Module 7 - PAS 16 PPE

OVERVIEW
PAS 16 prescribes the accounting treatment for Property, Plant and Equipment
(PPE). It addresses the principal issues of recognition as assets, measurement of
carrying amount and recognition of depreciation charges.
In this module it is expected that learners will be able to apply the basic
principles and concept of PAS 16 such as recognition criteria, initial and subsequent
measurement of property, plant and equipment.
LEARNING OUTCOMES
At the end of this module, you should be able:
 To know the definition of property, plant and equipment.
 To know and understand the recognition criteria, initial measurement and the
items included of property, plant and equipment.
 To understand the subsequent measurement of property, plant and equipment
as to cost model or revaluation model.
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7.0 PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment (PPE) – are tangible assets that are held for use
in production or supply of goods or services, for rental to others, or for administrative
purposes, and are expected to be used during more than one period.
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Major Characteristics of PPE
a. Tangible assets – items of PPE have physical substance.

b. Used in normal operations – items of PPE are used in the production or supply of
goods or services, for rental, or for administrative purposes
c. Long term in nature – items of PPE are expected to be used from more than a year.
Examples of items of PPE
a. Land used in business

b. Land held for future plant site
c. Building used in business
d. Equipment used in the production of goods
e. Equipment held for environmental and safety reasons
f. Equipment held for rentals
g. Major spare parts and long-lived stand-by equipment
h. Furniture and fixture
i. Bearer plants
Recognition
The cost of an item of property, plant and equipment shall be recognized as an
asset only if:
a. it is probable that future economic benefits associated with the item will flow to the
entity; and
b. the cost of the item can be measured reliably.
Initial Measurement
An item of PPE is initially measured at its cost. Elements of cost:
a. Purchase price, including non-refundable purchase taxes, after deducting trade
discounts and rebates.
b. Costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by the
management.
c. Initial estimate of the cost of dismantling and removing the item and restoring the
site on which it is located for which an entity has a present obligation.
Examples of directly attributable costs

a. Costs of employee benefits arising directly from the construction or acquisition of
PPE.
b. Costs of site preparation
c. Initial delivery and handling costs
d. Installation and assembly costs
e. Testing costs, net of disposal proceeds of samples generated during testing
f. Professional fees
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Costs not qualifying for recognition – examples of costs that are expensed rather
than recognized as element of cost of PPE are:
a. Cost of opening a new facility.
b. Cost of introducing a new product or service, including cost of advertising and
promotion.
c. Cost of conducting business in a new location or with a new class of customer,
including cost of staff training.
d. Administration and other general overhead cost.
e. Cost incurred while an item capable of operating in the manner intended by
management has yet to be brought into use or is operated at less than full capacity.
f. Initial operating loss.
g. Cost of relocating or reorganizing part or all of an entity’s operations.
7.1 Measurement of cost

The cost of an item of PPE is measured at the cash price equivalent at the
acquisition date. If payment is deferred beyond normal credit terms, the difference
between the cash price equivalent and the total payment is recognized as interest over
the period of credit (unless such interest is capitalized in accordance with PAS 23 Borrowing
Costs). The cost of a PPE acquired through an exchange of non-monetary assets is
measured using the following order of priority:
1. Fair value of asset given up
2. Fair value of asset received
3. Carrying amount of asset given up
If the exchange lacks commercial substance, the PPE acquired is measured at the
carrying amount of the asset given up.
Subsequent Measurement - subsequent to initial recognition, an entity shall choose

either:
(a) Cost model - a PPE is carried at its cost less any accumulated depreciation and
any accumulated impairment losses.
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 or, where applicable, the amount attributed to that asset when
initially recognized in accordance with the specific requirements of other
PFRSs.”
Depreciation - is the systematic allocation of the depreciable amount of an asset
over its estimated useful life.
Straight-line method of Depreciation - depreciation is recognized evenly over the
life of the asset by dividing the depreciable amount by the estimated useful life.
Depreciation = (Historical cost – Residual value)

Estimated useful life Page 3 of 6
illustration: On January 1, 20x1, Entity A acquires equipment for a total cost of
P1,000,000. The equipment is estimated to have a useful life of 5 years and a
residual value of P50,000. How much is the carrying amount of the equipment
on December 31, 20x3?
Solution:
Depreciation = 1,000,000 – 50,000 = 190,000
5 years
Jan. 1, 20x1 1,000,000

20x1 190,000 190,000 810,000
20x2 190,000 380,000 620,000
20x3 190,000 570,000 430,000
(b) Revaluation model – a PPE is carried at its fair value at the date of the
revaluation less any subsequent accumulated depreciation and subsequent
accumulated impairment losses.
Fair value is “the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the
measurement date.”
illustration: on January 1, 2019, Garden Company reported the following

information:
Building 30,000,000
Accumulated depreciation 12,000,000
The building was measured using the cost model and depreciated on a straight
line basis over 10-year period. On January 1, 2019, the management decided
to change the basis of measurement from the cost model to the revaluation
model. The equipment was revalued at the fair value of P27,000,000 with no
change in useful life. What is the revaluation surplus on January 1, 2019?
Solution:
Cost 30,000,000
Accumulated depreciation (12,000,000)
Carrying amount 18,000,000
Fair value 27,000,000

Carrying amount 18,000,000
Revaluation surplus – January 1 9,000,000
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7.3 ASSET ACQUIRED
Acquisition on a Cash Basis
The cost of an item of property, plant and equipment is the cash price equivalent
at the recognition date. The cost of asset acquired on a cash basis simply includes the
cash paid plus directly attributable costs such as freight, installation cost and other
cost necessary in bringing the asset to the location and condition for the intended use.
Acquisition on account
When an asset is acquired on account subject to a cash discount, the cost of

the asset is equal to the invoice price minus the discount, regardless of whether the
discount is taken or not. Cash discounts are generally considered as reduction of cost
and not as income.
Acquisition on installment
When payment for item of property, plant and equipment is deferred beyond
normal credit terms, the cost is the cash price equivalent. In other words, if an asset
is offered at a cash price and at an installment price and is purchased at the installment
price, the asset shall be recorded at the cash price. The excess of the installment price
over the cash price is treated as an interest to be amortized over the credit period.
Issuance of share capital
If shares are issued for consideration other than actual cash, the proceeds shall
be measured by the fair value of the consideration received. Accordingly, where a
property is acquired through the issuance of share capital, the property shall be
measured at an amount equal to the following in the order of priority:
a. Fair value of the property received
b. Fair value of the share capital
c. Par value or stated value of the share capital
Cessation of capitalizing costs to PPE

Recognition of costs in the carrying amount of an item of PPE ceases when the
item is in the location and condition necessary for it to be capable of operating in the
manner intended by management.
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Derecognition
The carrying amount of an item or PPE shall be derecognized:
a. on disposal; or
b. when no future economic benefits are expected from its use or disposal
SUMMARY
https://www.youtube.com/watch?v=4caFrcntTi8
ASSESSMENT TASK
Multiple choice. Refer to moodle/LMS ( Quiz – Module 7 )
REFERENCES
Millan, Z. B. (2020). Conceptual Framework and Accounting Standards.

Sampaloc, Manila: Bandolin Enterprise
Valix, Conrado. T (2020). Conceptual Framework and Accounting Standards.

Manila: GIC Enterprises & Co., Inc.
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OVERVIEW

a. Tangible assets – items of PPE have physical substance.

Examples of items of PPE

a. Land used in business

Examples of directly attributable costs

7.1 Measurement of cost

Subsequent Measurement - subsequent to initial recognition, an entity shall choose

Depreciation = (Historical cost – Residual value)

Jan. 1, 20x1 1,000,000

illustration: on January 1, 2019, Garden Company reported the following

Fair value 27,000,000

Acquisition on a Cash Basis

When an asset is acquired on account subject to a cash discount, the cost of

Issuance of share capital

Cessation of capitalizing costs to PPE

Millan, Z. B. (2020). Conceptual Framework and Accounting Standards.

Valix, Conrado. T (2020). Conceptual Framework and Accounting Standards.

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