(Intermediate Accounting 1B)

LECTURE AID

Adapted by:
Devota Normita Comia

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

• Identify the different modes of acquisition of

property, plant and equipment.
• State the elements of cost of property, plant
and equipment.
• State when the capitalization of costs of
property, plant and equipment ceases.

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 from 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)
Demolition Costs

Accounting for demolition costs depends on the

reason for demolition
a. To construct a new building ( cost of site preparation)
Razing or demolition costs is capitalized as cost of new building.
Proceeds from sale of scrap materials from razed building is deducted
from the demolition costs.

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Demolition Costs continuation

b. To clear the land for a probable future sale

The demolition cost is capitalized only if it enhances the future
economic benefits of the land; otherwise it is expensed (e.g. cost of
disposal /cost of sales)
Proceeds from sale of scrap materials from razed building is deducted
from the demolition costs.

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)
Bearer Plant

Bearer plant is a living plant that:

a. Is used in the production and supply of agricultural produce
b. Is expected to bear produce for more than one period
c. Has a remote likelihood of being sold as agricultural produce
except for incidental scrap sales

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Cost of Bearer Plant

Cost is accounted for similar to self constructed assets.

PAS 16 uses the term “construction” to include activities

that are necessary to cultivate the bearer plants before they
are in the location and condition necessary to be capable
of operating in the manner intended by management.

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)
Example

INTERMEDIATE ACCTG 1B (by:

MILLAN)
Acquisition through exchange of another asset

• 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 2: FOR CLASSROOM DISCUSSION

INTERMEDIATE ACCTG 1B (by: MILLAN)

  QUESTIONS????
 REACTIONS!!!!!

INTERMEDIATE ACCTG 1B (by: MILLAN)

 END
INTERMEDIATE ACCTG 1B (by: MILLAN)