506_712533_lecture - Ppe

Government Accounting &

Accounting for non-profit organizations

by: ZEUS VERNON B. MILLAN

Chapter 10 Property, Plant and Equipment

Learning Objectives

1. State the initial and subsequent measurements of items of PPE of government entities. 2. Describe the following and state their peculiar accounting requirements: Heritage Assets, Infrastructure Assets, and Reforestation Projects. 3. Account for Borrowing Costs by a government entity. GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Definition of Terms • When used in this Manual, the following terms shall mean: • Carrying Amount – is the amount at which an asset is recognized after deducting any accumulated depreciation and accumulated impairment losses. • Cost – is the amount of cash or cash equivalents paid and the fair value (FV) of the other consideration given to acquire an asset at the time of its acquisition or construction. • Depreciation – is the systematic allocation of the depreciable amount of an asset over its useful life. • Depreciable Amount – is the cost of an asset, or other amount substituted for cost, less its residual value. • Entity-specific Value – is the present value (PV) of the cash flows an entity expects to arise from the continuing use of an asset and from its disposal at the end of its useful life or expects to incur when settling a liability.

Definition of Terms – cont. • Exchange Transactions – are transactions in which one entity receives assets or services, or has liabilities extinguished, and directly gives approximately equal value (primarily in the form of cash, goods, services, or use of assets) to another entity in exchange. • Fair Value – is the amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. • Impairment Loss of a Cash-generating Asset – is the amount by which the carrying amount of an asset exceeds its recoverable amount. • Impairment Loss of a Non Cash-generating Asset – is the amount by which the carrying amount of an asset exceeds its recoverable service amount. • Non-exchange Transactions – are transaction where an entity either receives value from another entity without directly giving approximately equal value in exchange, or gives value to another entity without directly receiving approximately equal value in exchange.

k .Property, Plant and Equipment …are: a. tangible assets; b. held for use in the production or supply of goods, services or program outputs, for rental to others, or for administrative purposes, and not intended for resale in the ordinary course of operations; and c. expected to be used for more than one reporting period

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Definition of Terms – cont. • Residual Value – is the equivalent to at least five percent (5%) of the cost of an asset that the 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, unless a more appropriate percentage is determined by an entity based on their operation. • Recoverable Service Amount – is the higher of a non cash-generating asset’s fair value less costs to sell and its value in use. • Useful Life – is 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. • Value in use of a cash generating asset – the present value of the estimated future cash flows expected to be derived from the continuing use of an asset and from its disposal at the end of its useful life. • Value in use of a non-cash generating asset – the present value of the asset’s remaining service potential

Recognition • An item of PPE is recognized if it meets the definition of a PPE and the recognition criteria for assets, as well as the capitalization threshold of ₱15,000. • The threshold is applied on a per item basis, except as follows: – Individual items with values below the threshold but work together as a group are recognized as PPE if the total cost of the group is ₱15,000 or more – Bulk acquisitions of small items of PPE are recognized as PPE if their aggregate cost is ₱15,000 or more. • Items below the capitalization threshold are recognized as inventories (i.e., Semi-Expendable Property). GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Initial Measurement • PPE are initially measured at cost. Cost comprises the following: a. Purchase price, including nonrefundable taxes but excluding trade and cash discounts; b. Direct costs; and c. Present value of decommissioning and restoration costs. GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Examples of directly attributable costs • Costs of employee benefits arising directly from the construction or acquisition of PPE; • Costs of site preparation; • Initial delivery and handling costs (e.g., freight costs); • Installation and assembly costs; • Testing costs, net of disposal proceeds of samples generated during testing; and • Professional fees. GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Examples of costs that are expensed outright

• Costs of opening a new facility. • Costs of introducing a new product or service (including costs of advertising and promotional activities). • Costs of conducting business in a new location or with a new class of customers (including costs of staff training). • Administration and other general overhead costs. GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Applying the Capitalization Threshold of P15,000.

The capitalization threshold of P15,000 represents the minimum cost of an individual asset recognized as a PPE on the Statement of Financial Position.

Modes of Acquisition a. Acquisition by Purchase – Cash discounts, whether taken or not, are excluded from the initial measurement. Cash discounts not taken are recognized as “Other Losses.” – A PPE purchased under installment basis is initially measured at the cash price equivalent. – Promotional items are accounted for as follows: • If the promotional item is the same as those purchased, the total acquisition cost is allocated to all the items acquired including the promotional item. • If the promotional item is different from the other items acquired, the initial cost of the promotional item is its fair value. The purchase price, net of the fair value of the promotional item, is allocated to the other assets acquired. GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Modes of Acquisition b. Acquisition by Construction 1. Acquisition through Construction Contracts awarded to contractors – the cost is the contract price. 2. Construction by Administration (Self-construction) – the cost includes direct materials, labor and other construction overheads. • Construction costs are initially recorded in the “Construction in Progress” account pending the completion of the asset. Upon completion, the construction costs are reclassified to the appropriate PPE account.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Modes of Acquisition c. Acquisition through Exchange – With Commercial Substance (order of priority): 1. Fair value of asset Given up (plus any cash paid or minus any cash received); 2. Fair value of asset Received; or 3. Carrying amount of asset Given up (plus any cash paid or minus any cash received) – Lacks Commercial Substance: Carrying amount of asset Given up (plus any cash paid or minus any cash received) GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Modes of Acquisition d. Acquisition through Non-Exchange Transaction – measured at fair value at the acquisition date. i. If without condition, recognized immediately as income. ii. If with condition, initially recognized as liability (i.e., ‘Other Deferred Credits’) and subsequently recognized as income when the condition is met.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Modes of Acquisition e. Acquisition through Intra-agency or Inter-agency Transfers – measured at the carrying amount of the asset received

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

f. Modes of Acquisition • Grants are assistance in the form of transfer of resources, in cash or in kind, to an agency/entity from other levels of government, private sectors or international institutions with or without conditions relating to the operating activities of the agency/entity. These grants shall be recognized as income over the periods necessary to match them with the related costs which they are intended to compensate on a systematic basis. Grants, including nonmonetary its cost shall be measured at its fair value as at the date of acquisition, and shall be recognized when there is reasonable assurance that: (a) the entity will comply with the conditions attached, and (b) the grants will be received.

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.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Subsequent Expenditures on recognized PPE a. Repairs and Maintenance 1. Minor repairs – costs of day-to-day servicing of an item of PPE, necessary to maintain its operating capability. These are charged as expenses. 2. Major repairs – are considered ‘betterments’ and are capitalized. • If it is not clear whether a repair is minor or major, it is treated as minor. GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Subsequent Expenditures on recognized PPE b. Replacement costs – The carrying amount of the old part is derecognized and charged as loss. – The cost of the new part is capitalized. – If the carrying amount of the old part cannot be determined, the cost of the new part is used as the basis.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Subsequent Expenditures on recognized PPE c. Spare parts and servicing equipment – Minor spare parts are recognized as inventory and charged as expense when consumed. – Major spare parts and stand-by equipment are recognized as PPE when they meet the recognition criteria, e.g., they are expected to be used over more than one period. – Spare parts and servicing equipment that can only be used in conjunction with an item of PPE are accounted for as PPE. GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Subsequent Expenditures on recognized PPE d.

Betterments – are enhancements to the future economic benefits of a PPE, such as: • increase in previously assessed physical output or service capacity; • reduction in associated operating costs; • extension of the estimated useful life; or • improvement in the quality of output. – Costs of betterments are capitalized (if they meet the recognition criteria for PPE) and are subsequently depreciated as follows: a. Over the remaining useful life, if the betterment increases the service potential of the asset without extending its useful life; or b. Over the extended useful life, if the betterment extends the useful life of the asset. The extended period shall not exceed the original estimate of useful life of the asset.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Subsequent Expenditures on recognized PPE e. Additions and Rearrangements – Additions are modifications which increase the physical size or function of the PPE. An addition can be: a. a new unit that is physically distinct from the old unit; or b. an expansion, extension or enlargement of the old unit. – The cost of a new unit is depreciated over its own useful life. – An expansion cost is depreciated over the shorter of its useful life and the remaining life of the PPE of which it is part. – Rearrangement is the relocation or reinstallation of an asset which proves to be less efficient in its original location. – As the PPSAS provides that capitalization of costs ceases when an asset is in the location and condition originally intended by management, rearrangement costs shall be capitalized only when it is clear that the PPE recognition criteria are met.

Subsequent Measurement • PPE are subsequently measured using the cost model. • Depreciation begins when the asset is available for its intended use. For simplicity, if a PPE becomes available for its intended use: – On or before the 15th of the month – depreciation is computed at the beginning of that month. – After the 15th of the month – depreciation is computed at the beginning of the following month. • Depreciation ceases when the asset is derecognized or fully depreciated. Depreciation does not cease when the asset becomes idle or retired from active use and held for disposal. • The straight line method of depreciation shall be used unless another method is more appropriate. GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Subsequent Measurement • Residual value shall be at least 5% of cost, unless an entity determines a more appropriate estimate, subject to the approval of COA. • The residual value and the useful life of an asset shall be reviewed at least at each annual reporting date and, if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate   • Depreciation shall be recognized on a monthly basis.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Impairment • A PPE is impaired if its carrying amount exceeds its recoverable service amount or recoverable amount.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Computation of Value in Use 1. Depreciated Replacement Cost Approach – Value in use is equal to the asset’s replacement cost adjusted for depreciation to reflect the asset’s used condition. – Replacement cost is the cost of replacing or reproducing the asset, whichever is lower.   2. Restoration Cost Approach – Value in use = Depreciated replacement cost minus Estimated restoration cost. – Restoration cost is the cost of restoring the service potential of an asset to its pre-impaired level. 3. Service Units Approach – Value in use = Depreciated replacement cost minus a proportionate reduction to reflect the reduced number of service units expected from the asset in its impaired state. GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Reversal of Impairment • The principles used in recognizing reversals of impairment loss on items of PPE are the same as those used for investment property.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Heritage Assets • Heritage assets are those which have historical, cultural and environmental significance, and are intended to be preserved for future generations. • Heritage assets are measured at cost. They are not depreciated, but subject to impairment. • However, heritage assets that have future economic benefits other than their heritage value are depreciated similar to the other items of PPE, e.g., a historic building being used as office.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Infrastructure Assets • Infrastructure assets include road networks (including facilities, such as traffic lights and road signage), flood control, sewer, water and power supply systems, communications networks, railways, seaports, airports, and the like.  • Infrastructure assets are accounted for similar to the other items of PPE, i.e., they are initially measured at cost and subsequently depreciated. • However, generally, infrastructure assets have no residual value. In cases where a part of an infrastructure asset has a residual value, it shall be at least 5% of the cost of that part. GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Reforestation Projects • Reforestation refers to the renewal of a forest cover by planting seeds or young trees. • Reforestation projects are recorded as land improvements.   • Subsequent costs are accounted for as follows: – Maintenance and protection costs incurred within the duration of the project are capitalized. – Those incurred after the turn-over of the project are charged as expense.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Derecognition • A PPE is derecognized when it is disposed or when no future economic benefits is 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 surplus or deficit.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Idle, Fully Depreciated, & Unserviceable PPE • Idle PPE refers to assets that are temporarily taken out of active use or temporarily abandoned. Idle PPE are not derecognized but continued to be depreciated. • A PPE is fully depreciated when its carrying amount is equal to zero or its residual value. Fully depreciated PPE are not derecognized. • Unserviceable property are those which do not have future economic benefits. Unserviceable property is derecognized.  

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Lost PPE • When a PPE is lost, e.g., through force majeure, the officer having custody of the PPE shall immediately notify the COA within 30 days and shall submit an application for relief, together with supporting evidence. If warranted by the evidence, a credit for loss shall be allowed. Failure to do the requirements will not relieve the officer of liability. (P.D. No. 1445, Sec. 73) • The carrying amount of the lost PPE is derecognized and charged as loss. • Pending the result of the investigation, the accountability of the officer shall be established, equal to the depreciated replacement cost of the lost PPE. If a credit for loss is subsequently allowed to the officer, the accountability is simply reversed. If not, the officer shall pay cash to settle his accountability.

Receipt and Disposition of PPE • The procedures in the receipt and disposition of PPE are similar to those of inventories. • Property Card – used by the Supply/Property Division to record all movements in items of PPE. This is the equivalent of the Stock Card used for inventories.  • Property, Plant and Equipment Ledger Card – used by the Accounting Division to record all movements in items of PPE, both in quantity and monetary amount. This is the equivalent of the Stock Ledger Card used for inventories.  GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Receipt and Disposition of PPE • Property Acknowledgement Receipt – used by the Supply/Property Division to record the issuance of PPE to the end user. This is based on the approved Requisition and Issue Slip (RIS) submitted by the requesting individual. This is the equivalent of the Report of Supplies and Materials Issued used for inventories. • Report on the Physical Count of Property, Plant and Equipment – At the end of each year, the entity shall perform a physical count of PPE and prepare this report. This report shall be submitted to the COA not later than January 31 of the following year. GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Receipt and Disposition of PPE • Inventory and Inspection Report for Unserviceable Property – used to account for all unserviceable property subject to disposal. • Report of Lost, Stolen, Damaged or Destroyed Property – used by the accountable officer to notify the concerned officials of the lost, stolen, damaged or destroyed property.  • Property Transfer Report – used to record transfers of property from one accountable officer to another.

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Borrowing Costs • Borrowing costs – are interest and other expenses incurred by an entity in connection with the borrowing of funds. (PPSAS 5.5)

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Recognition of Borrowing costs 1. Benchmark Treatment – expensed in the period incurred. 2. Allowed Alternative Treatment – capitalized if the borrowing costs are directly attributable to the acquisition of a qualifying asset. • Qualifying asset – is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. (PPSAS 5.5)

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

Recognition of Borrowing costs Applications: The borrowing costs on loans borrowed by: a. National Government (recorded by BTr) are expensed (i.e., Benchmark Treatment). b. Government agencies are capitalized, if they relate to the acquisition of a qualifying asset (i.e., Allowed Alternative Treatment).

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

OPEN FORUM QUESTIONS???? REACTIONS!!!!!

GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan

END GOVT ACCTG & ACCTG FOR NPOs by: Z.B.Millan