PROPERTY, PLANT, AND EQUIPMENT

SIR CALIWAN LECTURE

Recognition:
- Measured Reliably
- Future Economic Benefit

Measurement
- Initial: @ Cost
o Purchase Price, net of Trade Discount/Rebates (including revocable taxes – VAT)
o DAC
o PV of Dismantling Cost
 Different from demolition cost
- Subsequent Cost
o Cost Model: Cost – Accumulated Deprecation – Accumulated Impairment
 Recoverable Amount: FV less cost to sell vs. Value in Use
 Impairment: Carrying Value > Recoverable Amount
o Revaluation Model: Revalued Amount – Subsequent AD – Subsequent Accumulated Impairment
 Revalued vs Recoverable Amount
 Revalued Amount:
o Increase: RS
o Decrease: RS, then IL (if RS exhaust)
 Revaluation is different from Fair Value

ACQUISITION – PURCHASE PRICE

1. Cash
a. Cash Paid
2. Credit
a. Cash Price Equivalent
3. Exchange
a. With commercial substance: FV of Asset Given Up + Cash Paid – Cash Received
i. With Gain or Loss
b. Without commercial substance: CV of Asset Given Up + Cash Paid – Cash Received
4. Government Grant:
a. FV of the Grant
5. Issuance of Securities
a. Equity:
i. FV of Asset Received
ii. FV of Equity Securities
iii. Par of Equity Securities
b. Financial Liability
i. FV of Financial Liability
ii. FV of Asset Received
iii. Face Value of Financial Liability
6. Self-Construction
a. DM + DL + FOH
i. FOH
1. Applied: Rate of normal production
2. Residual
LAND AND BUILDING
- Cost allocated between Land and Building using their relative FV
- If Building
o No FV: Land only
o No FV but can still be used: Residual Approach

Total Cost xx
FV of Land (xx)
Building xx

- Demolishing Cost
o For the construction of new building: Capitalized to New Building
o CV of the Old Building:
 If PPE: Expense – P/L
 If Inventory: Added or Capitalized to New Building
 If Investment Property: Expense – P/L

REVALUATION AND IMPAIRMENT

Revaluation Model

IMPAIRMENT OF CASH GENERATING UNIT

Impairment Loss is charged to

1. Goodwill
2. Allocate between the Non-cash asset using their CV
a. Non-cash asset that is cost model

BORROWING COSTS
- Capitalized if it is incurred for the acquisition, construction, or production of qualifying assets
- Qualifying Asset: Takes substantial amount of time before it will be ready for its intended use
o Except:
 Qualifying Asset measured @ FV
 Inventories manufactured on a repetitive and large quantities

Specific Borrowing Costs

- Interest: Actual – Investment Income
General Borrowing Costs
- Interest: Actual vs Average (whichever is lower)
o Average interest rate x Weighted Average Expenditure
- Actual > Average = with interest expense
- Actual < Average = no interest expense

GOVERNMENT GRANT
- Recognize if the:
o Company will comply the condition
o Grant will be received
- Recognition
o Systematic Basis
 Compensation loss due to typhoon
Cash xx
Income from GG xx

1. Grant related to Income

a. Other Income or
b. Deduction from Expense

2. Grant related to Asset

a. Deferred Income from Government Income
b. Deduction from Asset

WASTING ASSET (IFRS 6)

- IFRS 6 is only used to determine the exploration evaluation asset and not the wasting asset/depletion as a whole
- Exploration Phase
o Obtaining the right to Technical Feasibility
o Not all costs in exploration phase will go to exploration cost
Exploration Evaluation Expenditure (EEE)
- Upon exploration evaluation expenditure, the company should create a policy so that this EEE will become and
exploration evaluation asset
o Exploration Evaluation Asset (EEA) will be part of Depletable Cost
- Tangible: PPE
- Intangible: Exploration

Policy used to capitalized EEE

1. Full-cost method
2. Successful-Effort

Depletable Cost
Acquisition Cost, net of Salvage Value xx
Exploration Cost (EEA) xx
Development Cost xx
Restoration Cost (@PV) xx
Total Depletable Cost xx

- P/L
- Will go to Inventory or Cost of Sales

Depletion (IAS 16)

- Output Method
DEAN’S BOOK

Inventory PPE Investment Property

Land Sold in the normal course of Land held as a future plant 1. For long-term capital appreciation
business site 2. Held for currently undetermined
future use
3. Held for lease under operating
lease
Building Owner-occupied Leased out to others under
operating lease and generates
cashflows.
Spare parts Usually, inventory Major spare parts and stand-
and Servicing by equipment expected to
Equipment use for a period of more than
twelve months

INITIAL MEASUREMENT
- @ COST
o Purchase Price: Cash Price equivalent at the recognition date
 Fair value of asset given up; unless
 Fair value of asset receive is more reliably determined
o Directly attributable cost: In bringing assets to the location and condition capable of operating
 Cost of employee benefits arising directly from the construction or acquisition of the the PPE
 Cost of site preparation
 Initial delivery and handling costs
 Installation and assembly cost
 Cost of testing whether the asset is functioning properly
 Professional fees
o Initial estimate of the costs of dismantling and removing the item and restoring the site on which it is
located: at the date of acquisition
 Discounted at the date of acquisition to the PV using an appropriate interest rate
 Account: Provision for Equipment Dismantling
 Interest expense (using interest rate): Adjustment every year

SPECIFIC ITEMS OF PPE

1. Land
a. Purchase Price
b. Brokers’ Commission
c. Cost of closing and obtaining title
d. Title Insurance
e. Escrow Fees
f. Surveying Costs
g. Local Government Special Assessment Taxes
h. Any Liens
i. Mortgages or encumbrances on the property
j. Cost of clearing grading, filling or leveling

2. Land Improvements
a. Not permanent
b. Depreciable site enhancements

3. Building
a. Include all costs incurred to put the building in a condition suitable for its intended use
b. Incurred obligations during the period of construction
 i. Cost of building includes Borrowing Costs to the extent capitalized based on IAS 23
c. Demolition Cost attributable to NEW BUILDING
i. Capitalizable to new building

4. Leasehold Improvements
a. Improvements made by the lessee to the leased property, unless specifically exempted in the agreement,
revert to the lessor at the termination of the lease contract, therefore, charged to lease contract

5. Equipment
a. If the equipment is constructed by the company using its own resources and the construction period takes
substantial period of time, the cost includes borrowing costs capitalized based on IAS 23

6. Natural Resources
a. Wasting Assets
b. Timber tracts and mineral and oil deposits
c. Cost:
i. Price paid to acquire the right to explore and extract natural resources
ii. Exploration and development costs incurred before extraction and production being

7. Bearer Plants

ALLOCATION OF LAND AND BUILDING

- Based on Fair values

DETERMINING THE PURCHASE PRICE

1. Cash Price: Lump-Sum Purchase of PPE

a. Allocation is based on the best available indicator of the relative fair values of the several assets involved
b. Allocation may be proportional or incremental, depending on the available basis for allocation

2. Deferred Payment of Purchase Price

3. Acquisition by Issuance of Equity Securities

a. If no equivalent cash price: Average market price

4. Acquisition by Donation
a. Shareholder: Assets received as donation
i. FV @ Date of Donation
ii. Credit to Donated Capital
iii. Expense: Charge to Donated Capital
iv. Direct Attributable Cost: Capitalized
b. From a non-governmental unit other than a shareholder
i. Revenue or gain: Equal to FV of the Donated Asset
ii. Unconditional: Income
iii. Conditional (If with restriction or conditions): Liability until the restrictions or conditions are full
met
c. From governmental unit
i. Shall not be recognized until there is reasonable assurance that the entity will comply with the
conditions attaching to them and the grants will be received

5. Acquisition by Self Construction

a. Direct Material + Direct Labor + Overhead
b. Cost of abnormal amounts of wasted material, labor or other resources incurred
i. Not included in the cost of the asset
Borrowing Cost
- Capitalized if:
o Incurs expenditure for the asset
o Incurs borrowing costs
o Activities that are necessary to prepare the asset for its intended use of sale
- Exceptions:
o Qualifying assets that are measured at fair value
 Biological assets
 Investment Property at Fair Value
 Large and repetitive
- Proceeds for such borrowing are used to finance:
o Asset construction
o Partly to finance working capital and other fund requirements

1. Specific Borrowing: Finance solely the construction of the qualifying asset

a. Capitalized Cost
i. Actual Interest Incurred – Interest Income on the Temporary Investment (Investment Income)

2. General Borrowing: Finance the general requirement for funds of the enterprise
a. Capitalized Cost: Lower between
i. Actual interest cost incurred
ii. Weighted Average Accumulated Expenditure x Weighted Average Interest Rate
1. Weighted Average Accumulated Expenditure
a. Expenditure x Period
2. Weighted Average Interest Rate
a. Actual Interest Cost on General Borrowings/Total General Borrowings

3. Combination of Specific Borrowing and General Borrowing

Weighted Average Accumulated Expenditure xx

Financed by specific borrowing (xx)
Financed by general borrowing xx

*Borrowing cost for specific borrowing cost is computed the same as stated above

General borrowing costs: Lower between

o Actual interest cost incurred on general borrowing
o (Weighted average accumulated expenditure – Specific Borrowing) x Weighted Average Interest Rate
 Weighted Average Interest Rate: Same computation as stated above

6. Acquisition under Lease Contracts

a. Lessee is granted a right to use the property for a specified period of time for a specified periodic amount
b. Right of Use asset
i. Beyond 12 months
ii. Not Low-value asset
c. Components of ROUA: Same as PPE
i. Amount of cash at or before lease commencement date
ii. Measurement of Lease Liability
iii. Initial Direct Cost incurred by the lessee
iv. Estimate of costs to be incurred by the lessee in removing and dismantling the underlying asset,
restoring the site on which the asset is located and other similar costs

7. Exchange of Non-monetary Assets

a. Measured at fair value unless:
 i. Lacks commercial substance
ii. FV of asset given up and FV of asset received are not reliably measured

b. There is commercial substance if:

i. Configuration (risk, timing, and amount) of cash flows of the asset received differs from the
configuration of cash flows of the asset transferred
ii. Entity-specific value of the portion of the entity’s operations affected by the transaction
iii. Difference of i and ii is significant relative to the FV of the asset exchanged

c. With Commercial Substance (WITH GAIN OR LOSS)

i. FV of asset given up plus cash payment (minus cash received)
ii. FV of asset received
d. Without Commercial Substance (NO GAIN OR LOSS)
i. CV of asset given up plus cash payment (minus cash received)

DEPRECIATION
- Depreciation is recognized even FV exceeds CV
o As long as residual does not exceed CV
- Begins:
o Available for use
o In the location and condition necessary for it to be capable of operating
- Ceases: Earlier between
o Derecognition of Asset
o Reclassification as held for use
o Transferred to inventory
- Depreciation continues even if the asset becomes idle (retired from active use)
o Unless fully depreciated

USEFUL LIFE
1. Physical Factors
a. Expected usage of the asset by the enterprise
b. Expected physical wear and tear
c. Passage of time
2. Functional or Economic Factors
a. Technical Obsolescence: Superseded by a newer model or another asset
b. Inadequacy: Changes or improvements in production, resulting from a change in the market demand
c. Legal or similar limits: Expiry dates of related leases

DEPRECIATION METHODS

A. Time Factor Methods

Straight Line Method

Cost – Residual Value

Estimated Useful Life

Accelerated Method
1. Sum of the years’s digits method:
a. Higher economic benefits during the early years of their useful life, thus providing higher depreciation
expense in earlier years
b. Assets generally are capable to generate more revenue in their early years of use

Depreciable Amount x EUL, beginning of the year

 Sum of the digits in the life of the asset - - - - - - [n x (n+1)]/2
2. Double declining balance method (200% declining method)
a. Ignores the residual value

Declining CV x Fixed Rate - - - - - - [Rate = 2/EUL]

3. 150% declining balance method

a. Same as double-declining method

Declining CV x Fixed Rate - - - - - - [Rate = 1.5/EUL]

4. Declining balance Method

B. Activity or use-factor methods/Variable Charge Method

- More of the function of use rather than passage of time

1. Service hours method

Depreciable Amount x Number of

Total number of productive hours Hours

2. Productive output method

Depreciable Amount x Number of units

Total units of production Produced

C. Multiple Asset Depreciation Methods

1. Group Method
2. Composite Method

GROUP DEPRECIATION AND COMPOSITE DEPRECIATION

- Uses Straight-line method
- When any one of the asset in the group is sold:

Cash (Proceeds) xx
Accumulated Depreciation (Cost – Proceeds) xx balancing figure
Equipment (PPE, at Cost) xx

Group Depreciation
- Similar assets are grouped

Composite Depreciation
- Dissimilar in nature are grouped and treated as a single unit

Composite Life = Total Depreciable Cost/Total Annual Depreciation

Composite Rate = Total Annual Depreciation/Total Cost

COMPONENT DEPRECIATION
- Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be
depreciated separately
- Depreciates separately each part based on their respective useful lives
NATURAL RESOURCES (WASTING ASSETS)

DEPLETION:
Natural Resources
- Wasting assets such as oil, gas, minerals, and timber
- Physically exhausted over the period of use

Depletion
- Allocation of the depletable cost of the of the natural resource to the periods in which benefits are received
- “Production Output Method” - - - - Based on Number of units expected to be extracted over the useful life

Depletion Expense
- Inventoriable Cost or Product Cost
- Included in COGS in P/L

Purchase Price, net of salvage value xx

Exploration Cost, to the extent capitalized xx
Development Cost xx
Restoration Cost (PV @ DOA) xx
Residual Value (xx)
Depletable Cost xx

Unit Depletion Rate = Total Depletable Cost/Total Estimated Recoverable Units

When additional expenditure have been incurred or estimates are revised

- New depletion rate has to be calculated

Carrying Value (Including Additional Capital Expenditure) – Residual value

Revised Remaining Units @ the beginning of the year

DEPRECIATION OF ASSETS USED IN MINING ACTIVITIES

- Period: Shorter between
o Useful life of the asset
o Expected mining period

- Useful Life < Expected Mining Period

o Time-Factor Depreciation
- Useful Life > Expected Mining Period
o Unit of Output Method

EXPLORATION FOR AND EVALUATION OF MINERAL RESOURCES

- Incurred by an entity in connection with the exploration for and evaluation of mineral resources before the
technical feasibility and commercial viability of extracting a mineral resource and demonstrable
- Classified as PPE or Intangible Asset
- Assessed for Impairment (Expense)
o Specific area expired during the period or will expire in the near future
o Substantive expenditure is neither budgeted nor planned
o Exploration for and evaluation of mineral resources have not lead to discovery of commercially viable
quantities and the entity has decided to discontinue such activity
o Carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful
development or by sale

2 Conventional Methods
 1. Successful efforts method
a. Capitalized and amortized: Successful discovery and acquisition of mineral resources
b. Expensed: Unsuccessful acquisition and exploration
2. Full-Cost Method
a. Capitalized and Amortized: Incurred in acquisition and exploration of mineral resources

EXPENDITURE AFTER INITIAL RECOGNITION

Treatment:
1. As Capital Expenditure: If criteria of assets are met
a. Probable that future economic benefits will flow
b. Expenditure significantly improves the condition of the asset beyonds its original assessed standard
performance
i. Modification
1. Extension of useful life
2. Increase the capacity of the asset
ii. Upgrade
1. Improvement of the quality of the output
2. Increase in the asset’s efficiency
iii. Adoption of new production process – leading to large reductions in operating losses
2. Otherwise, Expense

Losses
- Expenditure that results from accidents, neglect, intentional abuse

Expense:
- Normal repairs and maintenance merely restore and maintain the asset to fit condition

REPLACEMENT
- Derecognize the old asset: separately identifiable and practicable
o Revised Cost: Total Cost – Original Cost of the replaceable part + New Cost of the Replacement
o Accumulated Depreciation: Accumulated Depreciation of Total Cost – Accumulated Depreciation of
Replaceable Part
- If not separately identifiable:
o Use the cost of the new asset
o Revised Cost: Total Cost
o Accumulated Depreciation: Accumulated Depreciation of Total Cost – Accumulated Depreciation using
the cost of the new part

SUBSEQUENT MEASUREMENT (Page 110)

- Cost Model or Revaluation Model: applied to the entire class

A. Cost Model (Cost – accumulated depreciation – accumulated impairment loss)

B. Revaluation Model (Revaluation – subsequent accumulated depreciation – subsequent accumulated impairment loss)
- Sufficient regularity to ensure that the carrying amount does not differ materially from that which would be
determined using fair value at the reporting date
- Frequency: Depends upon the changes in FV of
- Application: Entire class of PPE

Accumulated Depreciation @ Date of Revaluation is treated either:

1. Proportional Method: Restated proportionally with the change in CV so that CV after revaluation equals its
revaluation amount
 2. Elimination Method: Eliminated against the gross CV and the asset account is restated to the revalued amount
of the asset

Revaluation Surplus
- May be transferred directly to RE: when asset is derecognized
- Left at its initial amount, until asset’s derecognition or subsequent revaluation
- Every Period: RS will be transferred to RE
- Net Decrease charged to:
o First: RS to the the extent of its balance (unrealized amount of RS)
o Second: Remainder – impairment loss or revaluation loss

Pro-forma for Revaluation

Cost Appraised/Revalued Increase/Decrease
Gross xx xx xx
Accumulated Depreciation (xx) (xx) (xx)
Net xx xx xx

*Usually, the given appraised amount is the Net amount

- To get Accumulated Depreciation:
o Increase (Decrease)/Net Cost x Accumulated Depreciation @ Cost + Cost (Cost – if decreased)

IMPAIRMENT LOSS
- CV > Recoverable Amount
- Assessment: Each reporting date
- Treatment :
o Expense in SCI
o For asset carried at a revalued amount: Revaluation Decrease in OCI to the extent of the balance of its
revaluation surplus

MEASUREMENT OF RECOVERABLE AMOUNT

Higher between:
- FV less cost to sell
- Value in use
o Estimated Future Cash Flows expected to arise from the continuing use of an asset and from its disposal
at the end of its useful life
 Undiscounted cash flow
 Residual Value
o Present Value or apply appropriate discount rate