CFAS Reviewer

PAS 16: Property, Plant & Equipment

PAS 16 prescribes the accounting treatment for PPE and addresses the principal issues of recognition as
assets, measurement of carrying amount, and recognition of depreciation charges.

PAS 16 applies to all items of PPE except

● Assets classified as held for sale
● Biological assets other than bearer plants
- PAS 16 applies to bearer plants but it does not apply to the produce on bearer
plants.
● The recognition and measurement of exploration and evaluation assets.
● Mineral rights and mineral reserves such as oil, natural gas, and similar non-
regenerative resources.

Property, Plant & Equipment

● Tangible assets (physical substance)
● Used in business ( in the production or supply of goods or services, for rental, or
administrative purposes)
● Long-term in nature ( expected to be used for more than one period)

Examples:
➔ Land used in business
➔ Land held for a future plant site
➔ A building used in business
➔ Equipment used in the production of goods
➔ Equipment held for environmental and safety reasons
➔ Equipment held for rentals
➔ Major spare parts and long-lived stand-by equipment
➔ Furniture & fixtures
➔ Bearer plants

The following are not PPE:

➔ Land held for speculation and held for an undetermined future use
➔ Classified as investment property under PAS 40 investment property
➔ Held for sale in the ordinary course of business
➔ Classified as held for sale under PFRS 5
➔ Intangible assets
➔ Minor spare parts and short-lived stand-by equipment
Recognition

Item of PPE is recognized if

● The future economic benefits associated with the item will flow to the entity.
● The cost of the item can be measured reliably.

An item of PPE is recognized if they meet the definition of PPE (e.g., Spare parts, stand-by
equipment, and servicing equipment because they are expected to be used for more than one
period); otherwise, they are classified as inventory.

Initial measurement

An item of PPE is initially measured at cost.

Illustration:

Entity A acquires equipment on January 1, 20x1. Information on costs is as follows:

The purchase price, gross of trade discount 1,000,000

Trade discount available 10,000
Freight costs 20,000
Testing costs 30,000
Disposal proceeds of samples generated 5,000
during testing
Present value of estimated costs of dismantling the 6,209
Equipment at the end of its useful life

The initial cost of the equipment:

The purchase of price, net of trade discounts (1M - 10K) 990,000

Freight costs 20,000
Testing costs 30,000
Present value of dismantlement costs 6,209
Initial measurement 1,046,209

Incidental operations
Income and related expenses of incidental operations are recognized in profit or loss, and
hence do not affect the measurement of cost of a PPE (e.g., a vacant lot may be temporarily
used as parking space before or during the construction of a building. The income and related
expenses from the parking space are recognized in profit or loss.)

Subsequent expenditures on recognized PPE

Capitalization of costs ceases when the PPE is in the location and condition necessary for it to
be capable of operating in the manner intended by management. Therefore, costs incurred in
using or redeploying a PPE are not capitalized.

An entity used the recognition criteria when determining whether subsequent expenditures can
be capitalized. PAS 16 specifically addresses the capitalization of the following subsequent
expenditures:

a. Replacement costs - Some PPE have parts that need to be replaced e,g., seats in
aircraft. The cost of replacing a part of an item of PPE is capitalized if the recognition
criteria are met.

b. Major inspections - Some PPE require regular major inspections as a condition for
their continued operation. For example, a cruise ship may not be permitted to continue
sailing without inspection. Major inspections are accounted for similar to replacement
costs, i.e., the cost of a major inspection is capitalized while the carrying amount of
previous inspections is derecognized.

Capitalization Period

Begins when:
● Expenditures for the asset have been made.
● Activities for readying the asset are in progress.
● Interest costs are being incurred.

Ends when:
● The asset is substantially complete and ready for use.

Subsequent Measurement
 An entity shall choose either the cost model or the revaluation model as its
accounting policy and apply that policy to an entire class of PPE.

❖ Cost Model

Under this model, PPE is carried at its cost less any accumulated depreciation and any
accumulated impairment losses.

Cost - the amount of cash or cash equivalents paid or the fair value of 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 by the
specific requirements of other PFRSs.

Depreciation

● Depreciation - a systematic allocation of the depreciable amount of an asset over its

useful life.

● Depreciable amount - the cost of an asset, or other amount substituted for cost, less
its residual value.

● Residual Value - the estimated amount that an entity would currently obtain from
disposal of the asset, after deducting the estimated costs of disposal, if the asset were
already of the age and in the condition expected at the end of its useful life.

● Useful Life - the period over which an asset is expected to be available for use by an
entity; or the number of production or similar units expected to be obtained from the
asset by an entity.

● Carrying amount - the amount at which an asset is recognized after deducting any
accumulated depreciation and accumulated impairment losses.

Each significant part of an item of PPE is depreciated separately (e.g., the engines and airframe
of an aircraft)

Depreciation starts when the asset is available for use, in the manner intended by
management.

Depreciation stops when the asset is:

 ➔ Derecognized ( sold or disposed of)
➔ Classified as held for sale under PFRS 5
➔ Fully depreciated
- An asset is fully depreciated when its carrying amount is zero or equal to its residual
value. However, if the residual value decreases below the carrying amount, the decrease is
recognized as an additional depreciation.

Depreciation does not cease when the asset becomes idle or is retired from active use.

Depreciation Method

PAS 16 mentions three examples: the straight-line method, diminishing balance

method, and units of production method. However, PAS 16 does not prescribe any specific
method. It depends on the management’s judgment. Therefore, PAS 16 requires the
management to choose the method that best reflects the expected pattern of consumption of
the future economic benefits embodied in the asset.

PAS 16, however, prohibits the use of a depreciation method that is based on the revenue.

Illustration: Straight-line method of depreciation

On January 1, 20x1, Entity A acquired equipment for a total cost of ₱1,000,000. The equipment is
estimated to have a useful life of 5 years and a residual value of ₱50,000.

The annual depreciation is:

Cost 1,000,000
Less: Residual value (50,000)
Depreciable amount 950,000
Divide by: Useful life 5
Annual depreciation 190,000

The carrying amount of the equipment at the end of 20x1 is:

Cost 1,000,000
Accumulated depreciation (190,000 x 1yr) (190,000)
Carrying amount - 12/31/20x1 810,000
 ❖ Revaluation Model

Under this model, a PPE is carried at its fair value at the date of the revaluation less any
subsequent accumulated depreciation and subsequent impairment losses.

● Fair value - 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.

Assets whose fair values fluctuate significantly may need to be revalued annually. Assets
whose fair values do not fluctuate significantly may be revalued every three or five years.

Revaluations are applied to an entire class of PPE. A class of PPE is a grouping of assets of
similar nature. Examples of separate classes include:

➔ Land
➔ Land and buildings
➔ Machinery
➔ Ships
➔ Aircraft
➔ Motor vehicles
➔ Furniture and fixtures
➔ Office equipment; and
➔ Bearer plants

Accounting for Revaluations

An increase or decrease in the carrying amount of a PPE resulting from revaluation is

recognized in other comprehensive income and accumulated in equity under the “Revaluation
surplus” account, except for the following:

a. An increase that represents a reversal of a previous impairment loss is recognized in

profit or loss as impairment gain.
b. A decrease over the credit balance in the Revaluation surplus of the asset is recognized
in profit or loss as an impairment loss.
The revaluation increase or decrease is computed the following formula:

Fair value xx
Less: Carrying amount (xx)
Revaluation surplus xx

Illustration:

On December 31, 20x1, Entity A determines that it is a building with a historical cost of
₱20,000,000 and accumulated depreciation of ₱5,000,000 has a fair value of ₱17,000,000.

The revaluation surplus is computed:

Fair value 17,000,000

Less: Carrying amount (20,000,000 - 5,000,000) (15,000,000)
Revaluation surplus 2,000,000

After revaluation, a revalued asset is depreciated based on its fair value.

Derecognition
➢ refers to the removal of a previously recognized asset or liability from the entity’s
statement of financial position.

The carrying amount of a PPE is derecognized when:

➔ It is disposed (sold)
➔ No future economic benefits are expected from the asset’s use or disposal

Disclosure

General disclosure for each class of PPE:

● The measurement bases used
● The depreciation methods used
● The useful lives or depreciation rates used
● The gross carrying amount and the accumulated depreciation (aggregated with
accumulated impairment losses) at the beginning and end of the period.
● A reconciliation of the carrying amount at the beginning and end of the period shows
additions, disposals, and other changes.

Additional disclosures:
 ● Restrictions on title and PPE pledged as security for liabilities
● Expenditures to construct PPE during the period
● Contractual commitments for the acquisition of PPE
● Compensation for impairment losses
● Proceeds and cost of items produced during testing of PPE
● Changes in estimates relating to PPE

Disclosures for revalued PPE:

● Date of revaluation
● Whether an independent valuer was involved
● The carrying amount of each revalued class of PPE if they had been measured under
the cost model
● Revaluation surplus, including changes during the period and any restrictions on its
distribution to shareholders

Encouraged disclosures:
● Carrying amount of temporarily idle PPE
● Gross carrying amount of any fully depreciated PPE that is still in use
● Carrying amount of PPE retired from active use and not classified as held for sale by
PFRS 5
● When the cost model is used, the fair value of PPE when this is materially different from
the carrying amount

Other information about PAS 16 (Quiz)

● When an ordinary repair occurs, several periods will usually benefit. False
● Fences and parking lots are reported in the statement of financial position as Land
improvements.
● Best describes the conceptual rationale for the methods of matching depreciation
expense with revenues. Systematic and rational allocation
● Items are capitalized as part of PPE when costs are directly attributable to bringing
the asset to the intended location and condition.
● Impairment losses should never be reversed as Loss on goodwill.
● It does not form part of the initial cost of an item of PPE. Advertising and promotional
costs.
● The asset that should be reduced the carrying amount first when allocating an
impairment loss is Goodwill.
● In measuring an impairment loss, PFRS uses a fair value test.
● The assumption on which straight-line method of depreciation is based on Service
value declines as a function of time rather than use.
● This does not affect the determination of depreciation charges on an item of PPE.
Repairs and Maintenance
● An asset is not considered to be fully depreciated when the asset’s cost is equal to its
carrying amount.
● If assets are to be disposed of, the recoverable amount is fair value less cost to sell.
● Estimates of future cash flows normally would cover projections over a maximum of 5
years.
● Assets under construction for a company's use do not qualify for interest cost
capitalization. False
● Assets purchased on long-term credit contracts should be recorded at the present
value of the consideration exchanged. True
● If a nonmonetary exchange lacks commercial substance, and cash is received, a partial
gain or loss is recognized. False
● The single cost of acquiring land and an unusable old building is allocated between
land and building based on relative fair values. False
● PAS 36 Impairment of Assets applies to inventories.

Remember:

Idle - a project or asset that is not being used and therefore is not
generating revenue.

Depreciation = (Cost or Fair value - Residual value)

(straight-line method) Useful life

Revaluation surplus = Fair value less Carrying amount

Gain or loss on disposal = Net disposal proceeds - Carrying amount

PAS 19: Employee Benefits

Prescribes the accounting for employee benefits by employers except employee benefits within
the scope of PFRS 2 and reporting by employee benefit plans to which PAS 26

Employee benefits
➢ All forms of consideration given by an entity in exchange for service rendered by
employees or for the termination of employment.
➢ It can be in any form, i.e., cash, goods or services and may be provided to either the
employees or their dependents.

Recognition
● Are recognized as expense when employees have rendered services, except to the
extent that the employee benefits form part of the cost of another asset.
● Employee benefits already earned by employees but not yet paid are recognized as
liabilities.
● It may arise from contractual agreements (e.g., employment contracts), legislation
(Social Security “SSS” Contributions), or informal practices that create constructive
obligations.

Four Categories of Employee Benefits

● Short-term employee benefits
● Post-employment benefits
● Other long-term employee benefits
● Termination benefits

❖ Short-term employee benefits

➢ Benefits are those that are due to be settled within 12 months after the end of
the period in which the employee has rendered services. Examples include:
○ Salaries, wages, and SSS, PhilHealth and Pag-Ibig contributions
○ Paid vacation leaves and sick leave
○ Profit-sharing and bonuses
○ Non-monetary benefits (e.g., free goods and services)
 General Accounting requirements

● Employee benefits are recognized as expense and as an accrued liability to the

extent that they are unpaid, after the employee has rendered services and
becomes entitled to payment.
● Short-term benefits are recognized periodically (e.g., salaries usually paid every
15th and 30th of the month)

Short-term paid absences

➢ Include vacation, holidays (e.g., regular and non-working holiday), maternity,
paternity, and sick leaves. Entitlement to paid absences may be either:

○ Accumulating - those that can be carried forward and used to future

periods if not used in the current period. Accumulating paid absences
may be either:
■ Vesting - unused entitlement are paid in cash when the employee
leaves the entity (i.e., monetized)
■ Non-vesting - unused entitlement are not monetized

○ Non-Accumulating - those that expire if not used in the current period

and are not paid in cash when the employee leaves the entity.

Post-employment benefits
➢ Employee benefits (other than termination and short-term employee benefits) that are
payable after the completion of employment.
➢ Examples of post-employment benefits:
○ Retirement benefits (e.g., lump sum payment and pensions)
○ Other post-employment benefits (life insurance or medical care)
➢ Are provided to employees through post-employment benefits plans, which are referred
to in various names including “retirement plans” and “pension schemes”

Post-employment benefit plan

➢ Can be a formal arrangement (e.g., explicitly stated in employment contract), it
can be also informal (e.g., not documented)
➢ Post-employment benefit plans can be:
○ Contributory - both the employee and employer contribute to the
retirement benefits fund of the employee

○ Non-contributory - only the employer contributes to the

retirement benefits fund of the employee
 ○ Funded - the retirement fund is isolated from the employer’s
control and is transferred to a trustee (investment company) who
undertakes to manage the fund and pay the retiring employees.

○ Unfunded - employer manages any established fund and pays

directly to the retiring employee.

● Post-employment benefit plans are either:

○ Defined contribution plan
○ Define benefit plan

❖ Defined contribution plan

➢ The employer commits to make fund contributions to a fund that will be
used to pay for the retirement benefits of the employees. It depends on
the amount of contributions to the fund together with the investment
income therefrom.
➢ If the fund balance is less than expected, the employer has no obligation
to make good the deficiency. The risk that retirement benefits may be
insufficient rest with the employee.

General Accounting requirements

● It simply recognizes the contribution as an expense and a liability (if unpaid)

when employees have rendered service during a period.
● The amount of contribution is measured at an undiscounted amount if it is due
within 12 months; if due beyond 12 months, it is discounted.

❖ Defined benefit plan

➢ The employer commits to pay a definite amount of retirement benefits,
which can be determined using a plan formula. The amount of promised
benefits is independent of any fund balance.
➢ If the fund proves to be insufficient to pay for the promised benefits, the
employer is obligated to make good the deficiency. The risk of fund
insufficiency rests with the employer

General Accounting requirements

● The accounting for defined benefit plans is complex because actuarial

assumptions are necessary to measure the obligation on a discounted basis.
 ● Steps in accounting for defined benefit plan:

○ Determine the deficit or surplus

➢ Present value of the defined benefit plan obligation (PV of DBO)
➢ Fair value of plan assets (FVPA)

○ PV of DBO represents the entity’s obligation for the accumulated

retirement benefits earned by employees to date.
○ FVPA represents the balance of any fund set aside for the payment of
the retirement benefits.
➢ If the FVPA less than PV of DBO, the difference is a deficit
➢ If the FVPA is greater than PV of DBO, the difference is a surplus

○ Net defined benefit liability or asset

➢ Is the amount that is presented in the statement of financial
position.
➢ If there is a deficit, the deficit is a net defined benefit liability
➢ If there is a surplus, the net defined benefit asset is the lower of
■ Surplus
■ Asset ceiling - present value of any economic benefits
available in the form of refunds

○ Defined Benefit Cost

➢ Current service cost - the increase in the PV of DBO resulting
from employee service in the current period
➢ Past service cost - the change in the PV of DBO for employee
service prior periods resulting from a plan amendment or
curtailment
➢ Gain or loss on settlement - arises when the employer’s
obligation to provide benefits is eliminated.
➢ Net interest on the net defined benefit liability (asset) - is the
change in the net defined benefit liability (asset) during the period
that arises from the passage of time.
■ Actuarial gains or losses - are changes in the PV of DBO
resulting from changes in actuarial assumptions.
■ Return on plan assets - represents the investment income
earned by the plan assets.

Multi-employer plans
➢ Various unrelated employers contribute to a common fund that is managed by a trustee
to provide post-employment benefits to the employees of the participating employers.
 ➢ It is classified as either a defined contribution or defined benefit plan

State plans
➢ Established by law and operated by the government.
➢ It is mandatory for all entities within its scope and is not subject to control or influence
by the entity
➢ It is classified as either a defined contribution or defined benefit plan

Qualifications for retirement benefit

● The member must be 60 years old, separated from employment or cease to be self-
employed and have paid at least 120 monthly contributions prior to retirement.
● The member is 65 years old whether employed or not and has paid at least 120 monthly
contributions prior to retirement.
Insured benefit
➢ An employer may pay insurance premiums to fund a post-employment benefit plan. It is
classified as either defined contribution or defined benefit plan.

Other long-term employee benefits

➢ Are employee benefits (other than post-employment and termination benefits) that are
due to be settled beyond 12 months.
➢ Examples include:
○ Long-term compensated absences, e.g., sabbatical leave
○ Jubilee or other long-service benefits
○ Long-term disability benefits
➢ Other long-term employee benefits are accounted for similar to defined benefit plans
except that all the components of the defined benefit cost are recognized in profit or
loss.

Termination benefits
➢ These are provided as a result of either (1) an entity’s decision to terminate the
employee before normal retirement date, (2) the employee’s decision to accept the
employer’s offer of benefits in exchange for termination.
➢ The obligation to pay termination benefits arises from the employer's act of terminating
an employee rather than from employee service.

Recognition
● Recognized as a liability and expense at the earlier of the ff. Dates:
○ When the entity can no longer withdraw the offer of those benefits
 ○ When the entity recognizes restructuring costs under PAS 37 that involve
payment of termination benefits.

Measurement
● Accounted for in accordance with the nature of the employee benefit. If the termination
benefits are
○ Payable within 12 months, they are accounted for similar to short-term
employee benefits
○ Payable beyond 12 months, they are accounted for similar to other long-term
benefits
○ In substance, enhancements to post-employee benefits, they are accounted for
as post-employee benefits

PAS 24: Related Party Disclosure

Prescribes the guidelines in identifying related party relationships, transactions, outstanding

balances and commitments, and the necessary disclosures for these items

Related Parties
➢ Parties are related if one party has the ability to affect the financial and operating
decisions of the other party through
➢ control, significant influence or joint control refer to the degree of one’s party ability to
affect the relevant decisions of another.

examples:
● Parent and its subsidiary
● Fellow subsidiaries with a common parent
● Investor and its associate; and the associate’s subsidiary
● Venturer and the joint venture
● A joint venture and an associate of a common investor
● Key management personnel of the reporting entity
● A person who has control, significant influence or joint control
● Close family member of the person

Key management personnel

➢ Those persons having authority and responsibility for planning, directing and controlling
the activities of the entity, directly or indirectly, including any director
Close family member
➢ One who may be expected to influence or be influenced by, the person in his/her
dealings with the reporting entity.
➢ This includes the person’s spouse, their children and their dependents.

These are not related parties:

● Two entities simply because they have one director or key management
personnel in common
● Two joint ventures simply because they are co-ventures in a joint venture
● Financers, trade unions, public utilities, and government agencies that do not
control, jointly control or significantly influence the reporting entity
● A customer, supplier, or other business that the entity does significant
transactions with.

Disclosure

Relationships between parents and subsidiaries

● A parent-subsidiary relationship is disclosed even if there have been no transactions
between them during the period

Key management personnel compensation

● An entity disclose the total key management personnel compensation broken down as
follows:
○ Short-term employee benefits
○ Post-employment benefits
○ Other long-term benefits
○ Termination benefits
○ Share-based payment

Related party transactions

➢ A transfer of resources, services or obligations between a reporting entity and a related
party regardless of whether a price is charged

Government-related entities
➢ An entity that is controlled, jointly controlled or significantly influenced by the
government.
PAS 36: Impairment of Assets
 Prescribes the procedures necessary to ensure that assets are not carried in excess of their
resources of their recoverable amounts

● PAS 36 applies in accounting for the impairment of the ff. Assets:

○ Property, plant and equipment
○ Investment property measured under the cost model
○ Investment in associates, joint ventures and subsidiaries
○ Intangible assets
○ Goodwill

Core principle
● The carrying amount of an asset shall not exceed its recoverable amount. If the carrying
amount exceeds its recoverable amount, the asset is impaired. The excess shall be
written-off as impairment loss.
● If the carrying amount is equal or less than the recoverable amount, the asset is not
impaired.

Carrying amount
➢ The amount at which an asset is recognized after deducting any accumulated
depreciation and accumulated impairment losses

Recoverable amount
➢ The amount to be recovered from the sale or use of an asset. It is the higher of an
asset’s:
○ Fair value less cost of disposal
○ Value in use

Fair value
➢ 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.

Costs of disposal
➢ Incremental costs directly attributable to the disposal of an asset or cash-generating unit,
excluding finance costs and income tax expense.

Value in use
➢ The present value of the future cash flows expected to be derived from an asset or cash-
generating unit

Indications of impairment
 ● External sources of information:
○ Significant decline in the asset’s (market) value
○ Significant changes in technological, market, economic, or legal environment
that adversely affect the recoverable amount of an asset
○ Increase in market interest rates that adversely affect the discount rate used in
calculating an asset’s value in use, and consequently, its recoverable amount
○ The carrying amount of the entity’s net assets exceeds its market capitalization

● Internal sources of information:

○ Obsolescence or physical damage of an asset
○ Significant changes in the expected use of an asset that adversely affect its
recoverable amount.
○ Indication that the economic performance of an asset is, or will be, worse than
expected

Required testing for impairment

➢ Ff. assets are required to be tested for impairment at least annually even if there are no
indications for impairment:
○ Intangible asset with indefinite useful life
○ Intangible asset not yet available for use
○ Goodwill acquired in a business combination

Measuring recoverable amount

● Recoverable amount is the higher of an asset’s FVLCD and VIU.
● It is not always necessary to determine both FVLCD and VIU. If one of them exceeds
the asset’s carrying amount, the asset is not impaired, and the other amount need not
be computed.
● If it is not possible to determine the FVLCD, the VIU is used as the recoverable amount
● If there is no reason to believe that the VIU exceeds the FVLCD, the FVLCD is used as
the recoverable amount.

Fair value less cost of disposal (FVLCD)

➢ Cost of disposal, except those have been recognized as liabilities, are deducted in
measuring fair value less costs of disposal. Examples of such costs are:
○ Legal costs, stamp duty and similar transactions taxes
○ Costs of removing the asset
○ Direct incremental costs to bring an asset into condition for its sale

Value in use
➢ Is the present value of the future net cash flows expected to be derived from the
continuing use of an asset and from its disposal at the end of its useful life.
 ● Cash flows projections cover a maximum period of 5 years

Discount rate
➢ A pre-tax rate that reflects current assessments of the time value of money and risks for
which the future cash flows estimates have not been adjusted

Recognition and measurement of an impairment loss

● Impairment loss is recognized immediately in profit or loss.

Cash-generating units and Goodwill

Cash-generating unit (CGU)

➢ The smallest identifiable group of assets that generates cash inflows that are largely
independent of the cash inflows from other assets or groups of assets.
PAS 40: Investment Property
PAS 40 prescribes the accounting and disclosure requirements for investment property

Investment Property
● Land and/or buildings held to earn rentals or for capital appreciation or both.
● It includes only land and buildings. It does not include any other type of assets
● It generates its cash flows independently from the other assets of an entity and the
following are not investment property:

➢ Owner-occupied property classified as PPE (Held for use in the production or

supply of goods or services or administrative purposes).
➢ Held for sale in the ordinary course of business. This is classified as Inventories.
➢ Classified as “held for sale” under PFRS 5
➢ Property acquired exclusively for sale in the near future or for development or
resale.
➢ Owner-occupied property, including
○ Property held for future use as owner-occupied property.
○ Property held for future development and subsequent use as owner-
occupied property.
○ Property occupied by employees.
○ Owner-occupied property awaiting disposal.
➢ Property that is leased out to another entity under a finance lease.

● Examples of investment property:

➔ Land held for long-term capital appreciation

➔ Land held for a currently undetermined future use.
➔ Building owned by the entity (or a right-of-use of asset relating to building) and
leased out under one or operating leases.
➔ A building that is vacant but is held to be leased out under one or more
operating leases.
➔ Property that is being constructed or developed for future use as an investment
property.
Partly investment property and partly owner-occupied

● A property may be partly held to earn rentals or for capital appreciation and partly
owner-occupied (e,g. A building that is partly being rented out and partly being used as
office space).

Such properties are accounted for as follows:

➢ If the portions could be sold separately (or leased out separately under a finance
lease), they are accounted for separately. The portion that is being rented out is
classified as an investment property while the owner-occupied portion is
classified as PPE.
➢ If the portions could not be sold separately, the entire property is classified as
investment property if the owner-occupied portion is insignificant. If the owner-
occupied portion is significant, the entire property is classified as PPE.

Ancillary services to occupants

When ancillary services are provided to the occupants of a property held, the property
is classified as investment property if the services are insignificant to the arrangement as a
whole (owner of an office building provides security and maintenance services to the building
tenants).

If the services are significant, the entire property is classified as PPE (services provided
to hotel guests in an owner-occupied hotel).

Investment property in consolidated financial statements

A property that is leased by a member of a group to another member (parent or

subsidiary) does not qualify as investment property in the consolidated financial statements.
However, the property is classified as investment property in the lessor/owner’s not affect
financial statement.

Recognition

An investment property is recognized if it meets the definition of an investment property

as well as the asset recognition criteria - probable future economic benefits and reliable
measurement of cost.
Initial measurement

Investment property is initially measured at cost. The measurement of the cost

depends on the mode of acquisition.

Acquisition by purchase

It comprises the purchase price and any directly attributable cost incurred in bringing
the asset to its intended condition (e,g. Professional fees for legal services, property transfer
taxes, and other transaction costs).

If the payment is deferred, the cost is the cash price equivalent. The difference between
this amount and the total payments is recognized as interest expense over the credit period
unless it qualifies for capitalization under PAS 23.

The cost of investment property excludes

➔ Start-up costs unless they are necessary to bring the property to the condition
necessary for it to be capable of operating in the manner intended by
management.
➔ Before the investment property is fully occupied, operating losses are incurred.
➔ In the process of constructing or developing the property, excessive amounts of
materials, labor, or other resources have been wasted.

Exchange of assets

The measurement of an investment property acquired in exchange for a non-monetary

asset depends on whether the exchange transaction has commercial substance or not.

● If the entity's subsequent cash flows are projected to alter as a result of the transaction, the
exchange has commercial substance. The asset received is measured under an order of
priority:
➔ The fair value of the asset Given up
➔ The fair value of the asset Received
➔ Carrying amount of the asset Given up

● The asset received is measured at the carrying value of the item given up if it lacks
commercial substance.
● No gain or losses arise if the asset received is measured at the carrying amount of the
asset given up.

Subsequent Measurement

After initial recognition, the entity chooses either the cost or fair value model as its
accounting policy and applies that policy to all of its investment property.

● Only one model shall be used. Using both models selectively for items of investment
property is prohibited, except in the following cases:

➔ When the fair value model is used but the fair value of one investment property
cannot be reliably determined on initial recognition, that investment property will
be measured under the cost model, the rest are measured under the fair value
model. For purposes of depreciation, the residual value of the property is
presumed to be zero.
➔ Separate choices of accounting policy may be made for (a) investment property
that backs liabilities that pay return linked directly to the fair value of, or returns
from, specified assets including that investment property and (b) all other
investment property.

● PAS 40 requires an entity to determine the fair value of its investment property,
regardless of the accounting policy used.
● Under the fair value model, fair value is used for measurement purposes while under the
cost model, fair value is used for disclosure purposes.
● An entity may subsequently change its accounting policy from the cost model to the fair
value model subject to the provisions of PAS 8. However, PAS 40 states that it is highly
unlikely that a change from the fair value model to the cost model will result in a more
relevant presentation.
● If the fair value is chosen, it shall be applied until the investment property is
derecognized or reclassified to another asset classification, even if fair value becomes
less readily determinable.

Cost Model

If the company decided to measure the investment property under the cost model it
would have to account for it under IAS 16 using the cost model prescribed under that Standard
(which requires that the asset should be carried at its cost less accumulated depreciation and
any accumulated impairment losses). Therefore, when an investment property is measured
under the cost model, the fluctuations in the fair value of the investment property from year to
year would not affect the profit or loss of the entity. Instead, the annual depreciation, which is
computed based on the acquisition cost of the investment property will be the only charge to
net profit or loss for each period.

Fair Value Model

If the company chooses to measure the investment property under the fair value model
it will have to recognize in net profit or loss for each period changes in fair value from year to
year.

● Any gains or losses arising from changes in fair value shall be recognized in the
income statement (profit or loss).

Illustration: Using the Cost model and Fair value model

Entity A acquires a building at a purchase price of ₱10,000,00 and spends an additional ₱3,000,000 in
getting the building to the condition for its intended use. The building is intended to be leased out under
various operating leases. Accordingly, it is classified as an investment property. The building becomes
available for lease on January 1, 20x1, at which date, Entity A estimates its useful life to be 20years, with
no residual value. On December 31, 20x1, the investment property’s fair value is ₱12,000,000.

Initial measurement: Cost

The building is initially measured at its cost of ₱13,000,000 (₱10M purchase price + ₱3M direct costs)

● Subsequent measurement: December 31, 20x1 (Cost Model)

The investment property is carried at its cost less accumulated depreciation and accumulated
impairment losses.

Statement of Financial Position:

Cost ₱13,000,000
Accumulated depreciation [(₱13M/20 years) x 1yr] (650,000)
Carrying amount - 12/31/x1 ₱12,350,000

Statement of profit or loss:

Depreciation expense (₱13M/20 years) ₱650,000

● Subsequent measurement: December 31, 20x1 (Fair value model)

The investment property is carried at its fair value at the end of each reporting period. Changes in fair
value are recognized in profit or loss. The investment property is not depreciated.

Statement of financial position:

Carrying amount - 12/31/x1 (fair value) ₱12,000,000
Statement of profit or loss:
Unrealized loss ₱1,000,000

The unrealized loss from the fair value is computed:

Carrying amount ₱13,000,000
Fair value - 12/31/x1 12,000,000
Decrease in value - unrealized loss ₱1,000,000

Cost Model Fair value Model

Statement of financial position: Statement of financial position:

● Initial measurement: ₱13,000,000 ● Initial measurement: ₱13,000,000
● Subsequent measurement: ● Subsequent measurement:
Carrying amount: ₱12,350,000 Carrying amont: ₱12,000,000

Statement of profit or loss: Statement of profit or loss:

● Depreciation expense: ₱650,000 ● Unrealized loss: ₱1,000,000

Transfers

Transfers to or from investment property are made only when there is a change in use:

➢ Commencement of owner-occupation, for a transfer from investment to PPE.

➢ End of owner-occupation, for a transfer from PPE to investment property.
➢ Commencement of an operating lease to another party, for a transfer from
inventories to investment property.
➢ Commencement of development with a view to sale, for a transfer from
investment property to inventories.

● In the absence of a change in use, no transfer is made to or from an investment

property.
● If the entity uses the cost model, transfers between investment property, PPE, and
inventories are accounted for at the carrying amount of asset transferred. No gain or
loss arises.
● For transfers from inventories to investment properties that are to be
carried at fair value, the remeasurement to fair value is recognized in profit or loss.
● Transfers from investment property at fair value to property, plant, and equipment shall
be at fair value, which becomes deemed cost.
 ● When a property under construction is completed and transferred to investment
property to be carried at fair value, the remeasurement to fair value is recognized in
profit or loss.

Derecognition

An investment property is derecognized when it is disposed of or when no future

economic benefits are expected from it.

● On derecognition, the difference between the carrying amount and the net disposal
proceeds, if any, is recognized as gain or loss in profit or loss.

Self-constructed investment property

It is accounted for in much the same way as a purchased investment property. The initial
cost of a self-constructed property includes all directly attributable costs of constructing and
preparing the property for its intended use. It excludes abnormal amounts of wasted material,
labor, or other resources incurred.

It is also subsequently measured using either the cost model or the fair value model.

Subsequent expenditures

Subsequent expenditures on recognized investment property are generally expensed

unless they meet the recognition criteria (e,g. The cost of day-to-day servicing of an investment
property are expensed in the period in which they are incurred (i.e., as repairs and maintenance
expense)

PAS 40 states an instance where a subsequent expenditure is capitalized, which is the

replacement of parts of an investment property.

➢ Under the cost model, the cost of the replacement part (new part) is capitalized
to the investment property, if it meets the recognition criteria. The carrying
amount of the replaced part (old part) is derecognized and charged as loss,
regardless of whether it had been depreciation separately.
➢ Under the fair value model, the cost of the replacement part (new part) is
capitalized to the investment property. The investment property’s fair value is
then reassessed and any difference between the fair value and the carrying
amount is recognized in profit or loss.
Impairment

An investment property that is subsequently measured under the cost model is tested for
impairment using PAS 36.

There is no separate accounting for impairment losses for investment property

measured under the fair value because any increase or decrease in fair value is simply
recognized as gain or loss in profit or loss.

Disclosure

Fair Value and Cost Model

An entity shall disclose:

• Whether it applies the cost or fair value model
• If it applies the fair value model, whether and under what circumstances property
interests held under operating leases are classified and accounted for as investment
property
• When classification is difficult, the criteria used to distinguish investment property,
owner-occupied property, and property held for disposal in the ordinary course of
business
• The methods used and significant assumptions made in determining fair value
• The extent to which fair values are based on assessments by an independent and
qualified valuer. If there are no such valuations, that fact shall be stated.
• The amounts recognized in profit or loss for
• Rental income from investment property
• Direct operating expenses that generated rental income
• Direct operating expenses that did not generate rental income
• Existence and amounts of restrictions on the realizability of investment property; or for
the remittance of income and proceeds on disposal
• Contractual obligations to purchase, construct, or develop investment property or for
repairs, maintenance, or enhancements

Fair Value Model

If an entity applies the fair value model, it shall also disclose a reconciliation of the opening and
closing carrying values of investment property, showing

• Additions, showing separately, acquisitions, subsequent expenditure, and additions

through business combinations
• Assets classified as held for sale under IFRS 5
 • Net gains or losses from fair value adjustments
• Net exchange differences arising on translation of financial statements in a different
reporting currency
• Transfers to and from inventories and owner-occupied property

Cost Model

For investment properties measured under the cost model, an entity shall disclose:
● Depreciation methods used
● Useful lives or depreciation rates used
● A reconciliation of the opening and closing gross carrying amounts and the
accumulated depreciation and impairment losses, showing
● Additions, showing separately, acquisitions, subsequent expenditure, and
additions through business combinations
● Assets classified as held for sale under IFRS 5
● Impairment losses recognized and reversed
● Net exchange differences
● Transfers to and from inventories and owner-occupied property
● Other changes
● The fair value of investment property and, if fair value cannot be reliably
measured
● Explanation as to why fair value cannot be reliably measured
● Range of estimates, if possible, within which the fair value is highly likely to fall
● Disposals of investment property not carried at fair value

PAS 41: Agricultural

 PAS 41 prescribes the accounting and disclosures for agricultural and related activity

Agriculture
➢ Means farming or producing crops and raising livestock.

PAS 41 applies to the following when they are related to agricultural activity:
○ Biological assets except for bearer plants
○ Agricultural produce at the point of harvest
○ Unconditional government grants related to a biological asset measured at its
fair value less costs to sell

It does not apply to the following:

○ Land related to agricultural activity (PAS 16 and PAS 40)
○ Bearer plants. But, PAS 41 applies to the “produce” - product on the bearer
plants
○ Government grants related to bearer plants (PAS 20)
○ Intangible assets related to agricultural activities (PAS 38)

● PAS 41 applies to the agricultural produce only at the point of harvest

Biological Asset
➢ It is a living animal or plant
➢ “Bio” means life. Therefore, dead animals and dead plants cannot qualify as biological
assets.
➢ It can be either:
○ Consumable biological assets
- Those that will be harvested for agriculture produced or sold as
biological assets:
● Livestock intended for the production of meat
● Livestock held for sale
● Fish in farms
● Crops such as maize and wheat
● Produce on a bearer plant
● Trees being grown for lumber
 ○ Bearer biological assets
- Those that are held to bear produce. Only the produce is harvested while
the bearer biological assets remains:
● Livestock from which milk is produced
● Fruit trees from which fruit is harvested

● Living animals, consumable or bearer, are classified as biological assets if they are
related to agricultural activity. But, living plants are classified as biological assets only if
they are consumable. Bearer plants are classified as PPE.

Bearer plant
➢ A living plant that:
○ Is used in the production or supply of agricultural produce
○ Is expected to bear produce for more than one period
○ Has a remote likelihood of being sold as agricultural produce except for
incidental scrap sales

● Plants that are to be harvested as agricultural products are not bearer plants (e.g., a
tree that is intended to be cut and used as lumber is a consumable plant and therefore,
classified as a biological asset.
● However, a tree that is intended to bear (produce) fruit and only the fruits are harvested
while the tree remains as a bearer plant, therefore, classified as PPE.
● Consumable plants, such as annual crops and similar plants that die once their product
is harvested, are classified as biological assets.

Items Applicable standard

● Bearer and consumable plants PAS 41

● Consumable plants PAS 41

● Bearer plants PAS 16

● Products growing on bearer plants PAS 41

Agricultural produce
➢ The harvested produce (product) of the entity’s biological assets.
➢ It refers to those that are in their natural state and are not yet processed

Harvest
● The detachment of produce (product) from a biological asset or the cessation of a
biological asset’s life processes.
 ● Those that are already subjected to processing are not treated as agricultural produce,
instead, as inventories.

illustration:

1. Apple tree - bearer plant (held to bear product) accounted for under PAS 16
2. Apple fruits growing in the trees - biological assets under PAS 41
3. Harvested apple - agricultural produce (product) accounted for under PAS 41
4. Apple pie - subjected to processing, accounted for under PAS 2

Nature of asset Type of asset

Living animal or plant Biological asset. However, bearer plants are

classified as PPE

Unprocessed harvested produce (product) Agricultural produce

Processed product Inventory

Agricultural activity
➢ The biological transformation and harvesting of biological assets by an entity for sale or
conversion into agricultural produce (product) or more biological assets. This includes:
○ Raising livestock
○ Forestry
○ Annual or perennial cropping
○ Cultivating orchards
○ Plantations
○ Floriculture
○ Aquaculture (fish farming)

Features of Agricultural activity

● Capability to change
- Living animals and plants are capable of biological transformation

● Management of change
- management facilitates biological transformation by enhancing, or at least
stabilizing, conditions necessary for the process to take place (e.g., harvesting from
unmanaged sources (such as ocean fishing and deforestation).
 ● Measurement of change
- Change in quality or quantity brought about by biological transformation or
harvest is measured and monitored as a routine management function.

Biological transformation
➢ Processes that cause qualitative or quantitative changes in biological assets:

● Asset changes through:

a. Growth - is an increase in quantity or improvement in quality of an

animal or plant
b. Procreation - the creation of additional living animals or plants
c. Degeneration - a decrease in the quantity of deterioration in the quality
of an animal or plant

● Production of agricultural produce

Recognition

● A biological asset or agricultural produce is recognized when it meets the assets

recognition criteria, including the reliable measurement of its fair value or cost.

Measurement

Biological Assets

● Biological assets are initially and subsequently measured at fair value less costs to sell.
● The gain or loss arising from initial measurement and subsequent changes in fair value
less costs to sell are recognized in profit or loss.
● Biological assets whose fair value cannot be reliably determined on initial recognition
are initially measured at cost and subsequently measured at cost less accumulated
depreciation and accumulated impairment losses.

Agricultural produce

● Agricultural produce is, in all cases, initially measured at fair value less costs to sell at
the point of harvest. This will be deemed a cost for subsequent accounting using PAS 2
or another applicable accounting standard.
 ● An entity uses PFRS 13 fair value measurements when measuring the fair value of
biological assets and agricultural produce.
● Contract prices are not necessarily relevant when measuring fair value.
● Cash flows for financing the asset or reestablishing biological assets after harvest is
not considered when measuring fair value.
● A biological asset that is previously measured at fair value less costs to sell is
continued to be measured at fair value less costs to sell until it is disposed of.

Government Grants

● Only government grants that are related to biological assets measured at fair value less
costs to sell are accounted for under PAS 41
● Those biological assets measured at cost less accumulated depreciation and
accumulated impairment losses are accounted for under PAS 20

Under PAS 41, if the government grants are:

● Unconditional
➢ The grant is recognized in profit or loss when it becomes receivable

● Conditional
➢ The grant is recognized in profit or loss when the attached conditions are
met.
● Conditional but the terms of the grant allow part of it to be retained according to
the time that has elapsed
➢ A portion of the grant is recognized in profit or loss as time passes

Disclosures

● An entity shall disclose the aggregate gain or loss that arises on the initial recognition of
biological assets and agricultural produce and from the change in value less estimated
point-of-sale costs of the biological assets.

● A description of each group of biological assets is also required. If it is not disclosed

anywhere else in the financial statements, then the entity shall also set out the nature of
its activities and non-financial measures or estimates of the physical quantity of each
group of the entity’s biological assets at period end. It should supply the same
information for the output for agricultural produce during the period.
● The methods and assumptions applied in determining fair value should also be
disclosed.

● The fair value less estimated point-of-sale costs of agricultural produce harvested
during
the period shall be disclosed at the point of harvest.

● The existence and carrying amounts of biological assets whose title is restricted and
any
biological assets placed as security should be disclosed.

● The amount of any commitments for the development or acquisition of biological assets
and management’s financial risk strategies should also be disclosed.

● A reconciliation of the changes in the carrying amount of biological assets, showing

separately, changes in value, purchases, sales, harvesting, business combinations, and
exchange differences should be disclosed. Where fair value cannot be measured, then
additional disclosure is required including the description of the asset, an explanation of
the circumstances, if possible a range within which the fair value is likely to fall, any gain
or loss recognized on disposal, the depreciation method, and useful lives or
depreciation rates.

● The gross carrying amounts on the accumulated depreciation should also be shown.

● If the fair value of biological assets previously measured at cost less accumulated
depreciation and impairment losses are now ascertainable, then additional disclosures
are required, such as a description of the biological assets, an explanation as to why
fair
value is now reliably measurable, and the effect of the change.

● Regarding government grants, disclosures should be made as to the nature and extent
of the grants, any conditions that have not been fulfilled, and any significant decreases
in
the expected level of the grants.