PAS 16: Property, Plant and Equipment

 
PPE - an asset account that stands for Property, Plant and Equipment. To consider an asset as PPE, it must
meet these conditions:
a. Tangible/physical form - can be seen or touched
b. Used in business - either used in operations or for administrative purposes in the business
c. Expected to be used for more than one year - long term use (kaya nga may Depreciation for PPE)
 
Examples of PPE:
1.) Land 7.) Motor Vehicles
2.) Land Improvements 8.) Furniture and Fixtures
3.) Building 9.) Office Equipment
4.) Machinery 10.) Patterns, molds and dies
5.) Ships 11.) Tools
6.) Aircraft 12.) Bearer Plants**
 
Scope of PAS 16:
An asset is considered PPE or is covered by PAS 16 except:
a. If another standard required a different accounting treatment - ex. Investment Property, although a
property, is covered by PAS 40
b. If the asset is not going to be used in the operations of the business, but is classified as held for sale or
distribution (PFRS 5 - Non-current assets Held for Sale and Discontinued Operations)
c. Biological assets, like Biological Plants and Animals, are covered by PAS 41. Although Biological
animals can be classified as PPE if they are used for transportation, scientific, recreational and other
purposes which are not agricultural.
d. Mineral rights, reserved and non-regenerating resources
 
Element of cost of an item of PPE
1. Purchase price, import duties, non-refundable purchase taxes after deduction of discount and rebates
2. Cost directly attributable to bringing asset in location/condition
3. Initial estimated cost of dismantling and removing asset and restoring on site
 
Directly Attributable Costs Costs that are expensed
a. Cost of employee benefits from a. Cost of opening new facility
construction/acquisition of PPE
a. Cost of site preparation a. Cost of introducing new
product/service + advertising/promotion costs
a. Initial delivery and handling cost a. Cost of conducting business in new
location with new class of customer and other
general overhead cost
a. Installation and assembly cost a. Administration and other general
overhead
a. Professional fees a. Cost incurred while item capable of
operating in manner intended by management
has yet to be brought to its use or is operated
less than full capacity
a. Cost of testing whether asset functions a. Initial operating loss
properly after deducing the net proceeds from selling  
any items produced while bring asset to location and a. Cost of relocating/reorganizing part
conditions; samples or all of an entity's operation
 
 
Measurement at Initial Recognition:
PPE is initially recognized or measured at its cost, meaning that every cost incurred to bring the asset to its
condition to be used can be capitalized. These costs usually include:
1. Purchase and freight cost - how much it was bought and shipping costs, if any.
2. Installation costs - if the asset needs to be installed
3. Professional fees - for installation(?)
4. Salaries and employee benefits from the construction
5. Cost of testing
 
Measurement After Recognition:
PPE is subsequently measured or recognized at its carrying amount. The business entity can either use cost
or revaluation model.
a. Cost Model - the carrying amount of the PPE results from its cost to acquire the asset less any
accumulated depreciation or any accumulated impairment losses.
b. Revaluation Model - the carrying amount of the PPE results from its fair value (current value in the
market) less any subsequent accumulated depreciation or accumulated impairment losses.
 
Modes of Acquiring PPE and Measurement:
1. Property acquired by direct cash purchase - "Cash price equivalent at the recognition date". PPE is
measured at cash price equivalent on the date it was acquired and recognized. If two or more PPEs were
bought at a lump-sum (basket) price, measurement of each PPE will be determined through a fraction based
on their fair values.
 
2. Property acquired on credit or on account - Invoice price minus the discount regardless of whether the
discount is taken or not. If discount is not taken, the should-be amount of the discount shall be charged as
expense 'Purchase Discount Lost'. PAS 16 requires that the amount of the PPE net of discount to be initially
recorded. Then another entry is to be made regarding the discount availed.
 
3. Property acquired by installment - entities can acquire PPEs through deferred payment where payment
delayed for period of time, usually more than a year. If an asset is offered at a cash price and instalment
price and is purchased at the instalment price, the asset is recorded at the CASH PRICE
There is an order of priority to measure/recognize the PPE acquired on deferred credit terms:
1) cash price equivalent
2) If no established cash price, down payment plus present value of note
 
 
4. Asset acquired by issuing share capital - according to GAAP, if shares are issued for consideration,
proceeds are measured at fair value of consideration received
 There is also an order of priority if PPE is acquired through issuance of share capital:
1.) Fair Value of the consideration received
2.) Fair Value of the Share Capital
3.) Par Value of the Share Capital
  
5. Asset acquired by issuing bonds payable - If bonds payable are used to acquire PPE, the financial
liability must be measured at fair value plus transactions costs (PFRS 9 5.1.1)
 There is an order of priority observed where the assets will be measured at an amount equal to:
1.) Fair Value of the Bonds Payable
2.) Fair Value of the asset received
3.) Face amount of the bonds payable
 
 
6. Exchange - when an asset is received, cash is exchanged and vice versa. The measurement depends
whether the transactions has or has no commercial substance. Transaction w/ commercial substance - if
the cash flow will differ/change significantly because of the transaction.
 The order of priority if the transaction has commercial substance:
1.) Fair Value of asset given plus cash paid less cash received
2.) Fair Value of asset received
3.) Carrying amount of asset given plus cash payment less cash received
*Gains/Losses = compare fair value of asset and carrying amount
 
If transaction has no commercial substance, asset is measured at carrying amount, no gains nor losses
computed.
 
*Fair Value + Cash Payment = pov of payor
*Fair Value of asset - cash received = pov of the recipient
 
 
7. Trade in - A form of exchange that involves a dealer of the asset, and ALWAYS has commercial
substance (cash flow will differ significantly). If the asset is acquired through trade in, an order of priority
is observed:
1.) Fair Value of the asset plus cash payment
2.) Trade in Value of the asset given plus cash payment 
 
8. Donation - measures asset at its fair value
 
9. Construction - A PPE that was self-constructed is measured with similar principles as that of an
acquired PPE. Such costs include: direct costs of materials, direct costs of labor, indirect costs and
incremental overhead identifiable to the construction.
 
Derecognition of PPE
This means that PPE with its related accumulated depreciation account shall be removed from the accounts in
the balance sheet. PPE is derecognized on:
a. The carrying amount shall be derecognized on disposal or when there is no future benefits from
use/disposal
 
b. Gain/loss arising from the derecognition shall be determined as the difference between the net
disposal proceeds and the carrying amount of the item.
 
Item of PPE held for sale within one year from the date of classification as held for sale shall be excluded
from PPE but is presented as current asset still.
 Non-current asset classified as held for sale is measured at lower of carrying amount or fair value
minus cost of disposal.
 Non-current asset classified as held for sale shall not be depreciated
 
 

 
PAS 20: Government Grant
 
Government Grant - assistance by the government in the form of transfer of certain resources to an entity
in return for past or future compliance with certain conditions relating to the operating activities of the
business.
*subsidy, subvention, premium
 
Recognition and Measurement:
Government grant, which including nonmonetary grant at fair value, shall be recognized when there is a
reasonable assurance that:
a. The entity will comply with the conditions of the grant
b. The grant will be received
 
Classifications of Government Grant
a. Grant related to asset - the primary condition for the grant is that the entity will
purchase/construct/acquire a long term asset
 
a. Grant related to income - grant other than grant related to asset
 
Government Grants related to Rule for Recognition
Income
1. Specific Recognized as income over the period of
expenses related expenses
1. Depreciable Recognized as income over the periods and
Asset in proportion to the depreciation of the
related asset
1. Non- Recognized as income over periods which
depreciable Asset bear the cost of meeting conditions
1. Receivable Recognized as income of the period in which
as compensation for expenses it becomes receivable
or losses already incurred
 
Accounting for Government Grant
The government grant shall be recognized as income on a systematic basis over the periods in which the
entity recognizes as expenses the related costs for which the grant is intended to compensate.
*if the related expense is not yet recognized, the income from the government is also not yet recognized
 
Example 1. An entity received P15,000,000 from government for defraying safety and environmental
expenses over the period of three years (1st yr - 2,000,000; 2nd yr - 3,000,000; 3rd yr - 5,000,000; Total
expenses = 10,000,000)
 
Example 2: Entity received P50,000,000 from Australian government for acquisition of chemical facility with
estimated cost P80,000,000 and useful life of 5 years.
 
Example 3. An entity was granted a large tract of land in Mindanao by the national government. The fair
value of the land is P60,000,000; the grant requires that the entity shall construct a refinery on the site. The
cost of the refinery is to be P100,000,000 and is useful for 20 years. Accordingly P60,000,000 is allocated
over 20 years.
Example 4. An entity received grant of P50,000,000 from USA government to compensate for massive
losses incurred due to recent earthquake. Accordingly, the grant is recognized as income immediately.
 
Presentation of Government Grant
Grant related to asset Grant related to income
a. By setting the a. Grant is presented in
grant as deferred grant income income statement separately or under
'other income'
a. By deducting a. The grant is directly
the grant from the carrying deducted from the related expenses
amount of the asset
 
Example 5. At the beginning of current year, an entity purchased equipment for P5,000,000 and received a
grant of P500,000. The equipment is depreciated on straight line basis over 5 years with estimated residual
value of P200,000.
 
Repayment of Government Grant
Grant becomes repayable because of non-compliance with conditions shall be accounted for as change in
accounting estimate. If relating to income, shall be applied first against any unamortized deferred income
and excess is recognized as an expense.
 
If relating to asset, it will be recorded by increasing the carrying amount of asset. And the cumulative
additional depreciation that would've been recognized in the absence of grant is recognized as expense.
 
Example 6. On 1/1/20 an entity received P6,000,000 to compensate for costs to be incurred for planting
100 trees every year for a period of 3 years. But on 1/1/21 grant became repayable because entity never
planted the trees in 2020.
 
Example 7. On 1/1/20 entity received P5,000,000 related to a building that is purchased on same date at a
cost of P25,000,000 with useful life of 10 years. On 1/1/22 the entire amount became repayable due to
non-compliance.
*deferred income approach
*deducted from the asset approach
 
Grant of interest-free loan
o Forgivable loan from government - is treated as government grant when there is reasonable
assurance that the entity will meet terms of forgiveness of loan
o Benefit of a government loan - with a NIL or below-market rate of interest is treated as
government grant (difference between face amount and present value of loan)
 
Example 8. On 1/1/20 entity is received an interest free loan for P5,000,000 for a period of 3 years
evidenced by promissory note. Market interest rate for similar loan is 5% and present value of 1 at 5% for 3
periods is 0.8638. The gov. granted the loan if entity employs at least 0% of work force from area where the
entity is located for 3 years.
 
The diff. between the face amount of the loan and present value is recognized as discount on note payable
and grant income to be amortized over the term of the loan of three years using effective interest method.
 
Government Assistance – action by government designed to provide an economic benefit specific to an
entity or range of entities qualifying under certain criteria.
 
Examples of Government Assistance
o Free technical or marketing advice
o Provision of guarantee
o Government procurement policy that is responsible for a portion of the entity’s sales.
 
Required disclosures related to government grant
 a. Accounting policy and method of presentation in the FS.
b. Nature and extent of government grant
c. Unfulfilled conditions and other contingencies.
PAS 23: Borrowing Cost
 
Borrowing Cost - is defined as the interests and other costs that are incurred by the entity in connection with
borrowing of funds. The costs of construction, acquisition or production of an asset are capitalized. It
specifically includes:
a. Interest expense calculated using effective interest method
b. Finance charge with respect to a finance lease
c. Exchange difference arising from foreign currency borrowing to the extent that it is regarded as an
adjustment to interest cost.
 
Qualifying Asset - refers to the asset takes a necessarily substantial period of time to become ready for its
intended use or sale
Examples:
1. Manufacturing plant
2. Power generation facility
3. Intangible asset
4. Investment Property
 
Excluded from Capitalization
1. Assets measured at fair value like biological assets
2. Inventories that are manufactured or mass produced in a repetitive basis like maturing whisky, even if it
takes a long time
3. Assets already ready for intended use or sale when acquired
 
If the costs are directly attributable to the production, construction or acquisition of the qualifying asset, the
borrowing costs are required to be capitalized. The said borrowing costs are those that would have been
avoided if the expenditure on the qualifying asset had not been made.
 
If the costs are not directly attributable, they shall be expensed as they are incurred.
 
Asset financed by specific borrowing
Funds are borrowed specifically for the acquisition of the qualifying asset. Thus, Capitalizable Borrowing Cost
= Actual Borrowing Cost less any Investment Income from temporary investment
 
Example: At the beginning of the current year, an entity obtained a loan of P4,000,000 at an interest rate of
10% specifically for the construction of a new building. The total borrowing cost incurred amounted to
P250,000 for the current year and due to it being temporarily invested, it earned an interest income of
P40,000. The building was completed at year end. Find the capitalizable borrowing cost.
 
Asset financed by general borrowing
Funds are borrowed generally and is used for acquisition of a qualifying asset. Thus, Capitalizable Borrowing
Cost = Total Annual Borrowing Cost multiplied by Capitalization Rate or Average Interest Rate. The
Capitalization Rate is equal to the Total Annual Borrowing Cost divided by Total General Borrowing Cost
 
*the capitalizable borrowing cost shall not exceed the actual interest incurred, and any investment income
shall not be deducted to the capitalizable borrowing cost
 
Example: An entity had the following borrowings on 1/1/20 and were used for general purposes and proceeds
were partly used to finance the construction of a new building; 10% 3,000,000 bank loan, 12% 1,500,000
short-term bank note, and an 8% 3,500,000 long-term note. The construction was started on 1/1/20 and
completed on 12/31/20. Expenditures were:
1/1 400,000
3/1 1,000,000
6/30 1,200,000
9/30 1,000,000
12/31 400,000
 
Asset financed both by specific and general borrowing
Example: At the beginning of the current year, an entity borrowed P1,500,000 at an interest of 10% specifically
for construction of new building. The entity had also generally borrowed a 5-year 8% of P7,000,000. The
construction started on 1/1/20 and ended on 12/31/20 with these expenditures:
1/1 500,000
4/1 1,000,000
5/1 1,500,000
9/1 1,500,000
12/31 500,000
 
Construction period more than one year
Example: An entity had these following outstanding borrowings during 2020 and 2021:
Specific borrowing - 2,000,000 (15%)
General borrowing - 15,000,000 (12%)
 
The entity began the construction of a new building on 1/1/20 and ended on 12/31/21 with the following
expenditures:
1/1/20 2,000,000
7/1/20 4,000,000
11/1/20 3,000,000
7/1/21 1,000,000
 
More than one year but less than 2 years
Example:
An entity had these following outstanding borrowings during 2020 and 2021:
Specific borrowing - 2,000,000 (15%)
General borrowing - 15,000,000 (12%)
 
The entity began the construction of a new building on 1/1/20 and ended on 8/31/21 with the following
expenditures:
1/1/20 2,000,000
7/1/20 4,000,000
11/1/20 3,000,000
7/1/21 1,000,000
 
**If an asset is financed by specific borrowing but portion is used for working capital purposes, the borrowing
is then treated as general borrowing.
 
Commencement of Capitalization
Borrowing costs would be capitalized as part of the cost of the qualifying asset once:
a. An entity incurs expenditures for the asset
b. An entity incurs borrowing costs
c. An entity undertakes activities necessary to prepare the asset for intended use or sale
 
Activities necessary to prepare
There are activities that are needed in order to prepare the asset for its intended use/sale and encompasses
more than just the physical construction of it.
*Technical and Administrative Work; drawing up plans and obtaining permit
**merely holding asset without any associated development activity will not qualify for capitalization.
 
Suspension of capitalization
a. Capitalization of borrowing costs will be suspended when active development of qualifying asset is
interrupted, so they are expensed.
b. Capitalization of borrowing costs will not be normally suspended during periods when substantial
technical and administrative work are being carried out.
c. Capitalization of borrowing costs will not be suspended due to temporary delay which is necessary to
part of the process of getting the asset ready.
 
Cessation of capitalization
Capitalization of borrowing cost ceases when substantially all the activities which are necessary to prepare the
qualifying asset are complete.
 
Disclosures related to borrowing costs
a. Amount of borrowing costs capitalized
b. Capitalization rate used to determine the amount of capitalizable borrowing costs