PAS 16 Property, Plant and Equipment

PAS 16 Property, Plant and Equipment
Property, Plant and Equipment are tangible assets that are held for use in production or supply of goods or
services, for rental to others, or for administrative purposes, and more than one period.
 Land, land improvements, Building, Machinery, Ship, Aircraft, Motor vehicle, Furniture and fixtures,
Office equipment, Patterns, molds and dies, Tools and Bearer plants.
Recognition of PPE
An item of PPE shall be recognized as an asset when:
 It is probable that future economic benefits associated with the asset will flow to the entity.
 The cost of the asset can be measured reliably.
Measurement at recognition
An item of PPE that qualifies for recognition as an asset shall be measured at cost. Cost is the amount of cash
and cash equivalent paid and the fair value of the other consideration given to acquire an asset at the time of
acquisition or construction.
Elements of cost
The cost of an item of PPE comprises:
 Purchase price, including import duties and nonrefundable purchase taxes after deducting trade
discounts and rebates.
 Cost 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.
 Initial estimate of the cost of dismantling and removing the item and restoring the site on which it is
located for which an entity has a present obligation.
Directly attributable costs

 Cost of employee benefit arising directly from the construction or acquisition of the item of PPE.
 Cos of site preparation
 Initial delivery and handling cost
 Installation and assembly cost
 Professional fee
 Cost of testing whether the asset is functioning properly
Expense rather than recognized as element of cost of PPE:

 Cost of opening a new facility
 Cost of introducing a new product or service, including cost of advertising and promotion
 Cost of conducting business in a new location or with a new class of customer, including cost of staff
training
 Administration and other general overhead cost
 Cost 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
 Initial operating loss
 Cost of relocating or reorganizing part or all of an entity’s operations
Measurement after recognition

After initial recognition, an entity shall choose either the cost model or the revaluation model as the accounting
policy for PPE. The entity shall apply such accounting policy to an entire class of PPE.
Cost model means that PPE are carried at cost less any accumulated depreciation and any accumulated
impairment loss.
Revaluation model means that PPE are carried at revalued carrying amount
The revalued carrying amount is the fair value at the date of revaluation less any subsequent accumulated
depreciation and subsequent accumulated impairment loss.
Acquisition on a cash basis

The cost of an item of PPE is the cash price equivalent at the recognition date.
The cost of asset acquired on a cash basis simply includes the cash paid plus directly attributable costs such as
freight, installation cost and other cost necessary in bringing the asset to the location and condition for the
intended use.
Acquisition on account
When an asset is acquired on account subject to a cash discount, the cost of the asset is equal to the invoice
price minus the discount, regardless of whether the discount is taken or not.
Cash discounts are generally considered as reduction of cost and not as income.
Acquisition on installment basis

When payment for item of PPE is deferred beyond normal credit terms, the cost is the cash price equivalent. In
other words, if an asset is offered at a cash price and at an installment price and is purchased at the installment
price, the asset shall be recorded at the cash price. The excess of the installment price over the cash price is
treated as an interest to be amortized over the credit period.
Issuance of share capital

Philippine GAAP provides that if shares are issued for consideration other than actual cash, the proceeds shall
be measured by the fair value of the consideration received.
Accordingly, where a property is acquired through the issuance of share capital, the proceeds shall be measured
at an amount equal to the following in the order of priority:
a) Fair value of the property received
b) Fair value of the share capital
c) Fair value or stated value of the share capital
Issuance of bonds payable

The asset acquired by issuing bonds payable is measure in the following order:
 Fair value of bonds payable
 Fair value of asset received
 Face amount of bonds payable
Exchange
The cost of an item of PPE acquired in exchange for a nonmonetary asset or a combination of monetary and
nonmonetary asset is measured at fair value plus any cash payment. However, the exchange is recognized at
carrying amount of the exchange transactions lacks commercial substance.
Commercial Substance is a new notion and is defined as the event or transaction causing the cash flows of the
entity to change significantly by reason of the exchange. An exchange transaction has commercial substance
when the cash flows of the asset received differ significantly from the cash flows of the asset transferred.
Construction
The cost of self-constructed asset is determined using the same principles as for an acquired asset. The cost of
self-constructed property, plant and equipment includes:
 Direct cost of materials
 Direct cost of labor
 Indirect cost and incremental overhead specifically identifiable or traceable to the construction.
The cost if abnormal amount of wasted material, labor or overhead incurred in the production of self-
constructed asset is not concluded in the cost of the asset.
Derecognition means that the cost of the PPE together with the related accumulated depreciation shall be
removed from the statement of financial position.
 The carrying amount of an item of PPE shall be derecognized on disposal or when no future economic
benefits are expected from the use or disposal
 The gain or loss from the derecognition of an item of PPE shall be included in profit or loss
 Gains shall not be included in revenue but treated as other income
 The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference
between the net disposal proceeds and the carrying amount of the item.
Fully depreciated property

 A property is said to be a fully depreciated when the carrying amount is equal to zero, or the carrying
amount is equal to the residual value.
 In such a case, the asset account and the related accumulated depreciation account are closed and the
residual value is set up in a separate account.
 The cost of fully depreciated asset remaining in service and the related accumulated depreciation
ordinarily shall not be removed from the accounts
 However, entities are encouraged but not required to disclose fully depreciated property
Depreciation as the systematic allocation of the depreciable amount of an asset over the useful life.
 Depreciation is a matter of cost allocation in recognition of the exhaustion of the useful life of an item
of PPE
 Objective: To have each period benefitting from the use of the asset bear an equitable share of the asset
cost
 Depreciation is an expense
 May be part of the cost of goods manufactured or an operating expense
 The depreciable amount of an asset shall be allocated on a systematic basis over the useful life.
 Depreciation of an asset begins when it is available for use, meaning, when the asset is in the location
and condition necessary for the intended use by management
 Depreciation ceases when the asset is derecognized
 Therefore, depreciation doe not cease when the asset becomes idle temporarily.
Factors of Depreciation Depreciable amount is the cost of an asset or other amount

 Depreciable amount substituted for cost, less the residual value. Each part of an item of
PPE with a cost that is significant in relation to the total cost of the
 Residual value
item shall be depreciated separately.
 Useful life
Residual value is the estimated net amount currently obtainable if the asset is at the end of the useful life. The
residual value of an asset shall be reviewed at least at each financial year-end and if expectation differs from
previous estimate, the change shall be accountable for as a change in an accounting estimate. The residual value
of an asset may increase to an amount equal to or greater than the carrying amount.
Useful life is either the period over which an asset is expected to be available for use by the entity, or the
number of production or similar units expected to be obtained from the asset by the entity.
Factors in determining useful life

a) Expected usage of the asset – Usage is assessed by reference to the asset’s expected capacity or
physical output.
b) Expected physical wear and tear – This depends on the operational factors such as the number of
shifts the Depreciation
asset is used, method
the repairincludes:
and maintenance program, and the care and maintenance program,
 Straight
and the care and line method
maintenance of the asset while idle.
c) Technical orcommercial
Productionobsolescence
method – This arises from changes or improvements in production,
 market
or change in the demand
Diminishing for themethod
balance product output of the asset.
d) Legal limits for the use of the asset, such as the expiry date of the related lease.
Depreciation method shall reflect the pattern in which the future economic benefits from the asset are
expected to be consumed by the entity. If there has been a significant change in the expected pattern of
economic benefits, the method shall be changed to reflect the changed pattern. Such change shall be accounted
for as a change in accounting estimate.
Straight line method

 The annual depreciation charge is calculated by allocating the depreciable amount equally over the
number of years of useful life.
 Constant charge over the useful life of the asset
 Adopted when the principal cause of depreciation is passage of time
 Considers depreciation as a function of time rather than as a function of usage
Production method
 Assumes that depreciation is more a function of use rather than passage of time
 The useful life of the asset is considered in terms of the output it produces or the number of hours it
works
 Adopted if the principal cause of depreciation is usage
Diminishing balance or accelerated methods

 Provide higher depreciation in the earlier years and lower depreciation in the later years of the useful
life of the asset
 Results in decreasing depreciation charge over the useful life
 The accelerated deprecation is on the philosophy that new assets are generally capable of producing
more revenue in the earlier years than in the later years
 Include sum of years’ digit method and double declining balance method

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PAS 16 Property, Plant and Equipment

Directly attributable costs

Expense rather than recognized as element of cost of PPE:

Measurement after recognition

Acquisition on a cash basis

Acquisition on installment basis

Issuance of share capital

Issuance of bonds payable

Fully depreciated property

Factors of Depreciation Depreciable amount is the cost of an asset or other amount

Factors in determining useful life

Straight line method

Diminishing balance or accelerated methods

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