful life of six years. The company adopts the policy December 31, 2020
of reporting this items of property, plant and
Depreciation expense 450,000
equipment at revalued amount less subsequent
Accumulated depreciation 450,000
accumulated depreciation and subsequent
impairment losses. Revaluation surplus 150,000
Retained earnings 150,000
The company restated its accumulated depreciation
proportionately with the change in the gross carrying Cost 4,500,000
amount of the asset and transfer a portion of the Accum. Dep.
revaluation surplus as the asset is being used by the (2,250,000 + 450,000) (2,700,000)
CV, 12/31/2020 1,800,000
entity. On January 1, 2021, a second revaluation
indicates that the equipment had a fair value of
Revaluation surplus = P750,000 – P150,000 = P600,000
P1,500,000.
Prepare the journal entries from 2018 to 2021.
-

103

January 1, 2021

Example Incre
4,500,000 3,750,000
On December 31, 2018, Ice Cream Corp. has an only
Accum. Dep. (2,700,000) (2,250,000) ( 450,000)
item of machine with cost of P3,000,000 and
Carrying value 1,800,000 1,500,000 300,000
accumulated depreciation of P1,200,000 was revalued
to a market value of P2,700,000 and a remaining Accumulated depreciation 450,000
useful life of six years. The company adopts the policy Revaluation surplus 300,000
of reporting this items of property, plant and
Machine 750,000
equipment at revalued amount less subsequent
accumulated depreciation and subsequent December 31, 2021
impairment losses. Depreciation expense 375,000
Accumulated depreciation 375,000
The company restated its accumulated depreciation
1,500,000 ÷ 4 = 375,000
proportionately with the change in the gross carrying
amount of the asset and transfer a portion of the Revaluation surplus 75,000
revaluation surplus as the asset is being used by the Retained earnings 75,000
entity. On January 1, 2021, a second revaluation 600,000 – 300,000 = 300,000 ÷ 4 = 75,000
indicates that the equipment had a fair value of
P1,500,000. CV 12/31/2021 = P3,750,000 – P2,625,000 = P1,125,000
Prepare the journal entries from 2018 to 2021. Revaluation surplus = P300,000 – P75,000 = P225,000
-

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Example
January 1, 2020

Factory equipment 5,400,000

Cash 5,400,000

December 31, 2020

Depreciation expense 540,000

Accumulated depreciation 540,000
5,400,000 ÷ 10 = 540,000

CV 12/31/2020 = P5,400,000 – P540,000 = P4,680,000

Date of Revaluation Revalued amount
December 31, 2021
December 31, 2021 P4,680,000
Depreciation expense 540,000
Accumulated depreciation 540,000

Prepare the entries to record from January 1, 2020 to CV 12/31/2021 = P5,400,000 – P1,080,000 = P4,320,000
December 31, 2023.

105

Example
On January 1, 2020, Salad Corp. purchased a factory
December 31, 2021

Cost 5,400,000 ,850,000 450,000

equipment for P5,400,000 having an original useful Accum. Dep. (1,080,000) (1,170,000) ( 90,000)
life of 10 years. The equipment belongs to a class Carrying value 4,320,000 ,680,000 360,000
carried by Salad using the revaluation model. Any
Factory equipment 450,000
resulting revaluation surplus is transferred to retained
earnings at the time of disposal. The corporation Accumulated depreciation 90,000
records the proportionate relationship between the Revaluation surplus 360,000
asset account and accumulated depreciation. December 31, 2022
Depreciation expense 585,000
The results of the revaluation is as follows:
Accumulated depreciation 585,000
Date of Revaluation Revalued amount
4,680,000 ÷ 8 = 585,000
December 31, 2021 P4,680,000
CV 12/31/2022 = P5,850,000 – P1,755,000 = P4,095,000
December 31, 2023

Depreciation expense 585,000

Prepare the entries to record from January 1, 2020 to
December 31, 2023. Accumulated depreciation 585,000
CV 12/31/2023 = P5,850,000 – P2,340,000 = P3,510,000

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Example
On December 31, 2020, Mango Graham Corp. has an
December 31, 2020
only item of machine with cost of P3,000,000 and
accumulated depreciation of P1,200,000 was revalued Accumulated depreciation 1,200,000
to a market value of P2,700,000 and a remaining useful Machine 300,000
life of six years. The company adopts the policy of Revaluation surplus 900,000
reporting this items of property, plant and equipment at
revalued amount less subsequent accumulated December 31, 2021
depreciation and subsequent impairment losses. The
Depreciation expense 450,000
accumulated depreciation is eliminated against the
Accumulated depreciation 450,000
gross carrying amount of the asset. The surplus is
2,700,000 ÷ 6 = 450,000
transferred to retained earnings as the asset is being
used by the entity. Revaluation surplus 150,000
Retained earnings 150,000
On December 31, 2022, the company revalued the
900,000 ÷ 6 = 150,000
asset to P1,600,000.

Prepare the entry to record on December 31, 2020 to CV 12/31/2021 = P2,700,000 – P450,000 = P2,250,000
2022. Revaluation surplus 12/31/2021
= P900,000 – P150,000 = P750,000
107

Example December 31, 2022

On December 31, 2020, Mango Graham Corp. has an

Depreciation expense 450,000
only item of machine with cost of P3,000,000 and Accumulated depreciation 450,000
accumulated depreciation of P1,200,000 was revalued
Revaluation surplus 150,000
to a market value of P2,700,000 and a remaining useful
life of six years. The company adopts the policy of
Retained earnings 150,000
reporting this items of property, plant and equipment at
Incre
revalued amount less subsequent accumulated 1,600,000
Cost 2,700,000 1,100,000
depreciation and subsequent impairment losses. The
Accum. Dep. ( 900,000) ( 900,000)
accumulated depreciation is eliminated against the
Carrying value 1,800,000 1,600,000 200,000
gross carrying amount of the asset. The surplus is
transferred to retained earnings as the asset is being Accumulated depreciation 900,000
used by the entity.
Revaluation surplus 200,000
Machine 1,100,000
On December 31, 2022, the company revalued the
asset to P1,600,000.

Prepare the entry to record on December 31, 2020 to

2022.

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Impairment

Objectives of IAS 4&

▪ The objective of this Standard is to prescribe the procedures that an
entity applies to ensure that its assets are carried at no more than
their recoverable amount.

110

55
 Identifying An Asset thAt may be impAired

▪ An asset is impaired when its carrying amount exceeds its recoverable

amount (IAS 36 par. 8).
▪ An entity shall assess at the end of each reporting period whether
there is any indication that an asset may be impaired. If any such
indication exists, the entity shall estimate the recoverable amount of
the asset (IAS 36 par. 9).
▪ In assessing whether there is any indication that an asset may be
impaired, an entity shall consider, as a minimum, the following
indications:
➢ External source
➢ Internal source
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111

E/ternAl Source of Information

▪ There are observable indications that the asset’s value has declined
during the period significantly more than would be expected as a
result of the passage of time or normal use.
▪ Significant changes with an adverse effect on the entity have taken
place during the period, or will take place in the near future, in the
technological, market, economic or legal environment in which the
entity operates or in the market to which an asset is dedicated.
▪ Market interest rates or other market rates of return on investments
have increased during the period.
▪ The carrying amount of the net assets of the entity is more than its
market capitalization.
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InternAl Source of Information

▪ Evidence is available of obsolescence or physical damage of an asset.
▪ Significant changes with an adverse effect on the entity have taken
place during the period or are expected to take place in the near
future, in the extent to which, or manner in which, an asset is used or
is expected to be used.
▪ Evidence is available from internal reporting that indicates that the
economic performance of an asset is, or will be, worse than expected.

113

MeAsuring RecoverAble Amount

▪ Recoverable amount is the higher of an asset’s fair value less costs of
disposal and its value in use.
▪ Fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants at the measurement date.
▪ Costs of disposal are incremental costs directly attributable to the
disposal of an asset or cash-generating unit, excluding finance costs
and income tax expense.
▪ Value in use is the present value of the future cash flows expected to
be derived from an asset or cash-generating unit.
 MeAsuring RecoverAble Amount
▪ It is not always necessary to determine both an asset’s fair value less
costs of disposal and its value in use.
▪ If either of these amounts exceeds the asset’s carrying amount, the
asset is not impaired, and it is not necessary to estimate the other
amount (IAS 36 par. 19).
▪ Recoverable amount is determined for an individual asset, unless the
asset does not generate cash inflows that are largely independent of
those from other assets or groups of assets (IAS 36 par. 22).

115

FAir VAlue Less Cost of DisposAl

▪ It may be possible to measure fair value less costs of disposal, even if
there is not a quoted price in an active market for an identical asset.
▪ Examples of cost of disposal are legal costs, stamp duty and similar
transaction taxes, costs of removing the asset, and direct incremental
costs to bring an asset into condition for its sale.
▪ Termination benefits and costs associated with reducing or
reorganizing a business following the disposal of an asset are not
direct incremental costs to dispose of the asset.
 VAlue in Use
The following elements shall be reflected in the calculation of an asset’s
value in use:
▪ an estimate of the future cash flows the entity expects to derive from
the asset
▪ expectations about possible variations in the amount or timing of
those future cash flows
▪ the time value of money, represented by the current market risk-free
rate of interest
▪ the price for bearing the uncertainty inherent in the asset
▪ other factors, such as illiquidity, that market participants would
reflect in pricing the future cash flows the entity expects to derive
from the asset.
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117

VAlue in Use
▪ Estimating the value in use of an asset involves the following steps:
➢ estimating the future cash inflows and outflows to be derived from
continuing use of the asset and from its ultimate disposal; and
➢ applying the appropriate discount rate to those future cash flows.

▪ The discount rate (rates) shall be a pre-tax rate (rates) that reflect(s)
current market assessments of:
➢ the time value of money; and
➢ the risks specific to the asset for which the future cash flow
estimates have not been adjusted.
 VAlue in Use
▪ Estimates of future cash flows shall include:
➢ projections of cash inflows from the continuing use of the asset;
➢ projections of cash outflows that are necessarily incurred to
generate the cash inflows from continuing use of the asset
(including cash outflows to prepare the asset for use) and can be
directly attributed, or allocated on a reasonable and consistent
basis, to the asset; and
➢ net cash flows, if any, to be received (or paid) for the disposal of
the asset at the end of its useful life.

Recognizing & MeAsuring An ImpAirment Loss

▪ An impairment loss is the amount by which the carrying amount of an

asset exceeds its recoverable amount.
▪ An impairment loss shall be recognized immediately in profit or loss,
unless the asset is carried at revalued amount in accordance with
another Standard (for example, in accordance with the revaluation
model in IAS 16).
▪ Any impairment loss of a revalued asset shall be treated as a revaluation
decrease in accordance with that other Standard.
▪ After the recognition of an impairment loss, the depreciation charge for
the asset shall be adjusted in future periods to allocate the asset’s
revised carrying amount, less its residual value (if any), on a systematic
basis over its remaining useful life.

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Example Recoverable Amount

FV less cost to sell = P2,400,000

PV of expected net cash flows
(P1,125,000 - P525,000) x 3.7908 2,274,480
PV of residual value (P375,000 x .6209)
Recoverable
Value in use 2,507,318 amount

Impairment loss 3,117,683

Accumulated depreciation 3,117,683

December 31, 2021

How much is the impairment loss to be recognized? Depreciation expense 426,464

What is the revised depreciation expense after the Accumulated depreciation 426,464
impairment?
2,507,318 – 375,000 = 2,132,318 ÷ 5 =426,464

121

Example January 2020

Equipment 1,000,000
Cash 1,000,000
In January 2020, Chimmy Corp. purchased an
equipment costing P1,000,000. The equipment has
December 31, 2020
an estimated residual value of P100,000 and an
estimated useful life of eight years. The asset is Depreciation expense 112,500
depreciated using straight-line basis. On December Accumulated depreciation 112,500
31, 2022, it became apparent that the equipment
(1,000,000 – 100,000) ÷ 8 = 112,500
suffered permanent impairment in value. It was
determined that the equipment’s recoverable value CV 12/31/2020 = 1,000,000 – 112,500 = 887,500
was P400,000 with a remaining life of two years and a
residual value of P40,000. December 31, 2021

Depreciation expense 112,500

Prepare the journal entries from 2020 to 2023.
Accumulated depreciation 112,500

Noel A. Bergonia, CPA, MBA

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CV 12/31/2021 = 1,000,000 – 225,000 = 775,000

Noel A. Bergonia, CPA, MBA

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Example December 31, 2022

Depreciation expense 112,500

Accumulated depreciation 112,500
In January 2020, Chimmy Corp. purchased an
equipment costing P1,000,000. The equipment has
an estimated residual value of P100,000 and an Impairment loss 262,500
estimated useful life of eight years. The asset is Accumulated depreciation 262,500
depreciated using straight-line basis. On December CV 12/31/2022
31, 2022, it became apparent that the equipment (1,000,000 – 337,500) P662,500
suffered permanent impairment in value. It was Recoverable amount 400,000
determined that the equipment’s recoverable value Impairment loss P262,500
was P400,000 with a remaining life of two years and a
residual value of P40,000. December 31, 2023

Prepare the journal entries from 2020 to 2023. Depreciation expense 180,000
Accumulated depreciation 180,000
(P400,000 – P40,000) ÷ 2 = P180,000

CV 12/31/2023 = 1,000,000 – P780,000 = P220,000

-

Example January 1, 2020

Machine 600,000
Cash 600,000

December 31, 2020

On January 1, 2020, Tata Company acquired a factory
machine at a cost of P600,000. The machine is being Depreciation expense 60,000
depreciated using the straight-line method over its Accumulated depreciation 60,000
projected useful life of 10 years. On December 31,
600,000 ÷ 10 =60,000
2021, a determination was made that the asset’s
recoverable amount was P384,000. On December 31, CV 12/31/2020= P600,000 – P60,000 = P540,000
2022, the recoverable amount was determined to be December 31, 2021
444,000 and management believes that the
Depreciation expense 60,000
impairment loss previously recognized should be
reversed. Accumulated depreciation 60,000

Prepare the entry to record until December 31, 2022. Impairment loss 96,000
Accumulated depreciation 96,000
CV 12/31/2021 (600,000 – 120,000) P480,000
Recoverable amount 384,000
Impairment loss P 96,000

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December 31, 2022

Example Depreciation expense 48,000
Accumulated depreciation 48,000
On January 1, 2020, Tata Company acquired a
factory machine at a cost of P600,000. The 384,000 ÷ 8 =48,000
machine is being depreciated using the straight-
Machine 192,857
line method over its projected useful life of 10
years. On December 31, 2021, a determination Accumulated depreciation 84,857
was made that the asset’s recoverable amount was Recovery of impairment 84,000
P384,000. On December 31, 2022, the recoverable Revaluation surplus 24,000
amount was determined to be 444,000 and CV 12/31/2022 (384,000 – 48,000) P336,000
management believes that the impairment loss Recoverable amount 444,000
previously recognized should be reversed. Increase P108,000
Limit on recovery
Previous impairment P96,000
Prepare the entry to record until December 31, Impairment already recovered
2022. (60,000 – 48,000) (12,000)
Limit for recovery 84,000
Revaluation surplus P24,000

Shortcut for revaluation surplus

CV without impairment
(600,000 - [60,000 x 3]) 420,000
(264,000) (384,857) ( 84,857)
Recoverable amount 444,000
Revaluation surplus 24,000
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Example January 1, 2019

Koya Inc. purchased a delivery truck on January 1, Delivery Truck 1,500,000
2019 at a cost of P1,500,000. It is being Cash 1,500,000
depreciated using straight-line method over its
December 31, 2019
projected useful life of 10 years. On December 31,
2019, the asset’s fair value was P1,687,500. Depreciation expense 150,000
Accordingly, an entry was made on that date to Accumulated depreciation 150,000
recognize the revaluation surplus. It is the
company’s policy to transfer a portion of P1,500,000 ÷ 10 = P150,000
revaluation surplus to retained earnings every
period. 1,500,000 1,875,000
Accum. Dep. (150,000) (187,500) ( 37,500)
An impairment was detected on December 31,
2021 and the recoverable amount of the asset was Carrying value 1,350,000 1,687,500 337,500
determined to be P1,010,625. On December 31,
Delivery truck 375,000
2022, the fair value of the asset was determined to
be P1,095,000. Accumulated depreciation 37,500
Revaluation surplus 337,500
Prepare the entries from 2019 to 2022.

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December 31, 2020

Example Depreciation expense 187,500
Accumulated depreciation 187,500
Koya Inc. purchased a delivery truck on January 1,
2019 at a cost of P1,500,000. It is being P1,687,500 ÷ 9 = P187,500
depreciated using straight-line method over its Revaluation surplus 37,500
projected useful life of 10 years. On December 31,
2019, the asset’s fair value was P1,687,500. Retained earnings 37,500
Accordingly, an entry was made on that date to P337,500 ÷ 9 = P37,500
recognize the revaluation surplus. It is the
CV 12/31/2020 = P1,875,000 – P375,000 = P1,500,000
company’s policy to transfer a portion of
revaluation surplus to retained earnings every Revaluation surplus 12/31/2020
period. = P337,500 – P37,500 = P300,000
December 31, 2021
An impairment was detected on December 31,
Depreciation expense 187,500
2021 and the recoverable amount of the asset was
determined to be P1,010,625. On December 31, Accumulated depreciation 187,500
2022, the fair value of the asset was determined to Revaluation surplus 37,500
be P1,095,000.
Retained earnings 37,500
Prepare the entries from 2019 to 2022. CV 12/31/2021 = P1,875,000 – P562,500 = P1,312,500
Revaluation surplus 12/31/2021
- = P337,500 – P75,000 = P262,500

127

Example
December 31, 2021
Accumulated depreciation 129,375
Revaluation surplus 262,500
Koya Inc. purchased a delivery truck on January 1,
2019 at a cost of P1,500,000. It is being Impairment loss 39,375
depreciated using straight-line method over its Delivery Truck 431,250
projected useful life of 10 years. On December 31, CV 12/31/2021 P1,312,500
2019, the asset’s fair value was P1,687,500. Recoverable amount 1,010,625
Accordingly, an entry was made on that date to Decrease P 301,875
recognize the revaluation surplus. It is the Remaining balance of reval. surplus 262,500
company’s policy to transfer a portion of Impairment loss P 39,375
revaluation surplus to retained earnings every Increase
period.
1,875,000 1,443,750
An impairment was detected on December 31,
(562,500) (433,125) ( 129,375)
2021 and the recoverable amount of the asset was
determined to be P1,010,625. On December 31,
2022, the fair value of the asset was determined to
be P1,095,000. Depreciation expense 144,375
Accumulated depreciation 144,375
Prepare the entries from 2019 to 2022. 1,010,625 ÷ 7 = 144,375

-
CV 12/31/2022 = P1,443,750 – P577,500 = P866,250

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December 31, 2022

Example Delivery Truck 381,250
Accumulated depreciation 152,500
Koya Inc. purchased a delivery truck on January 1,
2019 at a cost of P1,500,000. It is being Recovery of impairment 33,750
depreciated using straight-line method over its Revaluation surplus 195,000
projected useful life of 10 years. On December 31, CV 12/31/2022 P 866,250
2019, the asset’s fair value was P1,687,500. Recoverable amount 1,095,000
Accordingly, an entry was made on that date to Increase P 228,750
Limit for impairment reversal
recognize the revaluation surplus. It is the
Previous impairment P39,375
company’s policy to transfer a portion of Recovered
revaluation surplus to retained earnings every (150,000 - 144,375) 5,625
period. Limit for impairment reversal (33,750)
Revaluation surplus P 195,000
An impairment was detected on December 31, Carrying value Revalued amount Incre

2021 and the recoverable amount of the asset was Cost 1,443,750 1,825,000 381,250
determined to be P1,010,625. On December 31, Accum. Dep. (577,500) (730,000) ( 152,500)
2022, the fair value of the asset was determined to

Carrying value 866,250 1,095,000 228,750

be P1,095,000.
Shortcut for the revaluation surplus
CV w/o impairment
Prepare the entries from 2019 to 2022. (1,500,000 -[150,000 x 4]) 900,000
Recoverable amount 1,095,000
- Revaluation surplus 195,000

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Derecognition
▪ The carrying amount of an item of property, plant and equipment
shall be derecognized:
❖ on disposal; or
❖ when no future economic benefits are expected from its use or
disposal. (IAS 16 par. 67)

▪ The gain or loss arising from the derecognition of an item of

property, plant and equipment shall be determined as the difference
between the net disposal proceeds, if any, and the carrying amount
of the item.

131

Derecognition
▪ Mode of derecognition:
➢ Sale
➢ Exchange
➢ Involuntary conversion
➢ Abandonment

▪ If the property, plant and equipment is not yet fully depreciated,

depreciation must be taken up until the date of derecognition.

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SAle of Property, PlAnt And Equipment

▪ When selling property, plant, and equipment for monetary consideration (cash or a
receivable), the seller recognizes a gain or loss for the difference between the
consideration received and the book value of the asset sold.

Selling price (consideration received) XX

Less: Carrying value at the date of disposal XX
Gain or Loss on sale XX

133

Example
As of December 31, 2020, the Selling price 55,000
equipment of Porkchop Inc., originally Carrying value, 1/1/21
(100,000 - 60,000) (40,000)
purchased on January 1, 2016, has a
Gain on sale 15,000
cost of P100,000 and accumulated
depreciation of P60,000. It is the
company’s policy to depreciate assets Cash 55,000
using straight-line method. Accumulated depreciation 60,000
Equipment 100,000
Gain on sale of equipment 15,000
On January 1, 2021, the company sold
it at P55,000.

Prepare the entry to record the sale.

 Example
Selling price 55,000
As of December 31, 2020, the Carrying value, 5/31/21
5/1/21
equipment of Menudo Inc., originally (100,000 - 65,000*) (35,000)
purchased on January 1, 2016, has a Gain on sale 20,000
cost of P100,000 and accumulated
depreciation of P60,000. It is the *60,000 ÷ 5 = P12,000 x 5/12 = P5,000
60,000 + 5,000 = 65,000
company’s policy to depreciate assets
using straight-line method.
Cash 55,000
Accumulated depreciation 60,000
On May 31, 2021, the company sold it Depreciation expense 5,000
at P55,000. Equipment 100,000
Gain on sale of equipment 20,000

Prepare the entry to record the sale.

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135

InvoluntAry Conversion
▪ An involuntary conversion occurs when your property is destroyed,
stolen, condemned, or disposed of under the threat of condemnation
and you receive other property or money in payment, such as
insurance or a condemnation award.
▪ Gain or loss arises from the difference of the amount received and the
carrying value of the property
 Example
Steak Co. has a delivery truck which
has an original cost of P250,000. This
truck is insured in Pork Insurance
Company. Tragically on February 1,
Cash 155,000
2021 when its carrying value is
Accumulated depreciation 100,000
P150,000, it was totaled in an
Delivery truck 250,000
accident. After the evaluation, the
Gain on disposal 5,000
insurance company paid Steak Co.
P155,000.

What is the entry to record the

transaction?

137

Abandonment
▪ If the asset has no use already or when it is fully utilized, the company
may abandon it.
▪ If the asset has still a carrying value at the time of abandonment, it will
be charged to loss.

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Example

On February 1, 2021, Burger Inc.

decided to abandon its factory
equipment with zero carrying value on
its accounting record. The original cost Accumulated depreciation 150,000

of this equipment purchased 8 years Factory Equipment 150,000

ago is P150,000.

Prepare the entry to record the

transaction.

139

Example
On January 1, 2021, Shanghai Inc.
decided to abandon its faulty factory
equipment with P20,000 carrying
value on its accounting record. The Accumulated depreciation 130,000
original cost of this equipment Loss on disposal 20,000
purchased 8 years ago is P150,000. Factory Equipment 150,000

Prepare the entry to record the

transaction.
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