PROPERTY, PLANT

AND EQUIPMENT
PART 1
1
INTRODUCTION AND
SCOPE

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PAS 16
CLASSES OF PPE:
a. Land
b. Land and buildings
c. Machinery
d. Ships
e. Aircraft
f. Motor vehicles
g. Furniture and fixtures
h. Office equipment
i. Bearer plants

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PAS 16
DOES NOT APPLY TO:
 Classified as held for sale (PFRS 5-non current assets
held for sale)
 Biological assets, other than bearer plants (PAS 41-
agriculture)
 Exploration and evaluation assets (PFRS 6)
 Mineral rights and reserves
 Land held for undetermined use or for capital
appreciation (PAS 40-investment property)
 Land by real estate developer held for sale in the
normal course of business (PAS 2-inventories) 4
DEFINITION OF PPE

Tangible assets Used in normal Long-term in nature

Items of PPE have operations Items of PPE are
physical substance Items of PPE are used expected to be used
in the production or from more than a year
supply of goods or
services, for rental, or
for administrative
purposes

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RECOGNITION and DERECOGNITION
▰ The cost of an item of property, plant and equipment shall
be recognized as an asset only if:
▻ it is probable that future economic benefits associated
with the item will flow to the entity; and
▻ the cost of the item can be measured reliably.

▰ The carrying amount of an item of property, plant and

equipment shall be derecognized:
▻ On disposal; or
▻ When no future economic benefits are expected from
its use or disposal.

▻ Not all fully depreciated assets are derecognized

because some assets are still being used 6
2
MEASUREMENT

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INITIAL at cost
SUBSEQUENT using cost or
revaluation model

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INITIAL COST

PURCHASE PRICE DIRECTLY COSTS OF

 Invoice price ATTRIBUTABLE DISMANTLING
 Import duties COSTS Dismantling and
 Non-refundable Costs necessary to removing the item
purchase taxes bring the asset to the and restoring the site
 Minus trade location and condition on which it is located
discounts and intended by
rebates management

9
“
Aldous Company imported a new machine at a peso
equivalent of P330,000. The company has to pay
additional cost of importing the asset such as
P10,000 import duties and P15,000 value-added
taxes. Costs of transporting the asset was P5,000 and
cost of preparing the asset for its intended use
include P5,000 installation. How much is the initial
cost of the machine?

10
“
Purchase price P330,000
Import duties 10,000
Cost of transport 5,000
Installation cost 5,000
Initial cost P350,000

*Value-added taxes are refundable taxes, thus, not capitalizable.

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3
SPECIAL CASES OF
ACQUISITION

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DEFERRED SETTLEMENT

▰ Cash price equivalent (or present value of

deferred payments)
▰ Any difference from total amount paid
recognized as interest expense
▰ If short term, invoice price less discount,
whether taken or not

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“
On September 1, 2018, Bane Corporation purchased a new
machine on a deferred payment basis. A down payment of
P20,000 was made and 4 annual installments of P60,000
each are to be made beginning on September 1, 2018. The
cash equivalent price of the machine was P230,000. Due to
an employee strike, Bane could not install the machine
immediately, and thus incurred P3,000 of storage costs.
Costs of installation (excluding the storage costs) amounted
to P8,000. The amount to be capitalized as the cost of the
machine is ______________.

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“
Cash price equivalent P230,000
Installation cost 8,000
Initial cost P238,000

*Storage costs are not necessary to bring the asset to its intended
location and condition.

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ISSUANCE OF BONDS

▰ Hierarchy:
a. Fair value (or present value) of the
bonds issued
b. Fair value of asset received
c. Face value of the bonds issued

16
ISSUANCE OF SHARES

▰ Hierarchy:
a. Fair value of asset received
b. Fair value of shares issued
c. Par value or stated value of shares
issued

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“
On October 1, 2019, Harith Corporation purchases an industrial
building by an issue of 5,000,000 ordinary shares of P1 par
each to the vendor. Harith Corporation’s shares have been
actively traded on the stock exchange but its quoted price has
been erratic ranging from a low of P3.50 to a high of P13.50 for
the year. On the date of purchase of the building, Harith
Corporation’s shares are quoted at P8.80. The company paid
P220,000 transfer and legal cost in relation to the building. At
the time of acquisition, the industrial building has a fair value
of P35,000,000 on the existing use basis. At what amount
should the building be initially recorded?

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“
Fair value of building P35,000,000
Transfer and legal cost 220,000
Initial cost P35,220,000

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EXCHANGE OF ASSETS

▰ If with commercial substance:

a. Fair value of asset given up plus additional cash
payment
b. Fair value of asset received minus cash received
c. Book value of asset given up plus additional cash
payment

▰ Lacks commercial substance:

a. Book value of asset given up

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“
A brand-new set of monobloc chairs in exchange for
used chairs which originally cost P300,000 and was
50% depreciated. Additional cash of P50,000 was
paid. The fair value of the old chairs was determined
to be P180,000, while the fair value of the new chairs
is P250,000. The exchange has commercial
substance. How much is the initial cost of the new
chairs?

21
“
Fair value of asset given up P180,000
Cash paid50,000
Initial cost P230,000

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DONATED ASSET

▰ If from a shareholder, at fair value of the

asset received to be recorded as “Donated
Capital”, any additional cost deducted from
share premium
▰ If from a non-shareholder, at fair value of
the asset received plus directly attributable
costs, recorded as “Income from Donations”

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“
A cabinet was donated by a shareholder. The
cabinet has an appraised value of P50,000.
Delivery and handling costs amounts to P1,500
to bring the cabinet to the company’s premises.
How much is the initial cost of the asset?

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“
Fair value of asset P50,000
Initial cost P50,000

*Delivery and handling costs will be recorded as a deduction from

Share Premium.

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SELF-CONSTRUCTED ASSET

▰ Direct costs of materials

▰ Direct costs of labor
▰ Indirect costs (i.e. overheads, indirect materials, indirect
labor)
▰ Normal wastes and capitalizable borrowing costs shall be
included as part of the cost of the asset. However, abnormal
wastes and any initial operating losses or profits that arise
during construction shall be excluded from the
capitalizable cost of the item of PPE.

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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.

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4
LAND & BUILDING

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COST OF LAND

▰ The following costs shall be included as part of the "Land"

account:
a. Purchase price
b. Legal fees and other expenditures to acquire clean title
c. Broker's commission
d. Escrow fees
e. Fees for registration and title transfer
f. Cost of relocation or reconstruction of property belongings to others
in other to acquire possession
g. Mortgages, encumbrances and interest on such mortgages assumed by
the buyer
h. Unpaid property taxes assumed up to date of acquisition. Taxes
accruing after the acquisition is expensed.

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COST OF LAND

▰ The following costs shall be included as part of the "Land"

account:
i. Cost of surveying
j. Cost of demolishing unwanted old structures, less proceeds from sale
of salvage materials.
k. Payment to tenants to induce them to vacate land (or costs of
relocating squatters)
l. Cost of non-depreciable, permanent improvements such as grading,
levelling, subdividing and landfill.
m. Cost of option to buy the acquired land. However, if the land is not
acquired, the cost of option is expensed
n. Special assessments

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COST OF BUILDING

▰ The following costs shall be included as part of the

"Building" account.
If purchased:
a. Purchase price
b. Legal fees
c. Unpaid taxes up to date of acquisition. Taxes accruing after the
acquisition is expensed.
d. Interest, mortgages, liens and encumbrances on the building assumed
by the buyer.
e. Payments to tenants to induce vacation from the existing building
f. Any renovation or remodeling costs incurred to put the building in its
necessary condition (e.g. lighting installations, partitions and major
repairs)

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COST OF BUILDING

▰ The following costs shall be included as part of the

"Building" account.
If self-constructed:
a. Materials, labor and overhead incurred
b. Building permit and licenses
c. Professional fees, such as architect fees, safety inspector fees and superintended
fees
d. Cost of excavation to layout foundation.
e. Cost of temporary building used as construction offices and storage for tools and
materials to be used.
f. Interest on construction loans and insurance (PAS 23)
g. Expenditures for service equipment and fixtures made a permanent part of the
building.
h. Temporary safety fence around site and costs of removing the same.
i. Insurance taken during construction.
j. Ventilation, lighting and elevator systems installed during construction.

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Carmela Company commenced operations at the beginning of the current year, costs are incurred by the
entity:
Payment for land P1,000,00 LAND
0
Payment of property taxes in arrears 40,000 LAND
Title search and insurance 50,000 LAND
Option paid for an alternative land which was not acquired 30,000 EXPENSE
Cost of relocating squatters 10,000 LAND
Special assessment for city improvements on water and sewer system 150,000 LAND
Demolition of old building on land, net of salvage of P10,000 100,000 BUILDIN
G
Survey before construction of new building 60,000 LAND
Contract price for factory building 5,000,000 BUILDIN
G

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Carmela Company commenced operations at the beginning of the current year, costs are incurred by the
entity:
Architect fee 230,000 BUILDIN
G
Building permit or payment to city hall for approval of building 120,000 BUILDIN
construction G
Excavation before new construction 110,000 BUILDIN
G
Safety fence around construction site 35,000 BUILDIN
G
Safety inspection on building 30,000 BUILDIN
G
Removal of safety fence after completion of factory building 20,000 BUILDIN
G
New fence surrounding the factory 80,000 LAND
IMPROVEMENT
S

Driveways, parking bays and safety lighting 550,000 LAND

IMPROVEMENT
S
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Cost of trees, shrubs and other landscaping 250,000 LAND
IMPROVEMENT
5
MACHINERY

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COST OF MACHINE

▰ The following costs are included under the “Machinery and

equipment” account:
a. Purchase price, net of VAT
b. Freight, handling, storage and other cost related to acquisition
c. Insurance while in transit.
d. Installation cost, site preparation and assembling costs
e. Cost of testing and trial runs, and other costs necessary in preparing the
item for use
f. Initial estimate of cost of dismantling and removing the machinery and
restoring the site on which it is located, and for which the entity has a
present obligation to do so.
g. Fees paid to consultations for advice on the acquisition of the item.
h. Costs of safety rail and platform surrounding the item.
i. Costs of water device to keep the machinery or equipment cool.
j. Irrevocable or irrecoverable purchase tax

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ABC Inc. acquired a machine at the beginning of the current year. The following costs were incurred:
Cash paid for machine, inclusive of 12% VAT P896,000 800,000
Cost of transporting machine 30,000 30,000
Labor cost of installation by expert fitter 50,000 50,000
Labor cost of testing machine 40,000 40,000
Cost of safety rails and platform surrounding machine 60,000 60,000
Cost of water device to keep machine cool 80,000 80,000
Cost of adjustment to machine to make it operate more efficiently 75,000 75,000
Estimated dismantling cost to be incurred as required by contract 65,000 65,000
Insurance cost for the current year 15,000 EXPENSE
Cost of training personnel who will use the machine 25,000 EXPENSE

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TEST YOUR KNOWLEDGE!
Property, plant and equipment are defined as
A. Tangible assets held for sale in the ordinary course of business.
B. Tangible assets held to earn rentals or for capital appreciation or both.
C. Tangible assets held for use in the production or supply of goods or services and
expected to be used during more than one reporting period.
D. Tangible assets held for use in the production or supply of goods or services, for rental to
others, or for administrative purposes and expected to be used during more than one
reporting period.
NOTE:
(a) are held for use in the production or supply of goods or services, for rental to others, or
for administrative purposes; and
(b) are expected to be used during more than one period”
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TEST YOUR KNOWLEDGE!
A machine was purchased on account with a price of P2,000,000 with credit terms 3/10,
n/30. Other costs paid were freight charges of P2,000, repairs of P3,500 for damage during
installation, and installation costs of P2,250. Estimated future dismantling costs of the new
equipment is P40,000. The company paid P20,000 to dismantle the old machine to make
room for the new one. The company paid the purchase price beyond the discount period.
How much is the initial cost of the machine?
A. P2,047,750
B. P1,987,750
C. P1,967,750
D. P2,027,750

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THANKS!

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