Property, Plant and Equipment

à Tangible assets
à Used in the normal business operations
a. production or supply of goods and services
b. for rental to others
c. for administrative purposes
à Expected to be used for more than one period
RECOGNITION
 js stated in Pj 16 paragraph 7
à The cost of an item of Property, Plant and Equipment
shall be recognized as an asset if & only if:
a. it is probable that future economic benefits
associated with the item will flow to the entity
b. the cost of the item can be measured reliably

à pare parts and servicing equipment are considered as

inventory and are recognized as profit or loss when
consumed. They are recognized as PPE if:
1. they are expected to be used for more than one
period
2. they are used only in connection with PPE item
Initial Costs
à ome PPE item are acquired for safety and
environmental reasons
ubsequent Costs
à Day to day servicing of PPE are not recognized in its
carrying amount

à Parts of some items of Property, Plant and Equipment

may require replacement at regular interval. They are
recognized as PPE if they met the recognition criteria
stated in paragraph 7.

à If major inspection is a condition of continuing to operate

an i\tem of PPE, such inspection is recognized in the
carrying amount if the recognition criteria is met.
hEj UREhENT
 I. jt Recognition
à PPE shall be measured at cost
Cost is the amount of cash or cash
equivalents paid or the fair value of the
other consideration given to acquire an
asset at the time of its acquisition or
construction.
à The cost of PPE includes not only the
purchase price but also other
expenditures incurred in acquiring and
preparing the PPE for its intended use.
à Recognition of the carrying amount of the
asset ceases when the asset has been
brought to location and condition
necessary for it to operate as intended by
the management.

à There are some incidental operations that

may occur before or during an item is
being constructed. These incidental
operations should be recognized as profit
or loss or included in their classification as
income or expenses.
The cost of PPE item may vary due to
the mode of acquisition:
1. Cash
- cash price equivalent

2. On jccount/ with credit terms

- net of discount

3. Deferred Payment (Installment)

- the difference between the total payment
and cash price equivalent is the interest
ã. Exchange of Non-honetary jssets
- the cost of the asset is measured at its fair vale
unless:
(a) the transaction lacks commercial substance

(b) the fair value of neither the asset received nor

the asset given up is reliably measurable

jn exchange transaction has commercial substance if:

1. the cash flow of the asset received differs from
the cash flows of the asset transferred
2. the entity-specific value of the portion of the
entity¶s operations affected by the transaction
changes as a result of the exchange
3. the difference between the first two is
significantly relative to the fair value of the
assets exchanged
à Ifthe acquired item is not measured at
fair value, its cost is measured at the
carrying amount of the asset given up
. Construction
- measured at cost including all
expenses incurred to build the asset and
prepare it for its intended use.
- any internal profits are eliminated in
arriving at such costs
- the cost of abnormal amounts of
wasted material, labor or other
resources incurred in self-constructing an
asset is not included in the cost of the
asset
 II. jfter Recognition
j. Cost hodel
Cost less jccumulated Depreciation &
jccumulated Impairment Loss

B. Revaluation hodel
Fair Value Less ubsequent jccumulated
Depreciation & Impairment Loss
Fair Value (harket Value) is determined
by appraisal
à If there is no market-based evidence of fair
value, it should be estimated using an income or
a depreciated replacement cost

à Changes in fair value determines the frequency

of revaluation. Revaluation of PPE must be done
annually. If the fair value of the revalued amount
differs significantly from its fair value, further
revaluation is required. If the carrying amount
does not differ significantly from the fair value, it
may be necessary to revalue the item only every
three to five years
à The accumulated depreciation of a PPE
item that is revalued should be treated any
of these ways:
1. restated proportionately with the
change in the gross carrying amount
2. eliminated against the gross carrying
amount of the asset and the net amount
restated to the revalued amount of the
asset

à If
an item of PPE is revalued, all the
member of its class should be revalued
à Ifthe carrying amount increases due to
revaluation, the increase must be credited
directly in equity under the heading
Revaluation urplus

à Ifthe carrying amount of the asset

decreases due to revaluation:
a. decrease shall be debited directly to
Revaluation urplus if there is an existing
credit balance in respect of that asset
b. if there is no existing credit balance,
decrease shall be recognized as loss
à Revaluationsurplus may be transferred to
retained earnings when:

1. asset is disposed
2. or when the asset is being used by
the entity; the amount of revaluation
surplus transferred would be the difference
between depreciation based on
revalued carrying amount and depreciation
based on original cost
Depreciation
à Parts of an item of PPE is to be depreciated if they
have significant cost that are related to the total
cost of PPE

à ignificant parts of the same item with the same

useful life and depreciation method may be
grouped together when determining the
depreciation charge

à The remaining parts should be depreciated using

approximation techniques in a manner that
faithfully represents the consumption pattern
and/or useful life of its part. But an entity may
depreciate the remaining part separately.
à Depreciation charge shall be recognized in profit
or loss unless it is a part of the cost of other
asset
Ex. Depreciation of manufacturing plant &
equipment is included in the cost of conversion
of inventories

à Depreciable amount is allocated on a systematic

basis over the useful life

à Residual value and useful life should be

reviewed at least each financial year-end, if
estimates differs from expectation, changes are
accounted for as a Change in jccounting
Estimate (Ij 8)
à Residual value of an asset may increase
to an amount equal to or greater than the
asset¶s carrying amount

à Depreciation starts when PPE is already

available for use, it ceases when PPE is
classified as held for sale

à Idle PPE are still depreciated

à In determining the useful life, the following
factors must be considered
a. expected usage of the asset
b. expected physical wear and tear
c. technical or commercial
obsolescence
d. legal or similar limits in the use of the
asset
à Estimation of the useful life of PPE may be
based from the company¶s experience with
similar asset
à Land and Building are separable assets

à Depreciationmethod reflects the pattern in

which the assets¶ future economic benefits
are expected to be consumed by the entity

à jny changes in the pattern of consumption

of the future economic benefit may be
accounted for as a Change in jccounting
Estimate (Ij 8)
à Depreciation hethods:

1. traight Line hethod - depreciation change is

constant over the useful life of the asset if there
is no significant change in the residual value and
useful life of the asset

2. Diminishing Balance hethod - decreasing

charge over the useful life of the asset

3. Unit of Production hethod ± based on expected

use or output
à Derecognition ± assets are removed in the
accounts

1. On disposal (sale, by entering into finance

lease or by donation)
2. when no future economic benefits are
expected from its use or disposal

à Gain or Loss on disposal shall be recognized in

profit or loss.

à Gains are not recognized as revenue but as

other income
à Replaced part of an item PPE shall be
derecognized regardless whether they are
depreciated separately or not

à Gain or loss on disposal is the difference

between net disposal proceeds and
carrying value
PRE ENTjTION
à PPE are long-term assets and therefore
they are included in the Non-Current
jssets section of the Balance heet as a
separate line item. Only the net carrying
amount is reflected in the face of the
Balance heet. The items with their
corresponding PPE are to be found in the
Notes to the Financial tatement
DI CLO URE
1. The measurement basis used for determining
the gross carrying amount

2. The depreciation method used

3. The useful lives or the depreciation rate used

ã. The gross carrying amount and the

accumulated depreciation (aggregated with
accumulated impairment losses) at the
beginning and at the end of the period

. j reconciliation of the carrying amount at the

beginning and end of the period
 END«.

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