(Intermediate Accounting 1B)
LECTURE AID
2020
ZEUS VERNON B. MILLAN
PROPERTY, PLANT & EQUIPMENT
Overview on the topic:
Chapter Title Sub-topics___
15 PPE –Part 1 Initial recognition & measurement
16 PPE –Part 2 Subsequent measurement
Related standard:
• PFRS 16: Property, Plant and Equipment
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Chapter 15 PPE (Part 1)
Learning Objectives
• Measure the initial cost of a PPE and identify the
point where the capitalization of costs ceases.
• Provide examples of the common classes of PPE
and state some of the peculiar costs capitalized
for each class.
• Identify the different modes of acquisition of
PPE and state the initial measurement of cost for
each mode.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Characteristics of PPE
a. Tangible assets – items of PPE have physical substance
b. Used in normal operations – items of PPE are used in
the production or supply of goods or services, for rental,
or for administrative purposes
c. Long-term in nature – items of PPE are expected to be
used for more than a year
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Recognition
The cost of an item of property, plant and equipment shall be
recognized as an asset 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.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Initial measurement
• An item of PPE is initially measured at its cost.
Elements of Cost
1. Purchase price, including non-refundable purchase taxes,
after deducting trade discounts and rebates.
2. 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 the management.
3. Present value of decommissioning and restoration costs to
the extent that they are recognized as obligation
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Cessation of capitalizing costs to PPE
• Recognition of costs in the carrying amount of an item of
PPE ceases when the item is in the location and
condition necessary for it to be capable of operating in
the manner intended by management.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Measurement of Cost
• The cost of an item of PPE is the cash price equivalent at the
recognition date. If payment is deferred beyond normal credit
terms, the difference between the cash price equivalent and the total
payment is recognized as interest over the period of credit unless
such interest is capitalized in accordance with PAS 23 Borrowing
Costs.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Cost of Land (Property)
1. Purchase price including other necessary costs such as broker’s commissions.
2. Closing costs, such as titling costs, attorney’s fees, and recording fees.
3. Costs incurred in getting the land in the condition for its intended use, such as
surveying, grading, filling, draining, and clearing.
4. Unpaid taxes prior to date of acquisition assumed by the buyer.
5. Assumption of any liens, mortgages, or encumbrances on the property
6. Special assessments for local government-maintained improvements, such as
pavements, street lights, sewers, and drainage systems.
7. Option paid to acquire the land.
8. Costs incurred to induce tenants to vacate premises and costs of relocating and
reconstructing property belonging to others.
9. Initial estimate of restoration costs for which the entity has a present obligation
10. Any additional land improvements that have indefinite useful life such as costs of
draining, clearing, grading, leveling and filling, surveying, subdividing, and other
permanent improvements. INTERMEDIATE ACCTG 1B (by:
MILLAN)
Land improvement
• Land improvements are enhancements to the land which have
definite useful life, such as private driveways, walks, fences,
parking lots, drainages and water systems, and cost of trees, shrubs,
plants and other landscaping.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Cost of purchased Building (Plant)
1. Purchase price including other necessary costs such as broker’s
commissions and legal fees.
2. Assumption of any liens, mortgages, or encumbrances on the
property
3. Option paid to acquire the building.
4. Unpaid taxes prior to date of acquisition assumed by the buyer.
5. Costs incurred to induce tenants to vacate premises.
6. Costs of getting the building in the condition for its intended
use, such as remodeling, renovation, and other repairs prior to
occupancy.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Cost of self-constructed Building (Plant)
1. Materials, labor, and overhead costs incurred during construction.
2. Architectural costs, supervision costs, and costs of building permit
3. Excavation costs
4. Insurance costs and safety inspection fees
5. Costs of temporary structures built during construction
6. Interest on borrowings made to finance construction (Borrowing
costs are discussed in Chapter 18)
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Cost of self-constructed Building - continuation
The following costs are not included in the cost of a self-constructed
building:
1. Internal profits or savings on self-construction
2. Cost of abnormal amounts of wasted material, labor, or other
resources due to inefficiencies
3. Costs of uninsured hazards or claims for uninsured accidents
4. Costs of private driveways, walks, permanent fences, parking lots,
and drainages and water systems that are not included in the
building’s blueprint
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Building improvement
• Building improvements refer to costs incurred subsequent to
occupancy of a purchased building or subsequent to completion of a
self-constructed building that either increase the useful life of the
building or improve its current state.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Cost of equipment
1. Purchase price including other necessary costs such as broker’s
commissions and non-refundable purchase taxes.
2. Freight, handling charges, and insurance on the equipment while
in transit
3. Cost of necessary special foundations or platform,
4. Assembling and installation costs
5. Costs of testing and conducting trial runs
6. The initial estimate of decommissioning and restoration costs for
which the entity has a present obligation
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Cost of equipment - continuation
• The following costs are not included in the cost of an equipment:
1. Cost of relocating the equipment after it has been put to the
location and condition originally intended by management.
2. Cost of training personnel who will be responsible in operating the
equipment.
3. Cost of dismantling and removing an old equipment belonging to
the entity prior to the installation of a new equipment.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Lump-sum purchase
• The acquisition cost of a group of items of PPE acquired on a lump-
sum price (basket price) is allocated to the individual assets
based on their relative fair values at the date of purchase.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Demolition costs
•The accounting treatment for demolition costs depends on the reason for the
demolition.
Example:
Case: An old structure is demolished to make way for the construction of a new
building.
Accounting: The demolition costs are considered as costs of site preparation
under PAS 16.; and therefore, capitalized as cost of the new building.
Any proceeds from sale of salvaged materials from the demolition are
deducted from the demolition cost that is capitalized to the new building.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Acquisition through exchange
• If the exchange has commercial substance, the asset received from
the exchange is measured using the following order of priority:
a. Fair value of asset Given up Plus cash Paid/ minus cash received
b. Fair value of asset Received
c. Carrying amount of asset Given up Plus cash Paid/ minus cash received
• If the exchange lacks commercial substance, the asset received from
the exchange is measured at (c) above.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Acquisition through issuance of own equity instrument or debt
instrument
The assets acquired is measured using the following order of priority:
1. Fair value of asset Received
2. Fair value of instrument Issued
INTERMEDIATE ACCTG 1B (by:
MILLAN)
Acquisition by donation
Items of PPE received as donation are measured at fair value and
accounted for as:
a. Income – if the donor is an unrelated party.
b. Donated capital – if the donor is an owner (shareholder).
c. Government grant, in accordance with PAS 20 Accounting for
Government Grants and Disclosure of Government Assistance.
Accounting (see Chapter 17) – if the donor is the government.
INTERMEDIATE ACCTG 1B (by:
MILLAN)
APPLICATION OF CONCEPTS
PROBLEM 6: FOR CLASSROOM DISCUSSION
INTERMEDIATE ACCTG 1B (by: MILLAN)
OPEN FORUM
QUESTIONS????
REACTIONS!!!!!
INTERMEDIATE ACCTG 1B (by: MILLAN)
END
INTERMEDIATE ACCTG 1B (by: MILLAN)
