Ateneo de Zamboanga University

ACCOUNTANCY ACADEMIC ORGANIZATION

A School of Management and Accountancy Student Government

Property, Plant and Equipment (Part 2)

Subsequent Measurement
After initial recognition, an entity chooses either the cost model or the revaluation model as its
accounting policy and applies that policy to an entire class of PPE.

Cost Model
Under cost model, a PPE is carried at its cost less any accumulated depreciation and any
accumulated impairment loss.

Definition you need to know under this model:

Cost— “the amount of cash or cash equivalent paid or the fair value of the other consideration
given to acquire an asset at the time of its acquisition or construction or, where applicable, the
amount attributed to that asset when initially recognized in accordance with the specific
requirements of other PFRS.” (PAS 16.6)
DEPRECIATION
 Depreciation—the allocation of the depreciable amount of an asset over its useful life.
 Depreciable amount—the cost of an asset, or other amount substituted for cost, less its
residual value.
 Residual value—the estimated amount that an entity would currently obtain from disposal of
the asset, AFTER deducting the estimated costs of disposal, if the asset were already of the
age and in the condition expected at the end of its useful life.
 Useful life— (a) the period over which an asset is expected to be available for use by an
entity; or (b) the number of production or similar units expected to be obtained from the asset
by an entity.
The following are factors considered in determining the useful life of an asset:
A. Expected usage of the asset
B. Expected physical wear and tear
C. Obsolescence
D. Legal and similar limitation on the use of the asset (e.g., the government places an age
limit for public utility buses)

Kinds of depreciation
1. Physical depreciation—this relates to an asset’s deterioration and wear down over a period
of time.
2. Functional or economic depreciation—this arises from an asset’s obsolescence or
inadequacy to perform efficiently.
 Obsolescence—process of becoming no longer useful or outdated.
a. Functional obsolescence—occurs when an asset loses value due to its outdated design.
b. Locational or Economic obsolescence—occurs when a property loses value because of
negative influences from external factors.
c. Technical obsolescence— occurs when a new product or technology replaces an old one.
d. Physical obsolescence—occurs when an asset loses value due to misuse or poor
maintenance.
 Inadequacy—when an asset is no longer appropriate because of an increased volume or
operations

Recognition of depreciation
 Each significant part of an item of PPE is depreciated separately.
 Depreciation is recognized as expense (profit/loss) unless included in the cost of producing
another asset. (e.g. factory building is included in the cost of inventories)
 Depreciation starts when the asset is available for use, in the manner intended by
management.
 Depreciation stops when the asset is:
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a. Derecognized (i.e., sold or disposed of).

b. Classified as held for sale under PFRS 5; or
c. Fully depreciated. When the asset’s carrying amount is zero or equal to its residual value.
However, if the residual value decreases below the carrying amount, the decrease is
recognized as an additional depreciation.
o Carrying amount is the amount at which an asset is recognized after deducting any
accumulated depreciation and accumulated impairment losses.
 Depreciation does not cease when the asset becomes idle or is retired from active use.

Depreciation method
When making the judgment, PAS 16 requires management to choose the method that best
reflects the expected pattern of consumption of the future economic benefits embodied in the
asset and to apply that method consistently from period to period unless there is a change in the
expected pattern of consumption of those future economic benefits.
However, PAS 16 prohibits the use of a depreciation method that is based on revenue. Revenue
generally reflects factors other than the consumption of the economic benefits of the asset.
PAS 16 requires an annual review of the depreciation method and the estimated useful life and
residual value at each year-end. Any change is accounted for prospectively as a change in
accounting estimate.
The common methods of depreciation are the following:
 Depreciation methods based on time:
1. Straight-line method
 Accelerated depreciation methods
2. Sum-of-the-years’ digits method (SYD)
3. Double declining balance method
 Depreciation method based on actual physical use:
4. Units of production method
DEPRECIATION METHODS BASED ON TIME
Depreciation methods based on time is appropriate is a function of time or caused by the passage
of time rather than as a function of usage.
1. Straight-line method
Under this method, depreciation is recognized evenly over the useful life of the asset.

Formula: DEPRECIABLE AMOUNT

ANNUAL DEPRECIATION =
USEFUL LIFE

Illustration: Straight line method

On January 1, 20x1, ABC Co. acquired equipment with an estimated useful life of 4 years and a
residual value of ₱ 20,000 for a total purchase cost of ₱100,000
To get the Annual Depreciation: To get the Carrying Amount:
Initial cost of equipment 100,000 Initial Cost 100,000
Residual Value (20,000) Accumulated Depreciation (20,000)
Depreciable amount 80,000 Carrying amount 12/31/x1 80,000
Divided by: Estimated useful life 4
Annual Depreciation 20,000

Journal Entries for depreciation for the first two years are:
12/31/20x1 Depreciation Expense 20,000
Accumulated Depreciation 20,000
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12/31/20x2 Depreciation Expense 20,000

Accumulated Depreciation 20,000
Accelerated depreciation methods
Under accelerated depreciation methods (decreasing-charge methods), depreciation charges
decrease over the useful life of the asset, meaning, depreciation is higher in the early years of
the asset’s useful life and lower in the later years.
2. Sum-of-the-years’ digits method (SYD)
Depreciation is computed by applying a series of fractions to the depreciable amount of the asset.
A fraction is derived by dividing the asset’s remaining useful life by the sum of digits in the life
of the asset.
Formula: REMAINING USEFUL LIFE
SYD RATE=
SYD denominator
LIFE+1
SYD denominator=LIFE x [ ]
2
Illustration: Sum-of-the-years’ digits method (SYD)
On January 1, 20x1, ABC Co. acquired equipment with an estimated useful life of 4 years and a
residual value of ₱20,000 for a total purchase cost of ₱100,000.

To get the Depreciable amount: To get the Carrying Amount:

Initial cost of equipment 100,000 Initial Cost 100,000
Residual Value (20,000) Accumulated Depreciation (32,000)
Depreciable amount 80,000 Carrying amount 12/31/x1 68,000
The SYD denominator is computed as follows:
LIFE+1
SYD denominator=LIFE x [ ]
2
4 +1
SYD denominator=4 x [ ]
2
SYD denominator: 10
Date Depreciable amount SYD rate Depreciation Accumulated
a b c=axb depreciation
12/31/20x1 80,000 4/10 32,000 32,000
12/31/20x2 80,000 3/10 24,000 56,000
Journal Entries for depreciation for the first two years are:
12/31/20x1 Depreciation Expense 32,000
Accumulated Depreciation 32,000
12/31/20x2 Depreciation Expense 24,000
Accumulated Depreciation 24,000
Alternative Formula:

Total Expired Periods

Accumulated Depreciation=Depreciable Amount X
SYD Denominator
Total Unexpired Period /s
Carrying Amount=Depreciable Amount X
SYD Denominator
3. Double declining balance method
Depreciation is computed by applying a fixed rate on the carrying amount of the asset at the end
of each period. Unlike for other depreciation methods, the residual value is initially ignored
when computing depreciation under the double declining method. The residual value is only
considered when the asset’s carrying amount falls below the residual value.

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2 1.5
DOUBLE DECLINING RATE = 150 % DECLINING RATE=
Formula: LIFE LIFE
Illustration: Double declining balance method
On January 1, 20x1, ABC Co. acquired equipment with an estimated useful life of 5 years and a
residual value of ₱ 20,000 for a total purchase cost of ₱100,000.

To get the Carrying Amount:

Initial Cost 100,000
Accumulated Depreciation (40,000)
Carrying amount 12/31/x1 60,000
The Double declining rate is computed as follows:
2
DOUBLE DECLINING RATE = [ ]
LIFE
2
DOUBLE DECLINING RATE =[ ]
5
SYD denominator: 40%
Date Double declining Carrying Depreciation Accumulated
rate amount c=axb depreciation
a b = hist. cost - d d = prev. bal. + c
12/31/20x1 40% 100,000 40,000 40,000
12/31/20x2 40% 60,000 24,000 64,000
Journal Entries for depreciation for the first two years are:
12/31/20x1 Depreciation Expense 40,000
Accumulated Depreciation 40,000
12/31/20x2 Depreciation Expense 24,000
Accumulated Depreciation 24,000
Increasing depreciation under double declining balance
When the double declining balance method results to a larger depreciation charge in a year
compared to the previous year, the previous year’s depreciation charge is added to the
undepreciated depreciable amount and the sum is depreciated under the straight line method to
eliminate the increasing charge. This technically violates the concept of “decreasing charge”
under double declining balance.
Partial year depreciation
When an asset is either acquired or disposed of during the year, the full year depreciation charge
should be prorated during the accounting periods involved. This is necessary to achieve proper
matching.
Proration is normally done on the basis of the nearest full month:
1. When an asset is either acquired or disposed of during the first half (1-15th day) of a month,
the asset is treated as if it has been acquired or disposed of at the beginning of that month.
Hence, computation for depreciation will include the current month.
2. When an asset is either acquired or disposed of during the last half (16-30th day) of a month,
the asset is treated as if it has been acquired or disposed of at the end of that month (or at the
beginning of the following month). Hence, computation for depreciation will include the
following month.
DEPRECIATION METHOD BASED ON ACTUAL PHYSICAL USE
Depreciation method based on actual physical use is appropriate when depreciation is a function
of usage rather than as a function of time.
4. Units of production method (Activity or Variable-charge method)
The units of production method relate depreciation to the estimated production capability of an
asset and is expressed in a rate per unit of output or per hour of input.
Periodic depreciation computed under this method varies in proportion with the number of units
produced or the number of hours used. When the asset is not used during the period, no
depreciation is recognized.
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ACCOUNTANCY ACADEMIC ORGANIZATION
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For assets depreciated under methods based on time, depreciation is still recognized even if the
assets were not used during a period because there is passage of time whether the assets are used
or not.
Illustration: Units of production method
On January 1, 20x1, ABC Co. acquired factory equipment with an estimated residual value of ₱
20,000 for a total purchase cost of ₱100,000. The equipment has an expected total output of
160,000 units and an expected total input of 40,000 hours.
Information on actual operations is presented below:
Year Units produced Manufacturing hours
20x1 60,000 16,000
20x2 30,000 8,000
20x3 45,000 12,000
20x4 25,000 4,000
160,000 40,000
1. If ABC Co. uses the Output method (based on units), the depreciation rate is computed as:
Depreciable amount
DEPRECIATION RATE=
Estimated total units of output
DEPRECIATION EXPENSE=Depreciation rate X units of output produced per year

80,000
DEPRECIATION RATE=
160,000
DEPRECIATION RATE=0.50 per unit of output
Periodic depreciation charges are computed as follows:
Year Depreciation rate Depreciation Accumulate Carrying amount
x units of output d
depreciation
20x1 0.50 x 60,000 30,000 30,000 70,000
20x2 0.50 x 30,000 15,000 45,000 55,000
20x3 0.50 x 45,000 22,500 67,500 32,500
20x4 0.50 x 25,000 12,500 80,000 20,000
80,000
2. If ABC Co. uses the Input method (based on hours), the depreciation rate is computed as:
Depreciable amount
DEPRECIATION RATE=
Estimated total hours of input
80,000
DEPRECIATION RATE=
40,000
DEPRECIATION RATE=2 per unit of input
Periodic depreciation charges are computed as follows:
Year Depreciation rate Depreciation Accumulate Carrying amount
x units of output d
depreciation
20x1 2 x 16,000 32,000 32,000 68,000
20x2 2 x 8,000 16,000 48,000 52,000
20x3 2 x 12,000 24,500 72,000 28,000
20x4 2 x 4,000 8,500 80,000 20,000
80,000

OTHER DEPRECIATION METHODS

An entity is not precluded in depreciating insignificant parts of an item of PPE when it chooses
to do so. However, in the interest of cost-benefit consideration and convenience the depreciation
methods mentioned above may not be expedient for items of PPE belonging to a relatively
homogenous group of assets that are long-lived, low-cost, and are regularly acquired and

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disposed of. For such items of PPE, depreciation may be made on a group basis rather than an
individual basis.

The following items of PPE may be depreciated on a group basis:

1. Tools and other implements such as small tools used to operate machineries, kitchen utensils
used by entities engaged in catering services, and poles, meters, chips, and lines used by a utility
entity.
2. Patterns and dies used in imparting desired shape, form or finish of products to conform to
product specification and design that are regularly acquired and disposed of.
3. Returnable containers such as crates, boxes, bottles, and other containers which are used to
contain products sold but are returned to the seller.

Group depreciation
When component depreciation (i.e., item by item basis or per significant part basis) becomes too
costly to implement, the following depreciation methods may be used if they are assessed to
closely reflect the expected pattern of consumption of the future economic benefits embodied in
the asset.
1. Composite method and Group method
Composite method of depreciation is a process of averaging the useful lives of a number of
property units and depreciating the entire class of assets over a single life (e.g., all at five years),
thus simplifying record keeping of assets and depreciation calculations.
Group method is a variation of the composite method. The only difference is that under the
composite method, dissimilar assets are grouped and depreciated as one while under the group
method, similar assets are grouped and depreciated as one. Accounting for depreciation is
similar under both methods.
Since depreciation is computed on the entire group (composite or group) only one accumulated
depreciation account is used. It is impossible therefore to determine the exact accumulated
depreciation for each unit in a group. Thus, no gain or loss is recognized when one asset in the
group is derecognized.
2. Retirement method
The original cost of an asset is retained in the books and charged as expense only when the asset
retired. Any salvage proceeds received on the asset retired is deducted from the expense
recognized.
3. Replacement method
The original cost of an asset is retained in the books. The cost of replacing the asset is charged as
expense when the asset is replaced. Any salvage proceeds on the asset replaced is deducted from
the expense recognized. No depreciation expense is recognized when new assets are acquired but
no replacements are made.
4. Inventory method
Depreciation for the period is computed as the difference between costs at the beginning and end
of the period after adjustments for costs of acquisitions and salvage proceeds from assets retired
5. Revenue method

LEASEHOLD IMPROVEMENTS - are modifications made by a tenant to a property leased

under an operating lease.
Leasehold improvements are relatively immovable that they are necessarily transferred without
charge to the landlord upon the expiration of the lease. Improvements which are movable,
meaning, the tenant may take with him upon expiration of the lease are not recognized as
leasehold improvement but rather as furniture or equipment.
Leasehold improvements are debited to a “leasehold improvements” account and depreciated
over the useful life of the improvements or the remaining lease term, whichever is shorter.
If the lease contains an option for renewal and it is probable that the option will be exercised,
then the lease extension is added to the remaining lease term to determine the shorter between
useful life and remaining lease term.

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ACCOUNTANCY ACADEMIC ORGANIZATION
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Illustration:
On January 1, 20x1, ABC Co. signed a ten-year lease for office space. ABC has the option to
renew the lease for an additional five-year period on or before January 1, 2x10. During the first
half of January 1, 20x2, ABC Co. incurred the following costs:
- ₱900,000 for general improvements to the leased premises with an estimated useful life
of 10 years
- ₱100,000 for office furniture and equipment with an estimated useful life of 10 years
- ₱200,000 for movable assembly line equipment with useful life of 5 years.
At the time the leasehold improvement were finished, ABC Co. is uncertain as to the exercise of
the renewal option.
Depreciation on leasehold improvement is computed as follows:
Useful life 10 years

Remaining lease term as of Jan. 20x2 9 years

Extension of lease* - 9 years
Shorter between useful life and lease term 9 years
*The option for renewal is disregarded since it is not probable.

Cost of general improvements 900,000

Divide by: 9 years
Annual depreciation on leasehold 100,000
improvements

Changes in depreciation method, useful life, and residual value

A change in depreciation method, useful life, and residual value is a change in accounting
estimate accounted for prospectively.
Prospective accounting means the change affects only the current periods and /or future periods.
The change does not affect the past periods. Depreciation charges in the past periods prior to the
change are not revised to reflect the change.
The carrying amount of the asset as of the date of change is depreciated over the remaining
useful life taking into consideration any change made to the depreciation methods, useful life of
residual value.

IDLE, TEMPORARILY TAKEN OUT OF USE, AND ABANDONED PROPERTIES

Depreciation normally ceases when the asset is derecognized. Therefore, assets that are idle,
retired from active use, temporarily taken out of use, or abandoned should still be depreciated
until the end of its useful life.
PFRS 5 defines abandoned assets as (a) assets that are to be used to the end of their economic
life or (b) assets that are to be closed rather than sold.

FULLY DEPRECIATED ASSETS

An asset is said to be fully depreciated when its carrying amount is zero or equal to its residual
value. When there are subsequent decreases in the residual value of a fully depreciated asset,
such decreases are recognized as additional depreciation expense.

COSTS SUBSEQUENT TO INITIAL RECOGNITION

Capitalization of costs ceases when the PPE is in the location and condition necessary for it to be
capable of operating in the manner intended by management. The following subsequent
expenditures on PPE are recognized as expenses:
a. Costs of day-to-day servicing of a PPE (i.e., repairs and maintenance expenses).
b. Costs incurred while an item capable of operating in the manner intended by management has
yet to be brought into use or is operated at less than full capacity
c. Initial operating losses
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d. Costs of relocating or reorganizing part or all of the entity’s operations.

An entity uses the recognition criteria when determining whether subsequent expenditures can be
capitalized. A subsequent cost that meets the recognition criteria is capitalized. This cost is called
capital expenditure. A subsequent cost that does not qualify under the recognition criteria is
expensed immediately. This cost is called revenue expenditure.

MAJOR TYPES OF SUBSEQUENT EXPENDITURES

1. Additions – refer to modifications made on an asset that increases its physical capacity. By
definition, such costs should be capitalized because a new asset is created. For example, the
addition of an air conditioning system to an office increases the service potential of that facility.
2. Improvements (betterment) and Replacements – is the substitution of a better asset for the
one currently used. A replacement is the substitution of a similar asset. If the improvement
extends the asset’s useful life, the cost is capitalized by debiting accumulated depreciation. If
the improvement increases the asset’s capacity or efficiency, the cost is capitalized by debiting
the asset account.
3. Replacements of major parts – the cost or replacing a part of an item of PPE is capitalized if
the recognition criteria are met. The carrying amount of the replaced part is derecognized and
charged as loss and if the carrying amount of the replaced part cannot be determined, the cost of
the replacement part (new part) is used as an indication of the cost of the replaced part.
4. Major inspections – accounted for similar to replacement costs, i.e., the cost of a major
inspection is capitalized while the carrying amount of the previous inspection is derecognized.
5. Rearrangements and reinstallation – when it satisfies the asset recognition criteria the cost
may be capitalized.
6. Repairs – Repairs made to maintain assets in operating condition are charged to expense in
the period such costs are incurred. When distinguishing a repair from an improvement or
replacement, the major consideration is whether the expenditure benefits more than one year or
one operating cycle, whichever is longer. If a major repair occurs, several periods will benefit.
An entity should handle the cost as an addition, improvement, or replacement.

REVALUATION MODEL
After recognition as an asset, an item of PPE whose fair value can be measured reliably shall be
carried at a revalued amount, being its fair value at the date of revaluation less any subsequent
accumulated depreciation and subsequent accumulated impairment losses.

ACCOUNTING FOR REVALUATIONS OF PPE

I. Increase
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 as gain on impairment reversal to the
extent that it reverses an impairment loss of the same asset previously recognized in profit or
loss.
Fair Value xx
Less: Carrying amount (xx)
Revaluation Surplus xx

II. Decrease
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.

Illustration:

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On December 31, 20x1, the building of ABC Co. with a historical cost of ₱20,000,000,
accumulated depreciation of ₱5,000,000, and an estimated useful life of 20 years has been
determined to have a fair value of ₱25,000,000
Solution:
Fair Value 25,000,000
Less: Carrying amount (20,000,000-5,000,000) (15,000,000)
Revaluation Surplus 10,000,000

FREQUENCY OF REVALUATION
Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not
differ materially from that which would be determined using fair value at the end of the reporting
period. When the fair value of a revalued asset differs materially from its carrying amount, a
further revaluation is required.
For items with significant and volatile changes in fair value, annual revaluation is necessary.
For items with insignificant changes in fair value, revaluation may be made every 3 or 5 years.

REVALUATION APPLIED TO ALL ASSETS IN A CLASS

If an item of PPE is revalued, the entire class of PPE to which the asset belongs shall be
revalued.
The items within a class of PPE are revalued simultaneously to avoid selective revaluation of
assets and the reporting of amounts in the financial statements that are a mixture of costs and
values as at different dates.
However, a class of assets may be revalued on a rolling basis provided the revaluation of the
class of assets is completed within a short period and the revaluations are kept up to date.

SUBSEQUENT ACCOUNTING FOR REVALUATION SURPLUS

1. Asset revalued is non-depreciable
The revaluation surplus is 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.
2. Asset revalued is depreciable
A portion of the revaluation surplus may be transferred periodically to retained earnings as the
asset is being used. The amount transferred is the difference between the depreciation based on
the revalued carrying amount and the depreciation based on the original cost. Transfers from
revaluation surplus to retained earnings are not made through profit or loss.
Illustration 1: Revaluation of non-depreciable asset
On December 31, 20x1, the land of ABC Co. with a historical cost of ₱20,000,000 has been
determined to have a fair value of ₱35,000,000.
The revaluation surplus is computed as follows:
Fair Value 35,000,000
Less: Carrying amount (20,000,000)
Revaluation surplus 15 ,000,000
The entry on December 31, 20x1 is as follows:
Dec. 31, 20x1 Land 15,000,000
Revaluation surplus 15,000,000
The revaluation surplus is initially recognized in the December 31, 20x1:
a. Statement of profit or loss and other comprehensive income – as “gain on property
revaluation,” a component of other comprehensive income

Subsequently, the revaluation surplus remain in equity until the asset is derecognized (e.g., sold
or disposed of), at which time the revaluation surplus is transferred directly to retained earnings.

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Assuming the asset is sold for ₱30,000,000 on January 1, 20x3, the entry to record the sale is as
follows:
Jan. 1, 20x3 Cash 30,000,000
Revaluation surplus 15,000,000
Loss on sale 5,000,000
Land 35,000,000
Retained earnings 15,000,000
Illustration 2: Revaluation of depreciable asset
On December 31, 20x1, the building of ABC Co. with a carrying amount of ₱20,000,000 and
remaining useful life of 10 years has been determined to have a fair value of ₱35,000,000. ABC
Co. depreciates its buildings using the straight-line method.
The revaluation surplus is computed as follows:
Fair Value 35,000,000
Less: Carrying amount (20,000,000)
Revaluation surplus 15 ,000,000
The entry on December 31, 20x1 is as follows:
Dec. 31, 20x1 Building 15,000,000
Revaluation surplus 15,000,000
The subsequent depreciation is computed as follows:
Fair Value 35,000,000
Divided by: Remaining useful life 10
Revised annual depreciation 3 ,500,000
The amount of revaluation surplus periodically transferred to retained earnings is computed as
follows:
Depreciation based on fair value (revised depreciation) 3,500,000
Depreciation based on historical cost (20M ÷ 10yrs) 2,000,000
Difference 1,500,000
The entries on December 31, 20x2 are as follows:
Dec. 31, 20x2 Depreciation expense 3,500,000
Accumulated depreciation 3,500,000
Dec. 31, 20x2 Revaluation surplus 1,050,000
Retained earnings 1,050,000

REVERSAL OF REVALUATION
Impairment losses and gains on reversal of impairment are recognized in profit or loss.
Illustration 1: Revaluation decrease representing impairment loss
The land of ABC Co. with historical cost of ₱8,000,000 has fair values of ₱12,000,000 and
₱7,000,000 on December 31, 20x1 and December 31, 20x4, respectively.
Solutions:
12/31/20x1
Fair value 12,000,000
Carrying amount ( 8,000,000)
Revaluation surplus 4,000,000
The entry to record the revaluation is as follows:
Dec. 31, 20x1 Land 4,000,000
Revaluation surplus 4,000,000

12/31/20x4
Fair value 7,000,000
Carrying amount (12,000,000)
Decrease in carrying amount (5,000,000)

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The decrease in carrying amount is allocated as follows:

Decrease in carrying amount (5,000,000)
Balance in revaluation surplus 4,000,000
Excess charged to impairment loss (1,000,000)
The decrease is charged first to the credit balance in revaluation surplus. The excess is
recognized in impairment loss.
The entry to record the revaluation decrease is as follows:
Dec. 31, 20x1 Revaluation surplus 4,000,000
Impairment loss 1,000,000
Land 5,000,000
Illustration 2: Revaluation increase representing reversal of impairment loss
On December 31, 20x1, the land of ABC Co. with an original cost of ₱10,000,000 has been
determined to have a fair value of ₱7,000,000. This was the first revaluation made on the land
since it was purchased 2 years ago. On December 20x4, the building has been determined to
have a fair value of ₱12,000,000.
Solutions:
12/31/20x1
Fair value 7,000,000
Carrying amount ( 10,000,000)
Decrease in carrying amount 3,000,000
The decrease in carrying amount is allocated as follows:
Decrease in carrying amount (3,000,000)
Balance in revaluation surplus (no existing balance in revaluation surplus -
Impairment loss (3,000,000)
The entry to record the revaluation is as follows:
Dec. 31, 20x1 Impairment loss 3,000,000
Land 3,000,000

12/31/20x4
Fair value 12,000,000
Carrying amount (7,000,000)
Increase in carrying amount 5,000,000
The increase in carrying amount is allocated as follows:
Increase in carrying amount 5,000,000
Previous impairment loss (gain on impairment reversal) 3,000,000
Excess credited to revaluation surplus 2,000,000
The entry to record the revaluation increase on December 31, 20x4 is as follows:
Dec. 31, 20x4 Land 5,000,000
Gain on impairment reversal 3,000,000
Revaluation surplus 2,000,000
The revaluation increase is applied first to the impairment loss recognized previously. The excess
is credited to revaluation surplus.

DERECOGNITION
The carrying amount of an item or PPE shall be derecognized:
a. on disposal; or
b. when no future economic benefits are expected from its use or disposal

The disposal of an item of PPE may occur in a variety of ways. The gain or loss arising from the
derecognition of an item of PPE shall be determined as the difference between the net disposal
proceeds, if any, and its carrying amount.
The gain or loss arising from the derecognition of an item of PPE shall be included in profit or
loss when the item is derecognized. Gains shall not be classified as revenue.

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 Ateneo de Zamboanga University
ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

Illustration 1: Sale of item of PPE measured under cost model

ABC Co. purchased equipment of August 14, 20x1 for a total cost of ₱100,000. The equipment
has an estimated useful life of 10 years and residual value of ₱20,000. It is the policy of ABC
Co. to provide full-year depreciation in the year of acquisition and none in the year of disposal.
On May 12, 20x4, the equipment was sold for ₱30,000. Additional costs incurred on the sale
amounted to ₱2,000.
Requirement: Compute for the gain or loss on the sale.
Solution:
The gain or loss on disposal is simply squeezed from the compound entry to record the sale:
May 12, 20x4 Cash (30K-2K) 28,000
Accumulated depreciation 24,000
Loss on disposal of equipment (squeeze) 48,000
Equipment 100,000
Alternatively, the gain or loss on sale may also be computed as follows;
Net disposal proceeds 28,000
Carrying amount as of date of sale [100K-20K)*7/10+20K] (76,000)
Loss on disposal (48,000)

Illustration 2: Sale of item of PPE measured under revaluation model

ABC Co. disposed of machinery on December 31, 20x1 for a total net disposal proceeds of
₱1,700,000. Information of the machinery as of December 31, 20x1 is as follows:
Cost at revalued amount 2,300,000
Accumulated depreciation 800,000
Revaluation surplus (presented in equity) 1,200,000

Requirement: Compute for the gain or loss on the sale.

Solution:
The entries to record the sale are as follows:
Dec. 31, 20x1 Cash 1,700,000
Accumulated depreciation 800,000
Machinery 2,300,000
Gain on disposal of machinery 200,000

Dec. 31, 20x1 Revaluation surplus 1,200,000

Retained earnings 1,200,000
The revaluation surplus does not affect the gain or loss on disposal because it is closed directly
to retained earnings.

COMPENSATION FOR IMPAIRMENT

Compensation from third parties for items of PPE that were impaired, lost or given up shall be
included in profit or loss when the compensation becomes receivable.
Impairment of PPE and other losses, related claims for or payments of compensation from third
parties, and any subsequent purchase or construction of replacement assets are separate
economic events and are all accounted for separately.

DISCLOSURE
General disclosures for each class of PPE:
a. the measurement bases used
b. the depreciation methods used
c. the useful lives or depreciation rates used
d. the gross carrying amount and the accumulated depreciation (aggregated with accumulated
impairment losses) at the beginning and end of the period

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 Ateneo de Zamboanga University
ACCOUNTANCY ACADEMIC ORGANIZATION
A School of Management and Accountancy Student Government

e. a reconciliation of the carrying amount at the beginning and end of the period showing:
additions, disposals, and other changes.

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