Junior Philippine Institute of Accountants and Auditors – United

FINANCIAL ACCOUNTING AND REPORTING

OVERVIEW Subsequent Measurement
• Cost Model – PPEs are carried at cost less
1. Definition, nature and classes any accumulated depreciation and any
2. Recognition of PPE accumulated impairment loss
3. Initial measurement (Cash purchase, • Revaluation Model – fair value at the date of
Purchase on a deferred payment contract, revaluation less any subsequent
Issuance of securities, Donation or accumulated depreciation and subsequent
discovery, Self-construction, Exchanges of accumulated impairment loss
non-monetary and monetary assets) Acquisition of Property
4. Depreciation of assets (Definition, nature a. Cash basis – cash paid plus direct
and causes; Factors affecting depreciation; attributable cost
Methods of depreciation (Straight-line b. On account – invoice price less discount
method, Declining balance method, Sum- whether taken or not
of-the-years’ digits method, Group and c. On installment – cash price or present value
composite depreciation) of cash payments
5. Depletion of wasting assets d. Issuance of shares – FV of assets, FV of
shares, and par value of shares in the order
of priority
PROPERTY, PLANT, AND EQUIPMENT e. Issuance of bonds payable – FV of bonds
- are tangible assets that are used in payable, FV of asset, and face amount of
business for a period of more than one bonds payable in the order of priority
year f. Exchange with commercial substance
- to be recognized as an asset it must have – FV of the asset given plus cash payment
future economic benefits and the cost on the part of payor or less cash received on
must be measured reliably the part of recipient; gain or loss is
- initially measured at cost recognized
g. Exchange without commercial substance
Generally speaking, these assets are classified as – carrying amount of the asset given plus
noncurrent assets. cash payment on the part of payor or less
cash received on the part of recipient; no
Recognition gain or loss is recognized
 Probable future economic benefits
 Cost of the asset can be measured reliably LAND, BUILDING, AND MACHINERY
– POINTERS
Derecognition
 the cost of the property, plant, and Land
equipment together with the related - classification of land depends on the
accumulated depreciation shall be nature and purposes of the land
removed from the accounts
 gain or loss shall be included in profit or 1. land used as a plant site shall be treated as
loss property, plant, and equipment
2. land held for currently undetermined use
Cost of PPEs is treated as an investment property
- purchase price, including import duties 3. land that is held as a future plant site is
and nonrefundable purchase taxes, after classified as owner-occupied
deducting trade discounts and rebates
- Cost directly attributable to bringing the Land Improvements
asset to the location and condition • Not depreciable – charged to the land
necessary for it to be capable of operating account
in the manner intended by the • Depreciable – charged to a special account
management. “land improvements”
- Initial estimate of the costs of dismantling
and removing the item and restoring the Special assessments - are taxes paid by the
site on which it is located. landowner as a contribution to the cost of public

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 Junior Philippine Institute of Accountants and Auditors – United
FINANCIAL ACCOUNTING AND REPORTING
improvements. It is treated as part of the cost of Initial Cost of an item of PPE:
land
Purchase price xx
Building – costs includes architect fee, plan and Import duties xx
specifications, permit, insurance during Non-refundable taxes xx
construction, excavation, safety fence during Directly attributable costs (DAC*) xx
construction and the cost to remove them, Est. Dismantling costs xx
temporary building for workers, tools, and Cash rebates/discounts (whether (xx)
materials taken or not)
Initial cost of PPE xx
Sidewalks, pavements, parking lot, and
driveways Examples of Directly attributable cost
• Building account - part of the blueprint for the
construction of a new building  Cost of site preparation
• Land improvements – occasionally incurred  Cost of employee benefits arising from the
or made not in connection with the construction or acquisition of the PPE
construction of a new building
 shipping fees/handling fees
 Installation/Assembly costs
Claims for damages – should be expensed
 Cost of testing
outright
 Professional Fees
Machinery – costs includes installation, testing,
freight, insurance while in transit, safety device, Dismantling costs are discounted over the useful
safety platform, estimated dismantling cost, site life of the PPE, this was also discussed in
preparation, nonrefundable purchase taxes Intermediate Accounting 2, PAS 37, Provisions
Tools – segregated from machinery account and contingent liabilities.
Patterns and dies – recorder as assets and
depreciated over the useful life DEPRECIATION
- refers to PPE; recognizes the exhaustion of
Spare parts and servicing equipment are usually a PPEs useful life
carried at inventory and recognized in profit or
loss as consumed. However, major spare parts The depreciation expense is used to reduce the
and stand-by equipment qualify as PPE value of the net balance and it flows to the income
statement as an expense.
Expenditures
• Cash – benefits both current and future a. Straight-line method
periods; reported as an asset
• Revenue – benefits current period only; - It is the simplest method for calculating
reported as expense depreciation over time. Under this
method, the same amount of depreciation
Subsequent cost is deducted from the value of an asset for
Capitalized - will increase the future service every year of its useful life.
potential of the asset
Expensed - merely maintains the existing level Cost xx
of standard performance Residual Value (xx)
Depreciable Amount xx
Improvements - modifications which increase Useful life in years ÷ xx
the service life or capacity of the asset; are Annual Depreciation xx
capitalized
b. Sum of the Year’s Digit
Replacements
• By a new one - capitalizable as a new asset - This method takes the asset's expected life
• Major parts - extraordinary repairs; and adds together the digits for each year.
capitalized
• Minor parts - ordinary repairs; expensed

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 Junior Philippine Institute of Accountants and Auditors – United
FINANCIAL ACCOUNTING AND REPORTING
Depreciable Amount xx Subsequent Recognition
Fraction (remaining years over SYD) ÷ xx
Depreciation for the Year xx a. Cost model
- Depreciation is recognized through
1 depreciation methods such as straight-line
SYD = Life (Life + 2 ) method, declining balance method, SYD,
etc.
c. Declining Balance Method - Carrying amount is equal to cost less
accumulated depreciation and any
- It is an accelerated depreciation system of accumulated impairment losses
recording larger depreciation expenses
during the earlier years of an asset's useful b. Revaluation model
life and recording smaller depreciation - Depreciation is recognized through
expenses during the asset's later years. depreciation methods mentioned under
cost model
Carrying Amount xx - Revalued amount is the fair value on
Multiplied by depreciation rate xx subsequent measurement
Depreciation for the Year xx - Carrying amount is revalued amount less
accumulated depreciation and
accumulated impairment losses
d. Double Declining Balance Method –
straight line rate is simply doubled
When to apply revaluation model?
e. 50% Declining Balance Method – the
If PPE can be measured reliably, revaluation
straight-line rate is simply multiplied by
method can be used.
150%
Frequency of Revaluation
DEPLETION
• It NEED NOT BE ANNUALLY but if there
- systematic allocation of the depletable
is a material change on fair value,
amount of a wasting asset over the period
revaluation must be accounted.
of the natural resource is extracted or
• Once revaluation is accounted, all items
produced
of an entire class of PPE is revalued.
That is, if Machinery A is revalued, all of
Depreciation of mining property – based on the
the machineries must be revalued; not all
useful life of the equipment or the useful life of
of the PPEs needs revaluation, only the
the wasting asset, whichever is shorter.
separate class of PPE.
• useful life of the equipment is shorter
Keywords, Basis, or Pointers in Revaluation
– normally, straight line method is used
• useful life of the wasting asset is shorter
• Depreciated replacement cost, also
– frequently, output depreciation method
called sound value
is used
• If fair market value is given, that is
already the depreciated replacement
REVALUATION AND IMPAIRMENT
cost
• Replacement cost is different from
Initial Measurement of PPE
depreciated replacement cost
• At cost, taking into consideration the
• Revaluation surplus is the difference
purchase price, directly attributable
between carrying amount and sound
costs, or measurement basis according
value upon revaluation
on how it was acquired (through issuance
Always remember the solution guide when it
of shares, bonds, exchange, etc.)
comes to revaluation (assuming without residual
value):

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 Junior Philippine Institute of Accountants and Auditors – United
FINANCIAL ACCOUNTING AND REPORTING
Reversal of Revaluation Surplus
In case there will be a decrease on the
replacement cost of an asset, there will either
be:
a. Reversal of revaluation surplus
b. Impairment loss
Notes: c. If the reversal of revaluation surplus is not
• PPE item is the PPE being revalued enough, charge it to impairment loss.
• A. Depn. means accumulated
depreciation Impairment Loss
• CA/SV/RS means carrying amount - When there is an impairment loss, there is
(pertains to the cost row), sound value an indication of decrease in replacement
(pertains to the replacement cost row), cost of an item of PPE. It is recognized
and revaluation surplus (pertains to the when the asset's carrying amount
appreciation row) exceeds its recoverable amount. At each
• In case RS is negative, that is recorded year-end, a company assesses whether
(order of priority): there are indications of impairment of an
1. Reversal on existing Revaluation Surplus item of PPE, such as obsolescence,
2. Impairment Loss technological change, etc.
• In case there is a Revaluation
Surplus, it is recorded accordingly Causes of Impairment Loss
and recognized under Other • Obsolescence or physical damage
Comprehensive Income. • Decrease or decline in the FMV of asset
a. Piecemeal of RS – recognized • Technological innovations that makes
in Retained Earnings yearly using the PPE obsolete
the remaining useful life of the • Increase on interest rates such as market
revalued asset rate of return or inflation rate
b. In case of impairment loss, the
whole amount is recognized as an Basis of Impairment Loss
expense for the year under P/L • Recoverable Amount – higher of
and not as Other Comprehensive FVLCOD or VIU
Loss
FVLCOD – fair value less cost of
disposal
With Residual Value: VIU – value in use which is
necessarily the present values of
all future net cash flows of an
asset

Calculation of Impairment Loss

Carrying Amount xx
Recoverable Amount xx
Notes: Impairment Loss xx
• For the residual value, use the new
residual value for both the cost and
Note:
replacement cost rows
• Impairment loss is expensed on the
• For the accumulated depreciation of cost
period it is incurred
row, use the old residual value or simply
• It is credited on the accumulated
the existing accumulated depreciation.
depreciation account
• For the accumulated depreciation of
replacement cost row, use the
Reversal of Impairment Loss
accumulated depreciation percentage of
• Reversal is credited directly as income if
the cost row using the old residual value.
the asset has not been revalued prior to

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 Junior Philippine Institute of Accountants and Auditors – United
FINANCIAL ACCOUNTING AND REPORTING
the reversal of impairment loss
• Reversal is credited to the extent of
impairment loss on the prior period (gain
on reversal of impairment), and the
excess is revaluation surplus
- The gain on reversal may also be
computed by deducting the carrying
amount of the asset as if there was no
impairment to the carrying amount of the
asset with impairment (that is the actual or
recorded carrying amount of the asset).

Remember: You can reverse an impairment loss

only when there is a change in the estimates used
to determine the asset's recoverable amount. It
means that you cannot reverse an impairment
loss due to passage of time or unwinding the
discount.

Impairment on Cash Generating Units: Notes

• If goodwill is present, exhaust first its

balance before allocating to the other
assets on CGU
• If there is a present recoverable amount,
that is the maximum amount that an
asset of CGU may at be (impairment loss
allocated to this is generally limited
because there is a ceiling-balance
amount)
• Generally, there must be no impairment
loss allocated to inventory and FVPL
investments (trading – Current Assets)
since they have different measurement
criteria

References
1. IAS 16 – Property, Plant, and Equipment
2. IAS 36 – Impairment of Assets

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