Module 2.1 (Property, Plant, and Equipment)
Module 2.1 (Property, Plant, and Equipment)
I. Definition
For an asset to be considered as Property, Plant, and Equipment, it must be:
1.) a tangible asset;
-this means with physical substance
2.) used in business; and
- this means that the asset is used in the production or supply of goods or services,
for rental purposes, and for administrative purposes
3.) expected to be used over a period of one year
-this means that the asset is classified as a noncurrent asset
V. Components of Cost
The cost of a property, plant and equipment includes:
1.) the purchase price, including import duties and nonrefundable purchase taxes, after
deducting trade discounts and rebates;
* The phrase “after deducting trade discounts and rebates” is clear. It does not
qualify whether the discount was taken or not. Thus, trade discounts, whether taken
or not, shall be deducted from the purchase price.
2.) any directly attributable cost to bring the asset to the location and working condition
necessary for it to be capable of operating as intended by management; and
3.) the initial estimate of the costs of dismantling and removing the asset and restoring the
site on which it is located, the obligation for which an entity incurs either when the asset is
acquired or as a consequence of having used the asset during a particular period for
purposes other than to produce inventories during that period.
4.) revenue items which may impact the cost of property, plant, and equipment
How to determine if the cost is directly attributable: Whether or not the cost will bring the
asset to its intended use.
Examples of directly attributable costs are:
a.) Costs of employee benefits arising directly from the construction or acquisition of the
property, plant and, equipment
b.) Cost of site preparation
c.) Costs of testing whether the asset is functioning properly after deducting the net
proceeds from selling any items produced while bringing the asset to that location and
condition.
Examples of costs which should not be capitalized because they are not directly attributable
to bringing the asset to its use. Hence, expensed immediately:
a.) Costs of opening a new facility
b.) Costs of introducing a new product or service (including costs of advertising and
promotional activities)
c.) Costs of conducting business in a new location or with a new class of customer
(including costs of staff training)
d.) Administration and general overhead costs
e.) Costs incurred while an asset capable of operating in the manner intended by
management has yet to be brought into use or is operated at less than full capacity
f.) Initial operating losses
g.) Costs of relocating or reorganizing part or all of an entity’s operations
Revenue items which may impact the cost of property, plant, and equipment:
a.) internal profits are eliminated from the costs of the self-constructed assets
b.) the carrying amount of property, plant, and equipment may be reduced by applicable
government grants under PAS 20: Accounting for Government Grants and Disclosure of
Government Assistance
c.) net proceeds from selling items produced in bringing the asset to that location or
condition (such as the sale of samples produced when testing the equipment).
* However, revenues and expenses incidental to construction or development, but
not necessary to bring the asset to its required location or working condition, would
be separately recognized in net profit or loss (such as the operation of a car park on
a building site).
VII. Depreciation
1.) Why An Asset Should Be Depreciated
The economic future benefits embodied in an item of property, plant, and
equipment are consumed by the entity principally through the use of the asset.
Depreciation is the recognition of the economic benefits of the asset consumed
during each period.
2.) How An Asset Is Depreciated
An asset is depreciated by allocating the depreciable amount of the asset on a
systematic basis over its useful life. The depreciation method should reflect the pattern in
which the asset’s future economic benefits are expected to be consumed by the entity.
* Depreciable amount of an asset is its cost (or other amount substituted for cost)
less its residual value).
*The residual value is determined at the acquisition date of the asset and it is
reviewed at the end of each reporting period. Any significant change in the residual
value will have an impact on the depreciable amount and the depreciation and it is
accounted for prospectively. The changes shall be accounted for as a change in
accounting estimate in accordance with PAS 8: Accounting Policies, Changes in
Accounting Estimates and Errors.
An estimate of the residual value is based on the amount recoverable from disposal,
at the date of estimate, of assets that have reached the end of their useful life and have
operated under conditions similar to those in which the asset will be used.
* In determining the useful life of an asset, we need to consider: (i) the expected
usage of the asset by the entity; (ii) the expected physical wear and tear; (iii)
technical or commercial obsolescence arising from changes or improvements in
production, or from a change in the market demand for the product or service output
of the asset; and (iv) legal or similar limits on the use of the asset.
Because the useful life of an asset is defined in terms of its expected utility to the
entity, the asset management policy of the reporting entity should be taken into account
when estimating the useful life of an asset.
In recognizing various components of the asset, an entity allocates the amounts
initially recognized in respect of an item of property, plant, and equipment to its significant
part. For example, it may be appropriate to depreciate separately the airframe and engines
of an aircraft, whether owned or subject to finance lease.
A significant part of an item of property, plant, and equipment may have a useful
life and a depreciation method that are the same as the useful life and the depreciation
method of another significant part of that same item. Such parts may be grouped in
determining the depreciation.
3.) How Temporarily Idle Or Retired And Held For Disposal Assets Are Depreciated
In accordance with PFRS 5: Non-current Asset Held for Sale and Discontinued
Operations, depreciation of an asset ceases at the earlier of the date that the asset is
classified as “held for sale” (or included in a disposal group that is classified as held for
sale) and the date that the asset is derecognized.
Depreciation does not cease when the asset becomes idle or is retired from active
use unless the asset is fully depreciated.
An entity shall assess at the end of each reporting period whether there is any
indication that an asset may be impaired. If any such indication exists, the entity shall
estimate the recoverable amount of the asset and recognize an impairment loss, if
necessary. (PAS 36: Impairment of Assets)
X. Derecognition
Derecognition means that the cost of the property, plant, and equipment together
with the related accumulated depreciation shall be removed from the accounts.
* Under paragraph 67 of PAS 16, the carrying amount of an item of property, plant,
and equipment should re derecognized: (i) on disposal; or (ii) when no future
economic benefits are expected from its use or disposal.
* The gain or loss arising from the retirement or disposal of an item of property,
plant, and equipment is the difference between net disposal proceeds, if any, and
the carrying amount of the asset.
* The gains or loss are recognized in profit or loss, unless PAS 17: Leases requires
otherwise on a sale and leaseback transaction. These gains shall not be classified as
revenue. However, an entity that, in the course of its ordinary trade and business,
routinely sells items of property, plant, and equipment that it has held for rental to
others shall transfer such assets to inventories at their carrying amount when they
cease to be rented and become held for sale. The proceeds from the sale of such
assets shall be recognized as revenue in accordance with PAS 18: Revenue (or
PFRS 15: Revenue From Contracts With Customers, if adopted by the entity).