Name: Rommel C.
Vinluan
Course and Block: BSA IV-A
Subject: Review in AFAR/ ACR2
SUMMARY NOTES:
PAS 16: PROPERTY, PLANT AND EQUIPMENT -
Tangible – something that we can see and hold
Held for use in the production or supply of goods or services (machinery is the PPE)
(building hindi nirentahan)
More than one period – it is a non current asset
-intention to use for operations
-entity has control over the asset
EXCLUSIONS FROM PAS 16:
-PPE held for sale (PFRS 5/PAS 2)
-Biological assets except bearer plants
-exploration and evaluation assets (PFRS 6)
-Mineral rights and reserves for nonrenewable
resources
A. Recognition of Property, Plant and Equipment
1. Property, plant and equipment are tangible items that are held for use in the
production or supply of goods or services, for rental to others, or for administrative
purposes; and are expected to be used during more than one period.
2. IAS 16 states that the cost of an item of property, plant and equipment shall be
recognized as an asset if, and only if:
a) it is probable that future economic benefits associated with the item will flow to the
entity; and
b) the cost of the item can be measured reliably.
3. This recognition principle shall be applied to all costs at the time they are incurred,
both incurred initially to acquire or construct an item of property, plant and equipment
and incurred subsequently after recognition to add to, replace part of or service it.
4. Initial Cost
a) Some items of property, plant and equipment might be necessary to acquire for
safety or environmental reasons.
b) Although they do not directly increase the future economic benefits, they might be
inevitable to obtain future economic benefits from other assets and therefore, should
be recognized as an asset.
5. Subsequent costs
a) Day-to-day servicing of the item shall be recognized in profit or loss as incurred,
because they just maintain (not enhance) item’s capacity to bring future economic
benefits.
b) However, some parts of the item of property, plant and equipment may require
replacement at regular intervals, for example, aircraft interiors.
Subsequent cost
− Repairs and maintenance
− The component approaches
− Major inspections and overhauls
Direct attributable cost includes (INCLUSION):
• Direct employees cost
• Cost of site preparation
• Initial delivery and handling cost
• Installation and assembly cost
• Cost of testing the functionality of the PPE – Net proceeds from the sale of items
produced during this testing
• Professional fees (engineers)
Direct attributable cost does not include (EXCLUDED):
• Cost of opening a new facility
• Advertising or promotional activity
• Cost of new location or new customer class, staff training
• Administration and other overheads
• Cost incurred in using or redeploying the item.
• Initial operating cost
• Cost of relocating or reorganising part or all of an entity’s operation.
B. Measurement
1. Initial measurement (An item of property, plant and equipment that qualifies for
recognition as an asset shall be measured at its cost.)
- The cost of an item of property, plant and equipment comprises:
a) its purchase price including import duties, non-refundable purchase taxes, after
deducting trade discounts and rebates
b) any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management.
Examples of these costs are: costs of site preparation, professional fees, initial
delivery and handling, installation and assembly, etc.,
c) the initial estimate of the costs of dismantling and removing the item and
restoring the site on which it is located.
The cost of an item of property, plant and equipment is the cash price equivalent at
the recognition date.
2. Subsequent Measurement
a) Cost model: An entity shall carry an asset at its cost less any accumulated
depreciation and any accumulated impairment losses.
b) Revaluation model: An entity shall carry an asset at a revalued amount.
Revalued amount is its fair value at the date of the revaluation less any subsequent
accumulated depreciation and subsequent accumulated impairment losses.
CLASSES OF PPE
1. Property -Cost of Land Improvements and Cost of Land
2. Plant - Cost of Building Improvements, Cost of Purchased Building, Cost of Self-
Constructed Building
3. Equipment -Cost of Equipment/Machinery
BUILDING IMPROVEMENTS- Cost of elevator, escalator and similar items-ventilation
systems, plumbing, and lighting systems-immovable fixtures attached to building
Generally: part of the constructed building
Exception: BUILDING improvements is not a part of the original blueprint
COST OF PURCHASED BUILDING-any renovating/ remodeling costs incurred to put
the building purchased in a condition suitable for the intended use.
COST OF SELF-CONSTRUCTED BUILDING-building permit and licenses-safety
inspection fee-architect fee, superintendent fee-cost of excavation-borrowing cost and
insurance during construction
Note that: Income earned from the temporary parking lot during the constriction is
recognized in P/L net of expense
BEARER PLANTS - A living plant that is:-used in production or supply of agricultural
products-expected to bear and produce for more than one period-has a remote
likelihood of being sold as agricultural produce
COST OF BEARER PLANTS-same computation of self-constructed building
MACHINERY UNFAMILIAR ITEMS INCLUDED IN ITS COST
-cost of WATER DEVICE TO KEEP THE MACHINE COOL
-cost of ADJUSTMENT TO MACHINERY FOR
OPERATIONAL EFFICIENCY AND INCREASE CAPACITY
-Construction of base
-Insurance while in transit
-Fees paid to consultants for advice on acquisition of machinery
-Asset retirement obligation represents the fair value of the liability recognized for
restoration
costs.
EXAMPLES OF PPE
Land used in business
Land held for future plant site
Building used in business
Equipment used in the production of goods
Equipment held for rentals
Machines
Major spare parts
Furniture and fixture
Bearer plants
NOT EXAMPL OF PPE
Land held for speculation
Land held for an undetermined future use
Land/Building classified as investment property
Property held for sale in the ordinary course of business
Assets classified as held for sale
Biological assets related to agricultural activity, other than bearer plants
Intangible assets
Minor spare parts
MODES OF ACQUISITION OF PPE
1. Cash Basis 6. Lump-sum purchase
2. Deffered/ Installment basis 7. Exchange
3. On account with available cash discount 8. Trade - Ins
4. Issuance of share capital 9. Donation
5. Issuance of bonds 10. Self-construction
