Property, Plant and Equipment

Subsequent Measurement: either

a. Cost model, or
 Net of accumulated depreciation
b. Revaluation model

DEPRECIATION
Depreciation is the systematic allocation of Computation for Depreciation
the depreciable amount of an asset overs its  Each part of an item of PPE with a cost
estimated useful life. that is significant in relation to the
 An attempt at cost allocation rather total cost of the item shall be
than asset valuation. depreciated separately.
 An entity may choose to depreciate
Three Terms used in the Systematic & separately the parts of an item that do
Rational Allocation of Cost of Long-term not have a cost that is significant in
Assets: relation to the total cost of the item.
1. Depreciation for PPE
2. Depletion for wasting assets Depreciation Methods
3. Amortization for intangible assets 1. Straight-line Method
2. Sum of the years’ Digit Method (SYD)
Kinds of Depreciation 3. Double declining balance method
1. Physical depreciation - related to an 4. Units of production method
asset’s deterioration & wear over a
period of time.
2. Functional or Economic Depreciation -
arises from obsolescence or inadequacy
of the asset to perform efficiently.

Inadequacy results when an asset is no

longer appropriate because of an increase
volume of operations.

Locational Obsolescence results when the

value of a property decreases because of
negative influence from external factors.

Straight-line Method
 Depreciation is recognized evenly over the useful life of the asset.

Annual Depreciation = Cost - Salvage Value

Useful Life

Sum-of-the-years’ Digits (SYD) Depreciation

 Depreciation is computed by applying a series of fractions to the depreciable amount
of the asset.
 Fraction is derived by dividing the asset’s remaining useful life by the sum digits in
the life of the asset.

SYD Denominator = Life x {life + 1)

2

Double Declining Balance Method

 Depreciation is computed by applying a fixed rate on the carrying amount of the asset
at the end of each period.
 Residual value is INITIALLY IGNORED. Only considered when the asset’s carrying amount
falls below the residual value.

Double Declining Rate = 2/life

150% Declining Rate = 1.5/life

Partial Year Depreciation

 When asset is either acquired or If individual assets in a relatively
disposed of during the year, the full homogeneous group are regularly acquired &
year depreciation charge should be disposed of, one of several conventions can
prorated during the accounting periods be adopted, as follows:
involved. Necessary to achieved proper 1. Record a full year’s depreciation in the
matching. year of acquisition & non in the year of
disposal.
Proration is normally done on the basis of 2. Record one-half year’s depreciation in
the nearest full month: the year of acquisition and one-half
1. When an asset is acquired or disposed of year’s depreciation in the year of
during the first half of a month: asset disposal (half-year convention)
 Property, Plant and Equipment
is treated as if it has been acquired or
disposed of at the beginning of the
month
2. When an asset is acquired or disposed of
during the last half of a month: asset
is treated as if it has been acquired or
disposed of at the end of that month (or
at the beginning of the following month)

Units of Production Method (Activity or Variable-charged Method)

 Appropriate when depreciation is a function of usage rather than as a function of
time.
 Depreciation to the estimated production capability of an asset & is expressed in a
rate per unit of output or per hour of input.
 Periodic depreciation varies in proportion with the number of units produced or the
number of hours used.
 When the asset is not used during the period, NO depreciation is recognized.
 Assets depreciation under methods based on time: Depreciation is still recognized even
if the assets were not used during a period because there is passage of time whether
the assets are used or not.

Capitalization Policy
 Normally provided under the policy adopted by an entity
 Example: An entity choose to have a policy of capitalizing acquisitions of items of
PPE amounting to P5,000 and above.
 Those items of PPE acquired for less than P5,000 are charged immediately as
expenses.
 It is disclose in the notes

Group Depreciation
Composite Method & Group Method Retirement Method
 The original costs of an asset is
 Composite Method - process of averaging retained in the books & charged as
the useful lives of a number of property expense only when the asset retired.
units & depreciating the entire class of  Any salvage proceeds received on the
assets over a single life. Dissimilar asset retired is deducted from the
Assets expense recognize.
 Group Method - similar assets are
grouped and depreciated as one. Replacement Method
 NO Gain/Loss is recognized  The original costs of an asset is
 Accumulated depreciation is debited retained in the books.
(credited) for the difference between  Cost of replacing the asset is charged
the original costs of the asset sold & as expense when the asset is replaced.
any proceeds received from the sale.  Any salvage proceeds on the asset
 If the asset is retired but not sold: replaced is deducted from the expense
accumulated depreciation is debited by recognized.
the asset’s original cost.
 When asset is replaced: Accumulated Note:
depreciation is debited by the replaced  No depreciation expense is recognized
asset’s original cost & the cost of when the new assets are acquired but no
replacement is added to the total cost replacement are made.
of the group.  Assets are not replaced but rather
 Subsequent Depreciation: dividing the retired: their original cost is expensed
new depreciable amount by the original in the period of retirement. Any salvage
composite life or my multiplying the new proceeds is deducted from the expense
total cost by the original composite recognized.
rate.
Inventory Method
Composite Life = Total depreciable amount  Depreciation for the period is computed
Total annual as the difference between costs at the
depreciation beginning & end of the period after
adjustments for costs of acquisitions &
Composite Rate = Total annual depreciation salvage proceeds from assets retired.
Total Cost

Annual depreciation is computed either by:

1. Dividing the total depreciable amount by
the composite life, or
2. Multiplying the total cost by the
composite rate

Leasehold Improvements
 Property, Plant and Equipment
 These are modifications made by a tenant  Debited to “leasehold improvements”
to a property leased under an operating account
lease.  Depreciated over the useful life of the
 These are immovable. improvements or the remaining lease
term, whichever is shorter.
NOTE:
 Movable improvements are not recognized  Any residual value of the leasehold
as leasehold improvements but rather as improvements is ignored.
furniture or equipment.

Lease Contains Option for renewal

 Probable that the option will be
exercised: Lease extension is added to
the remaining lease term.

Idle, Temporarily Taken Out of Use, and Abandoned Properties

 Depreciation ceases when the asset is derecognized.
 Assets that are idle, retired from active use, temporarily taken out of use, or
abandoned should still be depreciated until the end of their useful life.

PFRS 5 definition of Abandoned assets

a) Assets that are to be used to the end of their economic life, or
b) Assets that are to be closed rather than sold

Circumstances where Depreciation may Cease:

1. Asset is disposed of through sale or permanent retirement
2. Asset is classified as held for sale under PFRS 5
3. Asset is fully depreciated
4. Asset is not used in production during the period and the depreciation method used is
based on actual usage.

Subsequent Expenditure
ADDITIONS Improvements & Replacements
 Modifications made on an asset that  Improvement (betterment) is the
increases its physical capacity. substitution of a better asset for one
 It should be capitalized currently used
 Replacement - is the substitution of a
MAJOR INSPECTION similar asset.
 Cost is recognized in the CA of the PPE
as a replacement if the recognition IMPROVEMENT
criteria is satisfied.  Improvement extends the useful life of
 Any remaining CA of the cost of the asset improved: Cost is capitalized by
previous inspection is derecognized. debiting accumulated depreciation.
 Improvement increases the
REARRANGEMENT & REINSTALLATION capacity/efficiency of the asset beyond
 Charged to Expense. the previous condition originally
 When it satisfied the asset recognition intended by mngt.: Cost is capitalized
criteria: may be capitalized as an asset by debiting the asset account.

REPAIRS REPLACEMENT
 Charged to expense.  Whether on a regular basis or not, if it
 Major Repair (overhaul): handle the cost satisfies the recognition principle in
as an addition, improvement or PAS 16:
replacement. 1. Cost of replacing the part is recognized
 Recognizing a liability for future when the cost is incurred.
overhaul or future major repaid is 2. Carrying Amount of those parts that are
normally prohibited due to lack of replaced is derecognized.
present obligation.  Accounted in one of the following:
1. CA of replaced part is determinable
 Such amount is derecognized
 Cost of replacement is capitalized
2. CA of replaced part is indeterminable
 May use the cost of the replacement as
an indication of what the cost of the
replaced part was at the time it was
acquired or constructed.

Revaluation
 After recognition as an asset, an item Valuation Techniques
of PPE shall be carried at a revalued 1. Market Approach - uses prices & other
amount. relevant information generated by market
FV @ date of revaluation P xx transactions involving identical or
Acc. Depreciation (xx) comparable assets, liabilities, or a
group of assets & liabilities.
 Property, Plant and Equipment
Acc. Impairment losses (xx) 2. Cost Approach - reflects the amount that
Revalued Amount P xx would be required currently to replace
 Apply PFRS 13 “fair value measurement” the service capacity of an asset
(current replacement cost)
3. Income Approach - converts future
amounts to a single current amount,
reflecting current market expectations
about those future amounts.
Increase Market Approach
 If an asset’s CA is increased as a  FV measurement is based on the sale
result of a revaluation: the increase prices of similar properties that were
shall be recognized in OCI & accumulated recently sold.
in equity under the heading of  Factors to consider:
revaluation surplus. 1. Location
 Gain on Impairment Reversal: Increase 2. Features of the location
shall be recognized in profit/loss to 3. Size of Property
the extent that it reverses an 4. Physical features
impairment loss of the same asset 5. Legal restrictions on the use of the
previously recognized in P/L. property

Fair Value P xx
Less: CA xx
Revaluation Surplus P xx

Decrease
 If an asset’s CA is decreased as a
result of a revaluation: the decrease
shall be recognized in P/L.
 Decrease shall be recognized in OCI to
the extent of any credit balance
existing in the revaluation surplus in
respect of that asset.
Cost Approach Income Approach
 The FV measurement is based on the  Valuation is based on the amount of
amount currently needed to replace the income that the property can potentially
asset (current replacement cost). generate.
 An informed buyer will not pay more than
the cost of constructing an equal, Involves estimating the following:
substitute property minus depreciation 1. The annual income, net of OPEX
and assuming no delay. 2. The appropriate discount rate or
 Applicable when there is insufficient capitalization rate which shall be
data on recent market transactions for applied to the amount determined in (1).
similar assets.
Methods of Recording Revaluation
Steps: a. Proportional Method
1. Estimate the replacement cost of the  The gross CA is adjusted in a manner
building that is consistent with the revaluation
2. Estimate the depreciation taking into of the CA of the asset.
consideration the building’s physical b. Elimination Method
deterioration, functional obsolescence  The accumulated depreciation is
and location obsolescence. eliminated against the gross carrying
amount of the asset.
Total Economic Life = Effective Life + Remaining Economic
Life
% Depreciation = Effective life / Total economic life
Depreciation = % Depreciation x Replacement Cost

3. Estimate the fair value of the building

Fair Value = Replacement Cost - Depreciation
Revaluation Surplus = FV - CA
Frequency of Revaluation  Revaluation is initially recognized in
 When FV of a revalued asset differs OCI as either revaluation gain/loss.
materially from its CA, a further  Impairment loss/Reversal of impairment
revaluation is required. loss: Revaluation is recognized in P/L.
 For items with significant & volatile
changes in FV: Annual Revaluation is Revaluation Surplus is Accounted for:
necessary. a. Asset revalued in Non-depreciable
 For items with insignificant changes in  Revaluation surplus is transferred
FV: Revaluation may be made every 3 or 5 directly to retained earnings when asset
years. is derecognized.
 May involve transferring the whole of
 If an item of PPE is revalued, the the surplus when the asset is retired or
entire class of PPE to which that asset disposed of.
belongs shall be revalued. b. Asset revalued in depreciable
 The items within a class of PPE are  A portion of the revaluation surplus is
revalued simultaneously to avoid transferred periodically to retained
 Property, Plant and Equipment
selective revaluation of assets & the
reporting of amount in the FS that are a
mixture of costs & valued as different
rates.
 A class of assets may be revalued on a
rolling basis provided the revaluation
of the class of assets is completed
within a short period & the revaluation
are kept up to date.
earnings as the asset is being used.
 The amount transferred is the difference
between the depreciation based on the
revalued CA & the depreciation based on
the original cost.
 Transfers from revaluation surplus to
retained earnings are NOT made through
P/L.