ACQUISITION OF PPE - if the exchange has no commercial substance, and c) asset ready for the intended use or sale

and c) asset ready for the intended use or sale when

1. PURCHASE no cash is received: defer gains and recognize acquired
- most common method of asset acquisition loses
- the cash price equivalent of the PPE is the cost of the - if the exchange has no commercial substance, and Accounting for Borrowing Cost
item at the recognition date includes cash paid plus cash is received: recognize partial gain and PAS 23, paragraph 8, mandates the following rules on
any other directly attributable cost (freight and recognize full loss borrowing cost:
installation) 1. If the borrowing is directly attributable to the
IAS 23 – BORROWING COST acquisition, construction or production of a
Asset Account xxx Borrowing Cost qualifying asset, the borrowing cost is required to
Cash xxx - are directly attributable to the acquisition, construction be capitalized as cost of the asset.
or production of a qualifying asset form part of the cost - capitalization of borrowing cost is mandatory for a
2. SELF-CONSTRUCTION of that asset qualifying asset
- entities may opt to construct their own PPE for - PAS 23, paragraph 5, borrowing costs are defined as - the cost hat are directly attributable to the acquisition,
administrative and other purposes interest and other costs that an entity incurs in construction or production of a qualifying asset are
- the total construction costs (material used, labor connection with borrowing funds borrowing costs that would have been avoided if the
costs incurred, overhead) will be the basis for the expenditure on the qualifying asset had not been
asset cost Borrowing Cost Specially Includes made.
 interest expense calculated using the effective
3. DEFERRED PAYMENT CONTRACTS interest method 2. All other borrowing cost shall be expensed as
- when entities op to not directly involve direct cash  finance charge with respect to a finance lease incurred
outlay in the acquisition of PPE, the entity may enter  exchange difference arising from foreign - if the borrowing cost is not directly attributable to a
into a deferred payment contract using, for example, currency borrowing to the extent that it is qualifying asset, the borrowing cost is expensed
notes payable regarded as an adjustment to interest cost immediately.

4. EXCHANGE Qualifying Asset Specific Borrowing

- An entity may opt to exchange nonmonetary assets, - is an asset that necessarily takes a substantial period - PAS 23, paragraph 12, provides that if the funds are
e.g. old equipment for a new equipment or one asset of time to get ready for its intended use for sale borrowed specifically for the purpose of acquiring a
for another asset. Exchanges of assets might have  manufacturing plant qualifying asset, the amount of capitalized cost is the
commercial substance or o commercial substance.  power generation facility actual borrowing cost incurred during the period less
 intangible asset any investment income from temporary investment of
a. with commercial substance  investment property those borrowings
- an exchange is considered to have commercial
substance if future cash flow (timing and amount of Excludes from Capitalization General Borrowing
cash flows) change as a result of the exchange The Standard does not require capitalization of - PAS 23, paragraph 14, provides that if the funds are
transaction borrowing cost relating to the following asset: borrowed generally and used for acquiring a qualifying
- if the two parties to the exchange experience a) asset measured at fair value, such as biological asset, the amount of capitalizable borrowing cost is
changes in economic position, the transaction has asset equal to the average carrying amount of the asset
commercial substance b) inventory manufactured or produced in large during the period multiplied by a capitalization rate or
- if the exchange has commercial substance: gain and quantity on a repetitive basis, such as average interest rate
losses should be recognized manufacturing whisky, even if it takes a - the capitalizable borrowing cost should not exceed the
substantial period of time to get ready for sale actual interest incurred
b. no commercial substance
- the capitalization rate or average interest rate is equal process of getting an asset ready for its intended use investment property and therefore shall be included in
to the total amount of annual borrowing cost divided or sale PPE
by the total general borrowings outstanding during the - land held for long-term capital appreciation is treated
period Cessation of Capitalization as an investment property
- any investment income from general borrowing is not - capitalization of borrowing cost shall cease when - land held for current sale by a real estate developer as
deducted from capitalized borrowing cost substantially all the activities necessary to prepare the in the case of subdivided lots is treated as current
- the amount of capitalizable borrowing cost shall not qualifying asset for the intended use or sale are asset as part of inventory
exceed the actual borrowing cost complete
- an asset is normally ready for the intended use or sale Costs Chargeable to Land
Specific Borrowing Asset for Asset Used in General when the physical construction of the asset is complete a) Purchase Price
Purposes even though routine administrative work might still b) fees and other expenditures for establishing clean
- if the asset financed by specific borrowing but a portion continue title
is used for working capital purposes, the borrowing c) broker or agent commission
shall recognized as a general borrowing in determining Disclosures Related to Borrowing Cost d) escrow fees
capitalizable borrowing cost a) The amount of borrowing cost capitalized during the e) fees for registration and transfer title
- thus, the capitalizable borrowing cost is equal to the period f) cost of relocation or reconstruction of property
average expenditures on the asset multiplied by the b) The capitalization rate used to determine the belonging to other in order to acquire possession
average interest rate amount of borrowing cost eligible for capitalization g) mortgages, encumbrances and interest on such
- however, the amount capitalized should not exceed - segregation of qualifying asset from other assets in the mortgages assumed by buyer
the actual borrowing cost incurred during the statement of financial position is not required to be h) Unpaid real property taxes up to date of acquisition
construction period disclosed assumed by buyer. However, property taxes
subsequent to acquisition should be charged to
Commencement of Capitalization DEPRECIATION and DEPLETION expense
- The capitalization of borrowing cost as part of the cost Depreciation i) cost of survey
of a qualifying asset shall commence when the - is the systematic allocation of the asset’s depreciable j) payments to tenants to induce them to vacate the land
following three conditions are present amount over its useful life in order to prepare the land for the intended us but
 when the entity incurs expenditures for the  part of manufacturing overhead when PPE is used not to make room for the construction of new building
asset in relation to the production of goods k) cost of permanent improvements such as cost of
 when the entity incurs borrowing cost  part if operating expense when PPE is used for clearing, cost of grading, leveling and landfill
 when the entity undertakes activities that are administrative purposes l) cost of option to buy the acquired land. If the land is
necessary to prepare the asset for the - depreciation starts when the asset is available for use not acquired, the cost of option is expensed outright
intended use or sale and stops when an asset is derecognized m) special assessment taxes paid by landowner as
- if an asset is classified as held for sale, depreciation contribution to the cost of public improvement
Suspension of Capitalization shall be stopped
- capitalization of borrowing cost shall be suspended BUILDING ACCOUNT
during extended periods in which the active LAND AND BUILDING - the following expenditures are normally charged to the
development is interrupted Land building account when building is acquired by
- capitalization of borrowing cost is not normally - used as a plant site shall be treated as PPE purchase:
suspended during a period when substantial technical - held for a currently undetermined use is treated as an a) purchase price
and administrative work is being carried out investment property b) legal fees and other expenses incurred in connection
- capitalization of borrowing cost is not also suspended - if the land is held definitely as a future plant site, it is with the purchase
when a temporary delay is necessary part of the classified as owner-occupied property and not an
c) Unpaid real property taxes up to date of acquisition - to charge the damages to the building would be d) Needless to say, the net demolition cost
assumed by buyer. However, real property taxes tantamount to concealment of the management is capitalized as cost of the land if the old
subsequent to acquisition should be charged to failure or negligence. building is demolished to prepare the
expense. land for the intended use but not to make
d) Interest, mortgage, liens and other encumbrances on Building Fixtures
room for the construction of new building
the building assumed by the buyer - expenditures for immovable shelves, cabinets and
3. A building is acquired and used in a prior period but
e) payments to tenants to induce them to vacate the partitions should be charged to the building accounts
demolished in the current period to make room for
building - expenditures for movable shelves, cabinets and
construction of a new building :
f) any renovating or remodeling cost incurred to put a partitions should be charged to furniture and fixtures
a) the carrying amount of the old building is
building purchased in a condition suitable for the
recognized as a loss, whether the new
intended use such as lighting installations, partitions Ventilating System, Lighting System, Elevator
building is property, plant and equipment,
and repairs. - if installed during construction, the ventilating system,
investment property or inventory.
lighting system and elevator should be charged to
b) the net demolition cost is capitalized as
Land Improvements building
cost of the new building whether the ew
- land improvements not subject to depreciation are - the expenditures for ventilating system, lighting system
building is accounted for as PPE,
charged to the land account (cost of surveying, cost of and elevator should be charged o building
investment property or inventory
clearing, cost of grading, leveling ad landfill and cost of improvements
c) If the old buildings is subject to a contract
subdividing)
of lease, any payments to tenants to induce
- Depreciable land improvements are charged to land PIC Interpretation on land and building
them to vacate the old building shall be
improvements (fences, water systems, drainage 1. Land and an old building are purchased at a single
charged to the cost of the new building
systems, sidewalks, pavements and cost of trees, cost:
shrubs and other landscaping) a) if the old building is useable, the single cost
MACHINERY
is allocated to land and building based on
When machinery is purchased, the cost normally
Sidewalks, pavements, parking lot, driveways relative fair value
includes the following:
- such expenditures are charged to the building account, b) if the old building is unusable, the single cost
a) purchase price
if part of blueprint for construction of new building is allocated to the land only
b) freight, handling, storage, and other cst
- such expenditures occasionally made or incurred not in 2. The old building is demolished immediately to make
related to acquisition
connection with the construction of a new building are room for construction of a new building
c) insurance while in transit
charged to land improvements a) any allocated carrying amount of the useable
d) installation cost, including site preparation
old building is recognized as a loss if the
and assembling
Claims for Damages new building is accounted for as PPE or e) cost of testing and trial run, and other cost
- where insurance is taken during the construction of a investment property necessary in preparing the machinery for its
building, the cost of insurance is charged to building b) any allocated carrying amount of the intended use
because it is a necessary and reasonable cost of
useable old building is capitalized as cost f) Initial estimate of cost of dismantling and
bringing the building into existence
of the new building if the new building is removing the machinery and restoring the
- where insurance is not taken and the entity is required
accounted for as inventory site on which it is located and for which the
to pay claims for damages for injuries sustained during
c) the demolition cost minus salvage value entity has a present obligation as required
the construction, the payment for damages should be
is capitalized as cost of the new building by law or contract
expensed outright. The damages reflect management
g) fee paid to consultants for advice on the
failure or negligence in procuring insurance. ether the new building is accounted for
acquisition of the machinery
as PPE, investment property or inventory