PROPERTY, PLANT

AND EQUIPMENT
AKMALIA M. ARIFF/SHAYUTI ADNAN/WAN ZALANI @

ZANANI BT WAN ABDULLAH

UNIVERSITI MALAYSIA TERENGGANU

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Learning Outcomes
At the end of this chapter, students should be able to explain the main issues in accounting for
PPE as follows:

Explain how economic events result in assets such as the PPE

Describe the objective of providing information about PPE to users of accounting
information
Identify and classify PPE

Recognize PPE
Measure initially PPE
Present PPE in the financial statements
ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Revision on Conceptual
Framework
An

Asset

is

oa resource controlled by the entity,

oas a result of past events, and
ofrom which future economic benefits are expected to flow to the entity.

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Sub classification of Assets

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

What are PPE?

Long-term assets which arise from investment decisions of
reporting entities.
Normally require substantial outlay at the inception of an
investment decision with anticipation of benefits to be derived
from their usage over several accounting periods.
They shall be properly recorded & allocated fairly over several
accounting periods.

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Objective of Providing Information about PPE

Information about PPE is

useful to primary users
when they make decision
whether to buy or sell the
shares.

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

 MFRS 116 covers all tangible non-current assets

except :
PPE classified as assets held-for-sale MFRS 5
investment properties accounted for the fair
value model MFRS 140
Leases MFRS 117
biological assets IAS 41
exploration and evaluation assets MFRS 6
mineral rights and reserves (i.e oil, natural gas, &
similar non-regenerative resources

Accounting for PPE - MFRS

116

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Definition of PPE
MFRS 116 (para 6) defines PPE as :

assets that are held by an entity for use in the

production of goods and services, for rental to
others, or for administrative or maintenance
purposes; and are expected to be used during
more than one reporting period.

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Major Characteristics of Assets under

MFRS116
1. It is being used in operations.
Only assets used in the normal operations of the
business should be classified as fixed assets.
2. It has a long useful life.
Fixed assets are expected to yield services over
several accounting periods.
3. It possesses physical substance.
Fixed assets are characterised by tangible physical
substance and are thus differentiated from intangible
assets such as patent and brands.
ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Class Discussion : Definition and

Classification of PPE
An item of PPE is classified
as PPE if it is identified as
asset and meets the
definition of PPE.
PPE are intangible items
that are held tor use in the
production or supply of
goods or services, for rental
to
others,
or
for
administration
purposes;
and are expected to be
used for more than one
period.

Focus Eye Bhd acquired an advanced optical lens-making machine to

produce lenses. The machine is expected to be used for five years
before being scrapped.
Question: Is the machine an asset?
The machine is an asset of Focus Eye Bhd because it is a physical
resource (a steel and concrete structure) purchased by Focus Eye Bhd
(past event) and used at the entitys discretion (control) to produce
lenses. The sale is expected to result in the flow of cash (future
economic benefits) to the company.
Question: Is the machine an item of property, plant and equipment?
It has physical form (tangible), it is used to convert glasses into lenses
(held for use in production) and it is expected to be used for about five
years (in more than one period). Therefore, the machine is an item of
property, plant and equipment.
ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Initial Recognition of PPE

MFRS 116 requires that an item of PPE shall be recognised as
an asset if, and only if :
i. It is probable that future economic benefits associated
with the asset will flow to the entity; and
ii. The cost or value of the asset can be measured reliably
The classification of PPE depends on the nature & use of the
item (as in characteristics 1 in the previous slide)
Example:

a building used for administrative purpose is classified as building under

PPE.
a machine used in operations is classified as machinery under PPE.

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Initial Recognition of PPE

In some circumstances, considerable judgement is
required in deciding whether an expenditure shall be
capitalised as a PPE or represents as an expense that
shall be charged to Statement of Comprehensive
Income (SCI).
Large assets component accounting
Numerous small assets - combine as a single asset.
Example:
refer next slide
ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Initial Recognition of PPE

Example:
major machine components & stand-by equipment shall normally be
capitalised as PPE.
E.g. Ship - Items or parts of a piece of PPE that have a different
economic life or maintenance are identified and depreciated
accordingly.
other minor spare parts & servicing equipment are more appropriately
carried as inventory & charged to SCI when consumed.
Other insignificant items like moulds, tools & nuts are usually
expensed to SCI as incurred but the entity may aggregate them for
capitalisation as operating PPE (recognised as combine single asset).

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Initial Recognition of PPE

Equipment

Minor spare parts

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Initial Recognition of PPE

Note :
in practice, it is quite common for companies to
specify a quantum of amount below which a capital
expenditure shall be expensed.
Eg: an entity specify an amount of RM10,000 and
above for capitalisation.
Therefore, a routine replacement of a computer that
cost RM5,000 shall be recognised as an expense
when incurred.
ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Class Discussion : Initial Recognition

of are
PPE
PPE
recognized
as assets when it is
probable that future
economic benefits
associated with the
item will flow to the
entity; and the cost
of the item can be
measured reliably.

Focus Eye Bhd acquired an optical equipment to monitor and determine the quality of
visions of its customers. The equipment was paid in cash for RM52,000 on delivery.
Question: Is the item one of the elements?
The equipment is considered as an asset because it is a physical resource (a steel and
concrete structure), purchased by Focus Eye Bhd (past event), and used at the entitys
discretion (control) to monitor and determine the quality of visions of its customers.
Question: Is it probable that future economic benefit will flow to the entity?
Focus Eye Bhd acquired the equipment to be used in monitoring and determining the quality
of the customers vision. The entity will gain income when the customers pay for the service
provided. Therefore, it is probable that future economic benefits will flow to the business
from the use of the equipment.
Question: Can the item be measured with reliability?
The value of the item can be measured reliably because the equipment is exchanged for a
cash payment of RM52,000, which was paid at the time the entity received the equipment.

Initial Measurement of PPE

At cost shall comprise:
purchase price,
Import duties, taxes and
any directly attributable costs in bringing the asset to location and
condition for intended use as well as
initial estimate of cost of dismantling and removing and restoring the site.

Any trade or cash discount shall be deducted.

- Irrespective of whether of not the discount is taken.
Cost to exclude:
Administrative & general overhead expenses.
Start-up & related pre-production costs.
- Unless these costs are necessary to bring the asset to its working
condition.
ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Decommissioning, Dismantling and Restoration

Costs

These cost are expected to be incurred at the end of the useful life of the related
PPE,
but for which the obligation exists when the asset is acquired or consumed.
Eg:
Oil companies : are often required by the contractual arrangements to
dismantle their oil rigs on cessation of their operations or upon expiry of their
lease periods.
Telecommunication entities : may be required by contractual agreements to
decommission their telecommunication network facilities after a specified
period.
Timber concession entities : they may be required by law to replant or
replace their trees that they extract for sustainable forest development.
Aquaculture / Mining entities : they may have to refill the ponds or areas
extracted at the end of their lease periods.
ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Cost Cannot Be Capitalised

Should be write-off as expense.
Not included as part of cost of PPE.
The costs are:
a)
b)
c)

Administrative costs & general overheads unless they are directly

attributed to the acquisition of assets or bringing an asset to its working
condition
Cost of opening a new facility, cost of introducing a new product & cost of
conducting business in a new location or with a new class of customer;
and
Initial operating losses, cost of relocating or reorganising part or all of the
entitys operation

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Class Discussion : Initial Measurement

of
PPE
PPE are initially measured at cost that
Focus Eye Bhd purchased imported vision testers. The related
comprises:
(a) The purchase price, including import
duties and non-refundable purchase taxes,
after deducting trade discounts and rebates.
(b) Any cost directly attributable to bringing
the asset to the location and condition
necessary for it to be capable of operating in
the
manner
as
intended
by
the
management.
(c) The initial estimate of costs for
dismantling and removing the items and
restoring the site on which it is located.

costs incurred in relation to the testers were as follows:

Invoice price
RM50,000
Trade discount (10%)
Import duties
RM3,500
Transportation cost
RM1,500
Installation cost
RM1,500
Administrative cost
RM6,000
The cost of the testers:
Invoice price (net)
Import duties
Transportation cost
Installation cost
Cost of the testers

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

RM45,000
RM3,500
RM1,500
RM1,500
RM51,000

Other Ways of Acquisition of

PPE
Self Constructed Assets
Acquisition involving cost of decommissioning, dismantling, and restoration
costs
Deferred Payment
Asset Exchange Transaction
Government Grants

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

22

Self Constructed Asset

PPE may be self constructed. Example constructing a building
Cost to be capitalized :
-All cost related to the construction of assets (e.g. materials, labour)
-Cost related to the construction in general and can be allocated to the
assets (e.g. engineering and technical cost)
- borrowing cost (subject to being used in the construction)

Cost that can be eliminated from the total cost:

-Any internal profits
-Cost of inefficiencies

Examples: Example 2 (TLT p.390)

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Self Constructed Asset

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Acquisition involving cost of decommissioning,

dismantling, and restoration costs

These costs are part of cost of PPE. An estimate of these costs is included in the
initial measurement of costs of the related PPE.
The capitalised amount is the present value of these costs:

Recognised and measured in accordance with MFRS 137, Provisions, Contingent Liabilities
and Contingents Assets
The capitalised amount are depreciated over the period the property, plant and equipment
is used.

If the amount to be incurred in the future period represents a future nominal

value, it shall be discounted at the entitys current borrowing cost.
Subsequent accretions (the unwinding of the discount) in the provision
account shall be treated as a finance cost in accordance with MFRS 137.
Examples: Example 3 (TLT p.391)

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Acquisition involving cost of decommissioning,

dismantling, and restoration costs

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Acquisition involving cost of decommissioning,

dismantling, and restoration costs

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Deferred payment
When payment of the acquisition of PPE is not
immediate but deferred beyond the normal credit
period, the cost is the cash equivalent.
Cash equivalent is the PV of the future payment.
Difference between cash price equivalent and total
payment is to be recognised as interest.
Example : Refer Example 2 (JL p.439)

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Deferred payment

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Asset Exchange Transaction

PPE may be acquires in exchange for a non-monetary asset or a

combination of monetary & non-monetary assets.
Eg: an old car is exchanges for a motorcycle.
MFRS 116 requires item acquired in exchange for a non-monetary asset
or group of non-monetary assets is measured at fair value unless;
a) The exchange lacks commercial substances; or
b) The fair value of neither the asset received nor the asset given up
is reliably measurable.
If fair value is not determinable or exchange lacks commercial
substance then the cost of the asset acquired is equal to the
carrying value of asset given in exchange.
ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Asset
Exchange Transaction
MFRS 116 clarifies that an exchange transaction has

commercial substance if:

a) The configuration (risk, timing & amount) of the cash
flows or the asset received differs from the
configuration of the cash flows of the asset transferred.
b) The entity-specific value of the portion of the entitys
operations affected the transaction changes as a result
of the exchange; and
c) The difference in (a) and (b) is significant relative to
their fair value of the assets exchanged.

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Asset Exchange Transactioncont

The barter trade exchanges of non-monetary assets must

have commercial reasons for their exchange.
Eg: Entity A exchanges its hotel property with hotel
property of Entity B .
- the conditions of commercial substance in this
example will most likely be met because each hotel
would have its separate configuration of future cash
flows. Accordingly, the fair value basis shall be
applied.
-Examples: Example 4 and 5 (TLT p.393 and 395)
ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Asset Exchange Transactioncont

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Asset Exchange Transactioncont

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Asset Exchange Transactioncont

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Acquire PPE through

Government Grants
The entity has the option to reduce the cost of the PPE when it receives
government grants.
Refer : JL - Example 6 (pg 443)

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Acquire PPE - Government Grants

ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Presentation of PPE
Presentation is by Classes - refer Page 149
Each item of PPE shall be recorded separately in the
accounts of an entity.
For presentation in FS, they are aggregated and
presented by classes.
MFRS clarifies that a class of PPE is a grouping of assets
of a similar nature or use in an entitys operations.
Eg: Land, Land & buildings, Machinery, Ships, Aircraft,
Motor vehicles, Furniture & Fittings, Office equipment
ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1

Summary of Accounting for PPE

Please make an attempt to review all these resources on accounting for
PPE :
Videos :
a)https://www.youtube.com/watch?v=VgP1kakxmB4
b)https://www.youtube.com/watch?v=UquySO9qvxM
c)https://www.youtube.com/watch?v=32I2RzmPG1s
Documents :
a)http://www.ifrs.org/Documents/IAS16.pdf
b)http://www.bdointernational.com/Services/Audit/IFRS/IFRS%20at%
20a%20Glance/Documents/IAS%2016.pdf

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39

End of Lecture
ACT 3101 FINANCIAL ACCOUNTING AND REPORTING 1