Property, Plant, and Equipment

This module involves three main issues:

1.) What constitutes cost of initial recognition of an asset.
2.) How the asset should be measured subsequent to recognition.
3.) How subsequent expenditure and disposal of an asset should be accounted for.

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

II. Scope of PAS 16

General Rule: PAS 16 applies when accounting for property, plant and equipment.
Exception to the General Rule: PAS 16: Property, Plant and Equipment does not apply to:
1.) Property, plant and equipment classified as held for sale in accordance with PFRS 5:
Noncurrent Assets Held for Sale and Discontinued Operations
* Property, plant and equipment is classified as “held for sale” if the asset is
available for immediate sale in the present condition within one year from the date
of classification as held for sale.
* These assets are:
a.) presented separately as current assets;
b.) measured at lower of carrying amount or fair value less cost of disposal; and
c.) not depreciated.
2.) Biological assets related to agricultural activity other than bearer plants (PAS 41
Agriculture)
* Bearer plant is a living plant that is: (a) used in the production or supply of
agricultural produce; (b) expected to bear produce for more than one period; and
(c) not intended to be sold as a living plant or harvested as agricultural produce,
except for incident scrap sales.
3.) Mineral rights and reserves such as oil, natural gas and similar non-regenerative
resources
4.) The recognition and measurement of exploration and evaluation assets
5.) Investment property accounted for using the fair value model in accordance with PAS
40 Investment Property.
Exception to the Exception to the General Rule:
1.) Where an entity uses the cost model for its investment property, it shall use the cost
model in PAS 16.
2.) Property, plant and equipment used to develop and maintain the assets described in 2-4
under the exception to the general rule.
*For example, PAS 16 applies to land related to agricultural activity.

III. Spare parts, Stand-by Equipment, and Servicing Equipment

General Rule: Spare parts, stand-by equipment, and servicing equipment are generally
classified as inventory.
Exception to the General Rule: Major spare parts, stand-by equipment, and servicing
equipment that meet the definition of property, plant and equipment in PAS 16.
* These major spare parts, stand-by equipment, and servicing equipment are
depreciated over their useful life or the useful life of the related asset, whichever is
shorter.

IV. Recognition Principle

An item of property, plant and equipment shall be recognized as an asset if, and only if:
1.) it is probable that future economic benefits associated with the asset will flow to the
entity; and
2.) the cost of the asset can be measured reliably
* Both of these conditions must be met before the property, plant and equipment is
recognized as an 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).

VI. How Property, Plant and Equipment Are Acquired

1.) On a cash basis
2.) On account subject to cash discount
3.) On installment basis or deferred payment
4.) In exchange for equity instruments of the entity or through the issuance of share capital
5.) Through the issuance of bonds payable
6.) In exchange for a nonmonetary asset or a combination of monetary and nonmonetary
asset
7.) Constructed through the entity’s own effort
8.) Arising from donations
9.) Through government grant
1.) Cash Basis: The cost of property, plant, and equipment is the cash price equivalent at
the recognition date. This means cash paid plus directly attributable costs necessary in
bringing the asset to the location and condition for the intended use.
* When several assets acquired at a lump sum price or basket price, apportion the
single price to the assets acquired on the basis of relative fair value.
GAME: Try solving Problem-1 from the attached file then see the suggested answer if you
got it right.
2.) On Account: The cost of property, plant, and equipment is the invoice price minus the
discount, regardless of whether the discount is taken or not.
* Discount was not taken?
Charge the discount to purchase discount lost account which is shown as other
expenses because a reasonably wise management would take advantage of all
discounts. The discount we are discussing here refers to trade discount and not cash
discount since cash discounts are generally considered as reduction of cost.
Try to prepare the necessary journal entries on your own based on the foregoing discussion:
An equipment was purchased for P100,000 2/10, n/30.
Under the Gross Method:
a.) To record the acquisition:
b.i.) Assuming that the discount was taken or payment was made within the discount
period.
b.ii.) Assuming that the discount was not taken or payment was made beyond the discount
period.
Under the Net Method:
a.) To record the acquisition:
b.i.) Assuming that the discount was taken or payment was made within the discount
period.
b.ii.) Assuming that the discount was not taken or payment was made beyond the discount
period.
Answers:
Under the Gross Method:
a.) To record the acquisition:
Equipment 100,000
Accounts Payable 100,000
b.i.) Discount was taken or payment was made within the discount period?
Accounts Payable 100,000
Cash 98,000
Equipment 2,000
b.ii.) Discount was not taken or payment was made beyond the discount period?
Accounts Payable 100,000
Purchase Discount Lost 2,000
Cash 100,000
Equipment 2,000
Under the Net Method:
a.) To record the acquisition:
Equipment 98,000
Accounts Payable 98,000
b.i.) Discount was taken or payment was made within the discount period?
Accounts Payable 98,000
Cash 98,000
b.ii) Discount was not taken or payment was made beyond the discount period?
Accounts Payable 98,000
Purchase Discount Lost 2,000
Cash 100,000
* Observe that the asset may be initially recorded at gross or net but, ultimately, the
recorded cost should be the net amount because discounts are deducted from the
purchase price whether taken or not.
GAME: Try solving Problem-3 from the attached file then see the suggested answer if you
got it right.
3.1) On Installment Basis or Deferred Payment: The cost of property, plant, and equipment
is the cash price equivalent.
* The difference between the cash price equivalent and the installment price (total
payment) is recognized as an interest expense over the credit period unless
capitalized in accordance with PAS 23: Borrowing Costs.
* Where settlement is deferred or on installment basis, the economic substance of
the transaction is that payments in the future include a cost related to financing the
deferred settlement or the installment payments.
Let’s illustrate:
A machinery was purchased at an installment price of P350,000. The terms were
P50,000 down payment and the balance was payable in three equal annual installments.
The cash price of the machinery was P290,000. A promissory note was issued for
the installment balance of P300,000.
Try to prepare the necessary journal entries on your own based on the foregoing discussion:
a.) To record the acquisition
b.) To record the first installment payment
c.) To amortize the discount on note payable
Answers:
a.) To record the acquisition:
Machinery 290,000
Discount on Note Payable 60,000
Note payable 300,000
Cash 50,000
b.) To record the first installment payment:
Note Payable 100,000
Cash 100,000
c.) To amortize the discount on note payable:
Interest Expense 30,000
Discount on Note Payable 30,000
Note Payable Fraction Interest Expense
First year 300,000 3/6 30,000
Second year 200,000 2/6 20,000
Third year 100,000 1/6 10,000
600,000 60,000
3.2) On Installment Basis or Deferred Payment: In the absence of a cash price equivalent
of the asset, the cost of the asset is the present value of all payments using an implied
interest rate.
Let’s illustrate:
A machinery was acquired at an installment price of P700,000. The terms were
P100,000 down and the balance payable in three equal annual installments
A note was issued for the balance of P600,000. There was no available cash price
for the machinery. However, the implied interest rate for this type of note was 10%.
Using the implied interest rate of 10%, the present value of an ordinary annuity of
1 was 2.487 for three periods.
Try to prepare the necessary journal entries on your own based on the foregoing discussion:
a.) To record the acquisition
b.) To record the first installment payment
c.) To amortize the discount on note payable
Answers:
a.) To record the acquisition:
Machinery 597,400
Discount on note payable 102,600
Cash 100,000
Note Payable 600,000
Down Payment 100,000
PV of note Payable (200,000 x 2.487) 497,400
Total Cost of Machinery 597,400
b.) To record the first installment payment:
Note Payable 200,000
Cash 200,000
c.) To amortize the discount on note payable:
Interest Expense 49,740
Discount on Note Payable 49,740
Year Payment Interest Principal Present Value
Beginning 497,400
First year 200,000 49,740 150,260 347,140
Second year 200,000 34,714 165,286 181,854
Third year 200,000 18,146 181,854 -
GAME: Try solving Problem-4 from the attached file then see the suggested answer if you
got it right.
4.) In Exchange for Equity Instruments of the Entity or Through the Issuance of Share
Capital: The cost of property, plant, and equipment is the fair value of the property, plant,
and equipment received. If the fair value of the property, plant, and equipment cannot be
reliably determined, the fair value of the equity instruments is used. In the absence of both
fair values, the par value or stated value of the equity instruments is used. (Refer to PFRS
2: Share-based Payment)
Let’s illustrate:
A piece of land was acquired by issuing 20,000 shares with par value of P50. At
the time of acquisition, the fair value of the land was P1,600,000 and the share was quoted
at P90 per share.
Try to prepare the necessary journal entries on your own based on the foregoing discussion:
a.) The fair value of the property, plant, and equipment is available
b.) Assuming that the fair value of the property, plant, and equipment cannot be reliably
determine.
c.) Assuming that both the fair value of the property, plant, and equipment and equit y
instrument cannot be reliably determine.
Answers:
a.) The fair value of the property, plant, and equipment is used:
Land 1,600,000
Share capital (20,000 x P50) 1,000,000
Share premium 600,000
b.) Assuming that the fair value of the property, plant, and equipment cannot be reliably
determine. Hence the fair value of the equity instrument is used:
Land (20,000 x P90) 1,800,000
Share capital 1,000,000
Share premium 800,000
c.) Assuming that both the fair value of the property, plant, and equipment and equity
instrument cannot be reliably determine. Hence the par value or stated value of the equity
instrument is used:
Land 1,000,000
Share capital 1,000,000
5.) Through the Issuance of Bonds Payable: The cost of property, plant, and equipment is
the fair value of the bonds payable. If the fair value of the bonds payable cannot be reliably
determined, the fair value of the property, plant, and equipment is used. In the absence of
both fair values, the face amount of the bonds payable is used.
Let’s illustrate:
A building was acquired by issuing bonds payable with face amount of P5,000,000.
At that time of acquisition, the fair value of the building was P6,000,000 and the
quoted price of the bonds was P5,800,000.
Try to prepare the necessary journal entries on your own based on the foregoing discussion:
a.) The fair value of the bonds payable is available
b.) Assuming that the fair value of the bonds payable cannot be reliably determine.
c.) Assuming that both the fair value of the property, plant, and equipment and bonds
payable cannot be reliably determine.
Answers:
a.) The fair value of the bonds payable is used:
Building 5,800,000
Bonds Payable 5,000,000
Premium on Bonds Payable 800,000
b.) Assuming that the fair value of the bonds payable cannot be reliably determine. Hence
the fair value of the property, plant, and equipment is used:
Building 6,000,000
Bonds Payable 5,000,000
Premium on Bonds Payable 1,000,000
c.) Assuming that both the fair value of the property, plant, and equipment and bonds
payable cannot be reliably determine. Hence the face amount of the bonds payable is used:
Building 5,000,000
Bonds Payable 5,000,000
6.0) In Exchange for a Nonmonetary Asset or a Combination of Monetary and
Nonmonetary Asset: The cost of property, plant, and equipment is the fair value unless:
a.) the exchange transaction lacks commercial substance; or
b.) the fair value of neither the asset received nor asset given is reliably measurable,
then the exchange is recognized at carrying amount.
* An exchange has commercial substance if:(i) the configuration (risk, timing, and
amount) of cash flows of the assets received differs from the configuration of the
cash flows of the asset transferred; or (ii) the entity-specific value of the portion of
 the entity’s operations affected by the transaction changes as a result of the
exchange; and (iii) the difference in (i) and (ii) is significantly relative to the fair
value of the assets exchanged.
* The question to ask to determine if there is commercial substance is “whether or
not the cash flows from the new asset are different from the cash flows of the old
asset after considering the risk, timing and amount.”
* Entity-specific value is the present value of the cash flows an entity expects to
arise from the continuing use of an asset and from its disposal at the end of its useful
life or expects to incur when settling the liability.
6.1) In Exchange for a Nonmonetary Asset or a Combination of Monetary and
Nonmonetary Asset with Commercial Substance: The cost of property, plant, and
equipment is the fair value of the asset given plus any cash payment OR minus any cash
received.
Let’s illustrate:
Chris P. Bacon and Tack O. Yahki exchanged equipment.
Tack Chris
Equipment 2,000,000 1,600,000
Accumulated Depreciation 1,350,000 900,000
Carrying Amount 650,000 700,000
Fair Value 800,000 600,000
Cash Paid by Chris to Tack 200,000 200,000
The cash payment of P200,000 made by Chris to Tack is the difference in fair value.
Try to prepare the necessary journal entries on your own based on the foregoing discussion:
a.) Journal entry on the part of the payor
b.) Journal entry on the part of the recipient
Answers:
Perspective of Chris (payor)
Equipment – New 800,000
Accumulated Depreciation 900,000
Loss on Exchange 100,000
Equipment – old 1,600,000
Cash 200,000
Cost of the new asset (600,000 + 200,000) 800,000
Loss on exchange (600,000 – 700,000) (100,000)
Perspective of Tack (recipient)
Equipment – New 600,000
Cash 200,000
Accumulated Depreciation 1,350,000
Equipment – old 2,000,000
 Gain on Exchange 150,000
Cost of the new asset (800,000 - 200,000) 800,000
Gain on exchange (800,000 – 650,000) (100,000)
6.2) In Exchange for a Nonmonetary Asset or a Combination of Monetary and
Nonmonetary Asset without Commercial Substance: The cost of property, plant, and
equipment is the carrying amount of the asset given plus any cash payment OR minus any
cash received.
Let’s illustrate:
Sam G. and Pete Czah exchanged equipment.
Sam Pete
Equipment 800,000 1,000,000
Accumulated Depreciation 380,000 400,000
Carrying Amount 420,000 600,000
Fair Value 450,000 500,000
Cash Paid by Sam to Pete 50,000 50,000
The cash payment of P200,000 made by Chris to Tack is the difference in fair value.
Try to prepare the necessary journal entries on your own based on the foregoing discussion:
a.) Journal entry on the part of the payor
b.) Journal entry on the part of the recipient
Perspective of Sam (payor)
Equipment – New 470,000
Accumulated Depreciation 380,000
Equipment – old 800,000
Cash 50,000
Cost of the new asset (420,000 + 50,000) 470,000
Perspective of Tack (recipient)
Equipment – New 550,000
Cash 50,000
Accumulated Depreciation 400,000
Equipment – old 1,000,000
Cost of the new asset (600,000 - 50,000) 550,000
* As you can see, no gain or loss is recognized when the exchange lacks commercial
substance.
6.3) In Exchange for Another Property as Part of the Payment and the Balance Payable in
Cash or Any Other Form of Payment Based on the Agreement (Trade In): The cost of
property, plant, and equipment is the fair value of the asset given plus cash payment. If the
fair value of the asset given cannot be reliably determined, the cost of property, plant, and
equipment is the trade in value of the asset given plus cash payment (this is the fair value
of the asset received).
 * Trade in is a form of exchange with commercial substance that involves a
nondealer acquiring an asset from a dealer. Trade in usually involves a significant
amount of cash and therefore, the transaction has commercial substance.
Let’s illustrate:
Shaw Arm-A traded its old equipment with a dealer for a newer model.
Shaw Arm-A’s Old Equipment:
Cost 1,400,000
Accumulated Depreciation 1,000,000
Carrying Amount 400,000
Fair Value 350,000
Trade In Value 500,000
Newly Acquired Equipment-
List Price 2,000,000
Trade In Value of the Old Equipment (500,000)
Cash payment to the dealer 1,500,000
Try to prepare the necessary journal entries on your own based on the foregoing discussion:
a.) The fair value of the asset is available
b.) Assuming that the fair value of the asset given cannot be reliably determined
Answers:
The cost of the new property, plant, and equipment is the fair value of the asset given plus
cash payment.
Equipment – New 1,850,000
Accumulated Depreciation 1,000,000
Loss on exchange 50,000
Equipment – old 1,400,000
Cash 1,500,000
Cost of the new asset (350,000 + 1,500,000) 1,850,000
Loss on exchange (400,000 – 350,000) (50,000)
If the fair value of the asset given cannot be reliably determined, the cost of property, plant,
and equipment is the trade in value of the asset given plus cash payment (this is the fair
value of the asset received).
Equipment – New 1,850,000
Accumulated Depreciation 1,000,000
Loss on exchange 50,000
Equipment – old 1,400,000
Cash 1,500,000
Cost of the new asset (500,000 + 1,500,000) 2,000,000
Gain on exchange (400,000 – 500,000) (100,000)
Caveat: Careful in determining the fair value of the new asset received. The cash price of
the new asset is usually the fair value and not the list price.
7.) Constructed Through the Entity’s Own Effort: The cost of property, plant, and
equipment is composed of the direct cost of materials, direct cost of labor, and indirect
costs and incremental overhead specifically identifiable or traceable to the construction.
* Incremental overhead which are not specifically identifiable may be based on the
direct labor cost or direct labor hours.
* When the actual cost of construction is less than the price at which the constructed
asset can be purchased from other parties, the difference is treated as savings and
not income. As a result, future depreciation charges on the asset would be lower.
* When the actual cost of construction is more than the price at which the
constructed asset can be purchased from other parties, the difference has no effect
in recording the asset at actual cost.
* Paragraph 22 of PAS 16 provides that “the cost of abnormal amount of wasted
material, labor, or overhead incurred in the production of self-constructed asset is
not included in the cost of the asset.” When actual cost which turns to be materially
excessive due to construction inefficiencies or failures whether due to temporary,
idle capacity or industrial disputes, it is believed that the excess shall be treated as
loss.
* The income and related expenses of incidental operations which occur in
connection with the construction or development of an item of property, plant, and
equipment but are not necessary to bring the item to the location and condition for
the intended use are recognized in profit or loss.
Let’s illustrate:
An asset was constructed and the following costs are incurred:
Materials (constructed asset, P300,000) 1,300,000
Labor (constructed asset, P200,000) 1,000,000
Manufacturing Overhead 900,000
Total 3,200,000
Allocation of overhead to the constructed asset and the finished goods on the basis of direct
labor cost:
Constructed Asset Finished Goods Total
Constructed asset 300,000 1,000,000 1,300,000
Finished goods 200,000 800,000 1,000,000
Manufacturing Overhead 180,000 (1) 720,000 (2) 900,000
Total 680,000 2,520,000 3,200,000
Direct Labor Fraction Overhead
Constructed Asset 200,000 2/10 180,000 (1)
Finished Goods 800,000 8/10 720,000 (2)
1,000,000 900,000
8.) Arising From Donation: As provided by Philippine GAAP, contributions received from
shareholders are recorded at their fair value with the credit going to donated capital.
* Expenses incurred in connection with the donation, like payment of registration
fees and legal fees shall be charged to the donated capital. However, subsequent
directly attributable costs shall be capitalized.
9.) Through Government Grant: Capital gifts or grants of funds or other assets that are
restricted for property and equipment additions received from nonshareholders shall be
recorded at their fair value when received or receivable. These are generally considered as
subsidies and therefore recognized as income.
* However, when they are not subsidies, they are treated as liabilities first then they
are transferred to income when the initial restrictions or conditions are met.

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)

VIII. Measurement Subsequent To Initial Recognition

PAS 16 prescribes two alternative methods of measuring items of property, plant,
and equipment subsequent to initial recognition. Whichever accounting policy is selected,
it is required to be applied to the entire classes of property, plant, and equipment.
1.) Cost Model: After recognition as an asset, an item of property, plant and equipment
shall be carried at its cost less any accumulated depreciation and any accumulated
impairment losses.
2.) Revaluation Model: After recognition as an asset, an item of property, plant and
equipment whose fair value can be measured reliably shall be carried at revalued amount,
being its fair value at the date of the revaluation less any subsequent accumulated
depreciation and subsequent accumulated impairment losses.
* Revaluation shall be made with sufficient regularity to ensure that the carrying
amount does not differ materially from that which would be determined using fair
value at the end of the reporting period.
* If an asset’s carrying amount is increased as a result of a revaluation, the increase
shall be recognized in other comprehensive income and accumulated in equity
under the revaluation surplus. However, the increase shall be recognized in profit
or loss to the extent it reverses a revaluation decrease of the same asset that was
previously recognized in profit or loss.
* If an asset’s carrying amount is decreased as a result of a revaluation, the decrease
shall be recognized in profit or loss. However, the decrease shall be recognized in
other comprehensive income to the extent of any credit balance existing in the
revaluation surplus with respect to the same asset. The decrease recognized in other
comprehensive income reduces the amount accumulated in equity under the
revaluation surplus.
* The revaluation surplus included in equity may be transferred directly to retained
earnings while the asset is used.

IX. Subsequent Expenditures

The cost of replacing part of an item of property, plant, and equipment when
incurred is recognized in the carrying amount of that item if the recognition criteria for an
asset are met. Otherwise, subsequent expenditures should be recognized in profit or loss
immediately.
The carrying amount of those parts that are replaced is derecognized in accordance
with the derecognition provisions of PAS 16.

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).

XI. Compensation From Third Parties

Compensation from third parties (like proceeds from insurance contracts) for items
of property, plant, and equipment that were lost or destroyed (based on their agreement) is
included in determining profit or loss for the period when it becomes receivable.

XII. Continuance of Use of Fully Depreciated Property

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.

XIII. Optional Disclosures

Entities are encouraged but not required to disclose the following informations which may
prove relevant to the needs of financial statement users:
1.) The carrying amount of the temporarily idle property, plant, and equipment
2.) The carrying amount of any fully depreciated property, plant, and equipment
3.) The carrying amount of depreciated property, plant, and equipment retired from active
use and classified as held for sale
4.) When the entity uses the cost model, the fair value of property, plant, and equipment
when this is materially different from the carrying amount.