Substantive Test of Property Plant

and Equipment
Module 2

Instructor: Mr. Almario G. Parco, Jr., CPA, MBA

Intended Learning Outcomes:
• After studying this chapter, you should be able to:

1. Identify the audit objectives for property, plant and equipment and related accounts.

2. Describe the primary substantive audit procedures for property, plant and equipment
and related accounts

3. Identify assertions addressed by audit procedures for property, plant and equipment
and related accounts

4. Prepare a lapsing schedule for a PPE.

Introduction
Property, plant and equipment (PPE) are one of the most significant portions of an entity's
non-current asset; hence, before acquiring a property, plant and equipment, they should be
carefully planned and analyzed.

When planning for the audit of PPE, th.e auditor should .consider that the amounts for
this PPE is material to the statement of financial position and expect that the account
balances do not necessarily change significantly from year to year. The auditor normally
assesses control risk at a maximum level and performs extensive substantive tests· which
emphasize the review of significant additions and disposals, and analytical procedures to
test the provisions for depreciation and depletion.

In conjunction with the audit of property, plant and equipment, the auditors also obtain
evidence about the related accounts of depreciation expense, accumulated depreciation,
lease (rent) expense, impairment loss (if any) and repairs and maintenance expense.
Audit Objectives
When auditing property, plant and equipment, the principal objective for the substantive
tests is to determine the following:
Assertion Category Audit Objectives

Existence All PPE on the statement of financial position including assets leased under finance lease exist

Completeness All PPE owned or leased under finance lease. by the entity at the reporting date is included on the
statement of financial position.

Valuation and Allocation PPE is carried at the appropriate amount taking

into account the requirements of PAS 16 Property, Plant and Equipment and PAS 36 Impairment of
Assets.

Rights and Obligations The entity owns, or has a legal right to, all the PPE on the statement of financial position at the
reporting date.

Presentation and Disclosure PPE and related accounts are properly classified,
described and disclosed in the financial statement, including notes, in accordance with PFRSs.
Audit of Property, Plant and Equipment
(PPE)
The auditor's primary substantive procedures for property, plant and equipment will typically include the
following:

1. Obtaining a summary analysis of changes in property owned and reconcile with ledgers;

2. Vouching for additions and disposals (including retirements) of PPE during the year;

3. Physical inspection of major acquisition of PPE during the year;

4. Examining proof of ownership of PPE;

5. Analyzing lease, repair and maintenance expense accounts;

6. Testing for the accuracy and reasonableness for provision on depreciation or depletion;

7. Investigating current and potential impairments of PPE;

8. Performing analytical procedures to check for reasonableness of PPE and related expense reported in the
financial statements; and

9. Evaluating financial· statement presentation and disclosures for an item of PPE including its related
revenue and expense.
Reconciliation of Subsidiary Ledger with
General Ledger
Before making a detailed analysis of changes in PPE accounts during the year, the auditor should obtain a schedule of PPE,
including capitalized leases, and related additions, disposals, retirements, reclassifications and depreciation (PPE subledger)
and agree balances to the respective general ledger accounts. Reconciliation of the subsidiary ledgers with the controlling
accounts can be performed with the use of generalized audit software.

The reconciliation schedule normally includes the following items:

1. A description of the asset or asset classifications;

2. Cost for each asset or asset classification, including the opening balance at the beginning of the year, additions and
disposals, retirements and the balance at the end of the year;

Accumulated depreciation, showing:

a. Balance at the beginning of the year;

b. Debits to accumulated depreciation due to transfers, derecognition and reversals;

c. Depreciated book value before the current year's depreciation, if the provision is based on the declining balance;

d. Depreciation or depletion rate for each asset classification;

e. Depreciation or depletion expense for the year; and

f. Balance at the end of the year.

Examination of Additions and Disposals
(including retirements)
After reconciling the general ledger and sub-ledger of the PPE, the auditor vouches
additions and disposals (including retirements). Vouching of additions to the property,
plant and equipment accounts during the period under audit is considered one of the most
important substantive tests. The extent of vouching is dependent upon the auditors’
assessment of control risk for the existence and valuation of plant and equipment.

Additions

Normally, additions to property, plant and equipment are acquired and, therefore,
recorded at purchase or acquisition cost. An entity that constructs assets for its own use
may capitalize interest costs that it incurs during the time required to bring the asset to the
condition and location for its intended use, as permitted by PAS 16 Property, Plant and
Equipment and PAS 23 Borrowing Cost.

If the Ppe is donated or acquired for consideration other than cash, the cost of the
acquisition is determined in reference to PAS 16 Property, Plant and Equipment.
• When testing additions, the auditor normally vouches all additions but in , some cases, the auditor may decide to
vouch only sample additions. The specific steps typically performed by the auditor to verify additions during the year
will include the following:

1. For acquisitions of property (e.g., land and buildings), the auditor should verify the occurrence and cost of the
addition by examining the capital expenditure authorization and purchase agreement, contract deeds, cancelled
checks, or other documentation. The auditor should also ensure that all costs of acquisition are included in the PPE
account;

2. For other additions to PPE, verify the occurrence and valuation by tracing the description and amount to purchase
orders, capital expenditure authorizations, contacts, architects' certificates, legal correspondence, supplier's
invoices, cancelled checks, or other appropriate documentation;

3. For cost incurred related to PPE (e.g., land improvements, building improvements, major repairs, etc.), the auditor
should examine supporting invoices and check whether the acquisition represents capital expenditure based on the
capitalization policy of the entity;

4. For PPE under construction:

a. Check that additions are properly approved in accordance with the entity's authorization;
b. Verify the change in Construction in Progress (CIP) account by examining contractors' progress billings, labor charges, and other
supporting documentation for additions;
c. Check that all costs incurred up to the reporting date and any withholding payments (e.g., amounts withheld from payments to
contractors pending satisfactory completion of construction) have been properly recorded;
d. Test calculations of capitalized borrowing cost (e.g. interest) to determine if the appropriate rates, amounts and capitalization
periods have been used, and whether these are in accordance with the entity's capitalization policy;
e. Review and calculate the allocation of overhead charges attributable to construction;
f. Compare the total cost of self-constructed equipment with bids or estimated purchase prices for similar equipment from outside
supplier, savings on construction should not be recognized; and
g. Trace transfers from the CIP account to the property accounts, observing propriety of classification.
5. For assets leased under finance lease, the auditor should ensure the capitalized amount
is in accordance with PFRS 16 Leases by performing the following

a. Obtain a copy of the lease contract and examine the terms to verify that the lease
meets the criteria for finance lease;

b. Recompute the present value of the minimum lease payments;

c. Review the fair values of the asset leased; and

d. Check whether the capitalized value is the lower of the fair value of the leased asset
and the present value of the minimum lease payments.
Disposals/ Retirements
The principal purpose of this procedure is to determine whether any PPE has been replaced, sold, dismantled,
or abandoned without such being reflected in the accounting records. The auditor typically includes the
following procedures to discover unrecorded retirements or disposals:

1. Inquire of executives and supervisors of PPE retirements or disposals during the year;

2. For new additions, determine status of old asset whether this represent a replacement of old asset;

3. When verifying PPE acquisitions, check for any trade-in credits received and then check that the related
asset trade-ins are recorded in the disposals for the year;

4. Analyze miscellaneous revenue account for cash proceeds from sale of PPE;

5. If company's product lines are discontinued, investigate disposition of plant facilities;

6. Consider whether property exists for all property taxes paid, and, if not, determine whether the property
was sold and included in the disposals for the year;

7. Examine retirement work orders or other source documents for proper authorization; and

8. Investigate any reduction in insurance coverage as this may. Indicate retirement of PPE.

After the auditor ensures that all retirements or disposals are recorded, the auditor should check the propriety
of journal entries and derecognition gain or loss recorded. A retirement would normally include a debit to
Accumulated Depreciation account and credit to the corresponding plant equipment retired.
Physical Inspection of Major Additions of Plant and
Equipment and Examine and Evidence of Legal Ownership
of Property, Plant and Equipment
The auditors usually make a physical inspection of major units of property, plant and
equipment acquired during the year under audit to determine the existence of the asset. The
number of property, plant and equipment that need to be inspected will depend on the
auditors’ consideration of risk of material misstatement and the number of PPE in
consideration.

The auditor’s direction in examining a PPE may flow in either of the following:

1. Inspect the item of plant and equipment and trace it to the property, plant and equipment
ledger. This type of procedure provides evidence of completeness of recorded asset.

2. Select items of plant and equipment from the ledger to the physical assets. This type of
procedure provides evidence of existence and condition of assets. However, this
procedure does not provide evidence regarding the ownership of the asset.

3. To verify ownership of an item of PPE, the auditor examines proof of legal ownership,
for example, deeds of property (real estate) and vehicle registration documents. The
auditor should also inquire the management of any restriction on this item of plant , and
equipment as they may be used as collateral for a loan.
Examine Impairments of Property, Plant
and Equipment
PAS 36 requires that an entity should review assets for impairment whenever events or
changes in circumstances indicate that carrying value may not be recoverable. The
management should provide impairment loss if the carrying amount of an asset is greater
than its recoverable amount. Therefore, in assessing the proprietary of impairment, the
auditor should inquire with management their approach in identifying indicators of
impairment, and the actions taken as a result of any potential impairment noted. If an
impairment provision was made or the auditor considers it necessary, the auditor
ordinarily should perform the following procedures:

1. Evaluate the appropriateness of the valuation model and assumptions used;

2. Assess the reasonableness of management's estimates; and

3. Evaluate the accuracy, completeness, and the relevance of the important data on
which the estimates or measurements are based.
Analyze Lease, Repair and Maintenance
Expense Accounts
The auditors' principal objective in analyzing the lease (rent), repair and maintenance
expense accounts is to ensure that all capital expenditure should not been included in
these expense accounts. Normally, the items of lease expense and repairs and
maintenance examined by the auditor are those items that involve significant amount.

For lease expense, the auditor will normally examine the term of the lease contract to
determine if the lease is appropriately classified as operating lease, otherwise, this should
be accounted as an asset and depreciated.

For the repairs and maintenance expense accounts, the auditor should obtain the
companies written policy regarding the capitalization' of expenditures incurred in relation
to a property, plant and equipment as basis in determining the appropriateness of the
classification of the accounts.
 Test the Provision for Depreciation or Depletion
Depreciation or depletion is an example of accounting estimate. PSA 540 (revised and redrafted) requires that in evaluating accounting estimates,
auditors first obtain an understanding of the client's process and controls in developing accounting estimates. In auditing depreciation or depletion,
the auditor's objective is to obtain sufficient appropriate audit evidence about whether:

a. Depreciation or depletion recognized in the financial statements are reasonable; and

b. Related disclosures required in the financial statements are adequate.

The following are audit procedures to test the reasonableness of depreciation and depletion:

1. Review the depreciation policies set forth in the company manuals and determine if it is applied consistently;

2. Obtain or prepare a summary analysis of accumulated depreciation for the major property classifications as shown by the general ledger control
accounts, listing beginning balances, provisions for depreciation during the year, disposals, retirements, and ending balances.
a. Compare beginning balances with the audited amounts in last year's working papers; and
b. Determine that the totals of accumulated depreciation recorded in the plant and equipment subsidiary records agree with the applicable general ledger controlling
accounts.

3. Test the provisions of depreciation.

a. Assess the reasonableness of the depreciation methods and rates used to calculate the depreciation provision by comparing it with the methods and rates used in the
prior years and Investigate any variances;
b. For assets acquired or disposed during the year, check whether depreciation was provided based on the accounting policy of the company;
c. Check the computation of depreciation performing independent recalculation; and
d. Compare credits to accumulated depreciation for the year with the debits to depreciation expense.

4. Test deductions from accumulated depreciation for assets retired.

a. Trace deductions to the working paper analyzing retirements of assets during the year and
b. Test accuracy of accumulated depreciation to date of retirement.

5. Perform analytical procedures for depreciation.

a. Compute the ratio of depreciation expense to total cost of plant and compare with prior years and
b. Compare the percentage relationships between accumulated depreciation and the related property accounts with those in prior years. Inquire with management any
significant variations from the normal depreciation.
Evaluate Financial Statement Presentation and Disclosures
for Plant Assets and for Related Revenue and Expenses
For each class of property, plant, and equipment, the auditor should check whether the entity has disclosed the following
requirements under PAS 16:

1. Basis for measuring carrying amount;

2. Depreciation method(s) used;

3. Useful lives or depreciation rates used;

4. Gross carrying amount and accumulated depreciation and impairment losses at the beginning and end of the period;

5. Reconciliation of the carrying amount at the beginning and the end of the period;

6. Restrictions on title;

7. Expenditures to construct property, plant, and equipment during the period;

8. Commitments to acquire property, plant, and equipment; and

9. Compensation. from third parties for items of property, plant, and equipment that were impaired, lost or given up
that is included in profit or loss.

The auditor also should be satisfied that any revaluation surplus should be properly presented as part of 'other
comprehensive income' in the statement of comprehensive income. Items of property, plant and equipment are presented
as non-current asset in a line item in the statement of financial position as "Property, Plant and Equipment".
LAPSING SCHEDULE
Lapsing schedule is a worksheet containing specific accounting data about fixed assets
such as the original purchase cost, useful life, accumulated depreciation, additions, sales
of assets, and so on. Lapsing schedule is ordinarily provided by the audit client and may
slightly differ from one entity to another. Presented below is an example of lapsing
schedule which is essential in conducting an audit of PPE.
PPE (PAS 16), Borrowing Cost (PAS 23),
Impairment (PAS 36), EEMR (PFRS 6) and
Investment Property (PAS 40)
Module 4

Instructor: Mr. Almario G. Parco, Jr., CPA, MBA

Intended Learning Outcomes
a. define and understand the nature of property, plant and equipment; are measured upon
initial recognition;

b. identify the different depreciation methods and explain the appropriateness of each
method;

c. account for costs incurred subsequent to acquisition of property, plant and equipment;

d. account for changes in accounting estimates affecting property, plant and equipment

e. properly measure property, plant and equipment in the statement of financial position;

f. account for impairment losses on property, plant and equipment; and

g. obtain proficiency and accuracy in solving problems relating to property, plant and
equipment
Definition and Composition
Property, plant and equipment are tangible assets that are

• held by an enterprise for use in the production or supply of goods or services, for rental
to, others, or for administrative purposes; and

• expected to be used during more than one period.

• not held for sale.

Assets of this nature include

1. property ordinarily not subject to depreciation or depletion, such as land;

2. property subject to depreciation or amortization, such as land improvement, buildings,

machinery, equipment, furniture, improvements to leased facilities (right-of-use asset),
bookplates, and bearer plants; and

3. Property subject to depletion such as timber tracts and mineral and oil deposits.
Recognition and Measurement
An item of property, plant and equipment should be recognized as an asset when
• It is probable that future economic benefit associated with the asset will flow to the enterprise; and
• The cost of the asset to the enterprise can be measured reliably.

An item of property, plant and equipment that qualifies for recognition as an asset shall be measured
initially at cost. The cost comprises
• Purchase Price, including import duties and non-refundable purchase taxes;
• Any Directly Attributable Costs of bringing the asset to working condition for its intended use,
such as cost of site preparation, initial delivery and handling costs, installation cost, and
professional fees for architects and engineers;
• the initial estimated cost of dismantling and removing the asset and restoring the site. (debit asset
and credit liability)

Trade discounts and rebates are deducted in arriving at the purchase price.
Specific examples of directly attributable costs for
specific items of property, plant and equipment
• Land  Building permit fees for renovation or construction
 Brokers' fees and commissions, legal fees, title and escrow  Architect’s fees
fees  Interest costs on borrowing used in self-constructed
 Title insurance and unpaid property taxes assumed buildings
 Surveying fees
 Local government special assessment taxes • Machinery and Various Classes of Equipment
 Taxes and duties on purchase
• Land Improvements
 Freight, unloading and delivery charges
 Fences

 Insurance while in transit
Water system
 Sidewalks and driveways  Installation charges
 Parking lots  Costs of trial runs
 Landscaping costs that are not permanent
• Natural Resources
• Buildings  Payment for rights to explore and extract natural
 Brokers fees and commissions resources
 Legal fees, title and escrow fees  Exploration and development costs
 Reconditioning costs, alterations and improvement costs  Present value of estimated future restoration costs
Acquisition of Multiple Assets
The aggregate price is allocated to individual assets based on the best available indicator
of relative values of the assets, such as market values or current appraised values. Costs
directly attributable to specific assets are not allocated but rather charged in full to such
an asset.

Lump sum purchase price of land, building, and equipment is P24 million. Installation
costs of the equipment were P200,000. Building renovation costs amounted to P500,000.
Appraised values of the property at time of acquisition were:
Philippine Interpretations Committee (PIC)
Q and A 2012-02
Was issued relating to the purchase price of land with an old building. It states that the
single purchase price for land and building has to be allocated based on their fair values,
regardless of the intention of management for the building.

If the building is subsequently demolished to give way for the construction of a new one,
the cost assigned to the building is derecognized and charge to profit or loss.

The demolition cost of the building, net of any salvage or proceeds from the demolished
building, is deemed as cost incurred to give way for the construction of a new one hence,
preferably capitalized as part of the cost of the new building.
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Purchase Under Deferred Payment Plan
• The cost of an asset acquired through deferred payment plan is measured at either of the
following amounts, whichever is more objective and reliable.

1. Cash equivalent price of the asset (if available), or

2. PV of the future cash payments required by the debt arrangement, discounted at the
prevailing interest rate for that type of obligation.

Issuance of Equity Securities

• The cost of an asset acquired by issuance of equity securities is the asset’s fair value.
• In rare cases when the fair value of the asset received cannot be reliably determined,
reference is made to the fair value of the equity instruments issued.

Acquisition under Finance Lease (PFRS 16)

The cost of an asset acquired under finance leases is the present value of the minimum
lease payments.
Acquisition by Donation
• An item of property, plant and equipment received as donation is recorded at its fair
values at time of donation
• If the donor is a. shareholder, the donation is recorded by crediting an additional paid in
capital account appropriately titled (Donated Capital).
• If the donor is a non-governmental unit other than a shareholder, a revenue or, gain is
recognized at an amount equal to the value of the donated asset.
• If the asset is received from a government unit, the company recognizes income over
the periods necessary to match with the related costs they are intended to compensate,
on a systematic basis. The amount is initially credited to a deferred credit account,
Unearned Income from Government Grant
Acquisition by 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. If the actual

construction cost is less than the normal cost of the asset (bid price or cash purchase price),
the profit emerges in the accounts through lesser depreciation charges throughout the
useful life of the asset.

Allocation of Manufacturing overhead may be equivalent to (1) its fair share using the
same basis of allocation for manufactured inventory; or (2) the incremental amount of
indirect manufacturing overhead.

Interest on borrowing is generally treated as expense in the period incurred. However, if the
borrowing cost (interest) pertains to a borrowing that was utilized for a qualifying asset,
the interest is capitalizable and forms part of the asset cost. A qualifying asset is a discrete
project of an enterprise that takes substantial period of time to get ready for sale or use.
Qualifying asset
A qualifying asset is an asset that necessarily takes a substantial period of time to get
ready for its intended use or sale. Depending on the circumstances, any of the following
may be qualifying asset:

1. Bearer plants;

2. Inventories;

3. Manufacturing plants;

4. Power generation facilities;

5. Intangible assets;

6. Investment properties.
Steps in computing for the borrowing cost:
• Step 1: Compute for the capitalization rate using the following formula:

• Step 2: Compute for the weight average carrying amount or expenditures

• Step 3: Compute for the average borrowing cost or avoidable borrowing cost.
• Step 4: Compare the average borrowing cost with the actual borrowing cost and get the
lower figure as the capitalizable borrowing cost.
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Acquisition by Exchange of Non-Monetary
Assets
• The asset acquired by exchange of non-monetary assets is generally recorded at the fair value
of the asset received, which is equivalent to the fair value of the asset given up adjusted by
the amount of any cash or cash equivalent transferred. Any gain or loss is recognized for the
full amount of difference between the fair value and carrying value of the asset given up.
• The asset acquired however, is recorded at the carrying amount of the asset given up if
 The exchange transaction lacks commercial substance, or
 Both the FV of the asset given up and the asset received are not reliably measurable.

• An exchange transaction is deemed to have commercial substance if

 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
 the entity-specific value of the portion of the entity's operations affected by the transaction changes as a
result of the exchange; and
 the difference in the first two· items is significant relative to the fair value of the assets exchanged.

• An exchange transaction is always assumed to be a fair value transaction unless otherwise

indicated.
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Expenditures Subsequent to Acquisition
• These expenditures are added to the carrying amount of the asset when it is probable that
future economic benefits will flow to the enterprise and the expenditure significantly
improves the condition of the asset beyond its originally assessed standard of
performance. Examples of improvement which result in increased future economic benefits
include:
 Modification - extends its useful economic life; increases capacity
 Upgrade of machine parts to improve the quality of output
 Adoption of new production process that substantially reduces operating costs

• All other subsequent expenditures should be recognized as expense in the period in which
it is incurred.
• Expenditures that result from accidents, neglect, intentional abuse and theft are recognized
as losses.
• Normal repairs and maintenance costs merely maintain or restore the value of the asset and
do not improve or increase its value; thus, they are expensed when incurred.
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Depreciation
• The depreciable amount of an item of property, plant and equipment should be allocated on a systematic basis over its
useful life, and recognized as expense, unless included in the carrying amount of another asset (e.g., inventories)
• The depreciation method should reflect the pattern in which the asset's economic benefits are consumed by the enterprise.
• Factors considered in determining the useful life of an asset include
 the expected usage of the asset by the enterprise
 the expected physical wear and tear
 technical obsolescence
 legal or similar limits on the use of the asset

• Depreciation methods
 Straight line method
 Sum-of-the-years' digits method
 Double-declining balance method
 150% declining balance method
 Sum-of-the-units' method or productive output method
 Machine hours method

• Component depreciation: Under the components approach, each part of an item of property, plant and equipment with a
cost that is significant in relation to the total cost of the item shall be depreciated separately.
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Review of Useful Life and Depreciation
Methods
• The useful life of an item of property; plant and equipment should be reviewed
periodically and, if expectations are significantly different from previous, estimates, the
depreciation charge for the current and future periods should be adjusted. No
retrospective adjustment is required in the accounts.

Change in accounting estimate

Review of Useful Life and Depreciation
Methods
• The depreciation method applied to property, plant and equipment should be reviewed
periodically and, if there has been a significant change in the expected pattern of
economic benefits from those assets, the method should be changed to reflect the
changed pattern. When such a change in depreciation is necessary, the change, should
be accounted for as a change in estimate and the depreciation charge for the current and
future periods should be adjusted.
Measurement Subsequent to Initial
Recognition
• Cost Model. The item of property, plant and equipment is carried at its cost less any
accumulated depreciation and any accumulated impairment losses.
• Revaluation Model. The item of property, plant and equipment is carried at its fair value
at the date of revaluation less any subsequent accumulated depreciation and subsequent
accumulated impairment losses.
Revaluation Model
• Frequency of revaluation. Revaluation is made at sufficient regularity so that the CA
does not differ materially from the FV at the end of reporting period.
• If an asset’s CA is increased as a result of a revaluation, the increase shall be credited
directly to equity under the heading, Revaluation Surplus. If however, prior to a
revaluation increase, a revaluation decrease related to the asset was recognized as an
expense, the revaluation increase is recognized as an income to the extent that it
reverses the revaluation decrease related to that asset.
• When an item of property, plant and equipment is revalued, any accumulated
depreciation at the date of revaluation is treated in one of the following ways:
 Restated proportionately with the change.in the gross carrying amount of the asset. This is often
used when the revaluation is done by applying an index to depreciated replacement cost.
 Eliminated against the gross carrying amount of the asset and the net amount restated to the
revalued amount of the asset. This is often used for buildings.
Transfer of Revaluation Surplus to
Retained Earnings
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. This may involve transferring the whole of the surplus when the asset is
retired or disposed of. However, some of the surplus may be transferred as the asset is
used by an entity. In such a case, 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 (that is, no "recycling" through
profit or loss).
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Impairment of Property, Plant and
Equipment
• When an item of property, plant and equipment has suffered an impairment in value, the enterprise should
write down the carrying value of such asset to its recoverable amount. This reduction is recognized as an
impairment loss in the income statement in the period when the impairment occurs.
• The recoverable amount of an asset should be measured as the higher value of
 the asset's net selling price; and
 The asset’s value in use.

The net selling price of an asset is the amount obtainable from the sale of an asset in an arm’s length transaction between
knowledgeable, willing parties, less costs of disposal.

The value in use of an asset is measured as the present value or discounted value of estimated future cash flows (inflow
minus outflows) expected to arise from the continuing use of an asset and from its disposal at the end of its useful life.

• If the asset impaired is recorded at revalued amount, the impairment is treated as a reduction of revaluation
surplus pertaining to that asset and any excess is charged to profit or loss.
• When an asset’s value recovers after recording the initial impairment, recovery of impairment loss is taken up
as income to the extent of the impairment previously recorded minus the amount recovered through lower
depreciation charges. Any further increase, using the revaluation model is credited to revaluation surplus.
Reversal of an Impairment Loss
• When there is a reversal of previous impairment loss, the reversal should be recognized
immediately as income in the statement of comprehensive income and the carrying
amount of the asset is increased to its new recoverable amount.
• However, under the cost model, the new recoverable amount should not exceed its
carrying value as if no impairment loss has peen previously recorded.
• Under the revaluation model, the amount taken to profit or loss is similar to the amount
recognized under the cost model. Any further increase in the asset's revalued amount
however, is credited to revaluation surplus.
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Derecognition of Property, Plant and
Equipment
• The carrying amount of an item of property, plant and equipment shall be derecognized
on disposal when future economic benefits are expected from its use or disposal.
• When the asset is retired during the year and is subject to depreciation, it is depreciated
up to the date of disposal. When t}le asset is retired without any salvage or simply
abandoned, a loss is recognized equal to the asset’s carrying value at the time of
retirement.
• When an asset is sold for a certain amount, a gain or loss is recognized for the
difference between the sales price and the carrying value of the asset at the time of sale.
• When an asset is trade, a gain or loss is recognized for the difference between the trade-
in value allowed on the asset and the carrying value of the asset at the time of sale.
• When an asset is lost as a result of a casualty (fire, earthquake) and the asset is insured,
a gain or loss is recognized for the difference between the insurance proceeds and the
asset’s CA at the time of loss.
Depletion of Natural Resources
• The standard on property, plant and equipment does not apply to natural resources and
mineral rights (wasting assets), but· does apply to property, plant and equipment items
used to develop or maintain the activities or assets pertaining to natural resources and
mineral rights.
• Similar to property, plant and equipment, wasting assets are subject to depletion which
requires a systematic allocation of its cost over the period that the natural resource is
extracted or produced:
• The method used for depletion takes the form of the productive output method, where
the depletion rate is completed as

• -When an additional cost is incurred and/or when a change in estimate occurs, a revised
depletion rate is computed as
Microsoft Excel
Worksheet
Investment Property Defined (PAS 40)
• An investment property is land or building, or both, held by the owner or by the lessee
under a finance lease to earn rentals or for capital appreciation, or both.
• These assets are not intended for use in the production or supply of goods or services or
for administrative purposes (property, plant and equipment) or for sale in the ordinary
course of business (inventories).
Examples of Investment Property
• land held for long-term capital appreciation
• land held for a currently undetermined future use
• building owned by the entity and leased out under one or more operating leases
• building held by the entity ·under a finance lease and leased out under one or more operating
leases
• building that is vacant but 1s held to be leased out under one or more operating leases
• property that is being constructed or developed for future use as investment property

A property may be partly held for use in operations and partly held to earn rentals or for capital
appreciation. The portion held for use in operations shall be reported as property, plant and
equipment while the portion held to earn rentals or for capital appreciation is to be accounted for
as investment property. If it is not probable to apportion the property and only an insignificant
portion is held for use in operations, the entire property is accounted as investment property.
Initial Recognition
• Investment property shall be recognized as an asset when, and only when
 it is probable that the future economic benefits that are associated with the investment property
will flow to the entity; and
 the cost of the investment property can be measured reliably .

• Investment property shall be measured initially at its cost. Transaction costs, such as
professional fees for legal services and transfer taxes assumed by the buyer and are
directly attributable to the acquisition form part of its cost.
Measurement After Initial Recognition
• An entity may choose either the cost model or the fair value model when reporting
ALL the investment property on the statement of financial position.
• Under the cost model, an investment. property is measured at cost less accumulated
depreciation and accumulated impairment losses.
• Under the fair value model, an entity shall measure all of its investment property at fair
value and a gain or loss is recognized for the increase or decrease in fair value in the
period in which the change arises.
• If an enterprise opts to present its property interest held under operating lease as
investment property, only the fair value model· is allowed to measure all its investment
property.
Transfers to or from investment property
classification
Transfers to, or from, investment property should only be made when there is a change in use,
evidenced by one or more of the following: [PAS 40.57 (note that this list was changed from an
exhaustive list to an non-exhaustive list of examples by Transfers of Investment Property in
December 2016 effective 1 January 2018) ]
• commencement of owner-occupation (transfer from investment property to owner-occupied
property)
• commencement of development with a view to sale (transfer from investment property to
inventories)
• end of owner-occupation (transfer from owner-occupied property to investment property)
• commencement of an operating lease to another party (transfer from inventories to
investment property)
• end of construction or development (transfer from property in the course of
construction/development to investment property
When an entity decides to sell an investment property without development, the property is not
reclassified as inventory but is dealt with as investment property until it is derecognized. [PAS 40.58]
• The following rules apply for accounting for transfers between categories:
• for a transfer from investment property carried at fair value to owner-occupied property or
inventories, the fair value at the change of use is the 'cost' of the property under its new
classification [PAS 40.60]
• for a transfer from owner-occupied property to investment property carried at fair value, PAS 16
should be applied up to the date of reclassification. Any difference arising between the carrying
amount under PAS 16 at that date and the fair value is dealt with as a revaluation under PAS 16
[PAS 40.61]
• for a transfer from inventories to investment property at fair value, any difference between the fair
value at the date of transfer and it previous carrying amount should be recognized in profit or loss
[PAS 40.63]
• when an entity completes construction/development of an investment property that will be carried at
fair value, any difference between the fair value at the date of transfer and the previous carrying
amount should be recognized in profit or loss. [PAS 40.65]

When an entity uses the cost model for investment property, transfers between categories do not
change the carrying amount of the property transferred, and they do not change the cost of the
property for measurement or disclosure purposes.
Disposal
An investment property should be derecognized on disposal or when the investment
property is permanently withdrawn from use and no future economic benefits are
expected from its disposal. The gain or loss on disposal should be calculated as the
difference between the net disposal proceeds and the carrying amount of the asset and
should be recognized as income or expense in the income statement. [PAS 40.66 and
40.69] Compensation from third parties is recognized when it becomes receivable. [PAS
40.72]
Illustration
• On January 1, 2021 ABC Co. purchased building at a cost of P3,000,000. On the same
date, the building was leased out under an operating lease. The company’s policy
regarding depreciable asset is to depreciate using straight line method of depreciation
over an estimated useful life of 20 years. The fair value of the building from December
31, 2021 to 2023 is as follows:
• 12/31/2021 – P3,100,000
• 12/31/2022 – P2,450,000
• 12/31/2023 – P 2,990,000

What is the CA of building from December 2021 to 2023 assuming the company uses:

1.) Cost model

Microsoft Excel
2.) FV model Worksheet
Disclosure
Both Fair Value Model and Cost Model [PAS 40.75]
• whether the fair value or the cost model is used
• if the fair value model is used, whether property interests held under operating leases are classified and accounted
for as investment property
• if classification is difficult, the criteria to distinguish investment property from owner-occupied property and from
property held for sale
• the extent to which the fair value of investment property is based on a valuation by a qualified independent valuer; if
there has been no such valuation, that fact must be disclosed
• the amounts recognized in profit or loss for:
 rental income from investment property
 direct operating expenses (including repairs and maintenance) arising from investment property that generated rental income
during the period
 direct operating expenses (including repairs and maintenance) arising from investment property that did not generate rental income
during the period
 the cumulative change in fair value recognized in profit or loss on a sale from a pool of assets in which the cost model is used into
a pool in which the fair value model is used

• restrictions on the realizability of investment property or the remittance of income and proceeds of disposal
• contractual obligations to purchase, construct, or develop investment property or for repairs, maintenance or
enhancements
Additional Disclosures for the Fair Value
Model [PAS 40.76]
• a reconciliation between the carrying amounts of investment property at the beginning and end of the period, showing
additions, disposals, fair value adjustments, net foreign exchange differences, transfers to and from inventories and owner-
occupied property, and other changes [PAS 40.76]
• significant adjustments to an outside valuation (if any) [PAS 40.77]
• if an entity that otherwise uses the fair value model measures an item of investment property using the cost model, certain
additional disclosures are required [PAS 40.78]
• Additional Disclosures for the Cost Model [PAS 40.79]
• the depreciation methods used
• the useful lives or the depreciation rates used
• the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the
beginning and end of the period
• a reconciliation of the carrying amount of investment property at the beginning and end of the period, showing additions,
disposals, depreciation, impairment recognized or reversed, foreign exchange differences, transfers to and from inventories
and owner-occupied property, and other changes
• the fair value of investment property. If the fair value of an item of investment property cannot be measured reliably,
additional disclosures are required, including, if possible, the range of estimates within which fair value is highly likely