Chapter 15 Ppe (part 1)_reviewer_for Distribution.pdf

PROPERTY, PLANT & EQUIPMENT Overview on the topic: Chapter

Title

Sub-topics___

15

PPE –Part 1

Initial recognition & measurement

16

PPE –Part 2

Subsequent measurement

Related standard:

•

PFRS 16: Property, Plant and Equipment

Chapter 15 PPE (Part 1) Learning Objectives

•

Identify the different modes of acquisition of

property, plant and equipment.

•

State the elements of cost of property, plant and equipment.

•

State when the capitalization of costs of property, plant and equipment ceases.

Characteristics of PPE

a. b.

Tangible assets – items of PPE have physical substance 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

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

1.

Purchase price, including non-refundable purchase taxes, after deducting trade discounts and rebates.

2.

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.

3.

Present value of decommissioning and restoration costs to the extent that they are recognized as obligation

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.

Measurement of Cost

•

The cost of an item of PPE is the cash price equivalent at the recognition 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.

Cost of Land (Property) 1. 2. 3.

Purchase price including other necessary costs such as broker’s commissions. Closing costs, such as titling costs, attorney’s fees, and recording fees. Costs incurred in getting the land in the condition for its intended use, such as surveying, grading, filling, draining, and clearing.

4. 5. 6.

Unpaid taxes prior to date of acquisition assumed by the buyer. Assumption of any liens, mortgages, or encumbrances on the property

Special assessments for local government-maintained improvements, such as pavements, street lights, sewers, and drainage systems.

7. 8.

Option paid to acquire the land. Costs incurred to induce tenants to vacate premises and costs of relocating and reconstructing property belonging to others.

9. 10.

Initial estimate of restoration costs for which the entity has a present obligation Any additional land improvements that have indefinite useful life such as costs

of draining, clearing, grading, leveling and filling, surveying, subdividing, and other permanent improvements.

Land improvement •

Land improvements are enhancements to the land which have

definite useful life, such as private driveways, walks, fences, parking lots, drainages and water systems, and cost of trees, shrubs,

plants and other landscaping.

Cost of purchased Building (Plant) 1.

Purchase price including other necessary costs such as broker’s

commissions and legal fees.

2.

Assumption of any liens, mortgages, or encumbrances on the property

3. 4. 5. 6.

Option paid to acquire the building. Unpaid taxes prior to date of acquisition assumed by the buyer.

Costs incurred to induce tenants to vacate premises. Costs of getting the building in the condition for its intended use, such as remodeling, renovation, and other repairs prior to occupancy.

Cost of self-constructed Building (Plant) 1. 2. 3. 4. 5. 6.

Materials, labor, and overhead costs incurred during construction. Architectural costs, supervision costs, and costs of building permit Excavation costs Insurance costs and safety inspection fees Costs of temporary structures built during construction Interest on borrowings made to finance construction (Borrowing

costs are discussed in Chapter 18)

INTERMEDIATE ACCTG 1B (by: MILLAN)

Cost of self-constructed Building - continuation The following costs are not included in the cost of a self-constructed

building:

1. 2.

Internal profits or savings on self-construction Cost of abnormal amounts of wasted material, labor, or other resources due to inefficiencies

3. 4.

Costs of uninsured hazards or claims for uninsured accidents Costs of private driveways, walks, permanent fences, parking lots, and drainages and water systems that are not included in the

building’s blueprint

Building improvement

•

Building improvements refer to costs incurred subsequent to

occupancy of a purchased building or subsequent to completion of a self-constructed building that either increase the useful life of the

building or improve its current state.

Cost of equipment 1.

Purchase price including other necessary costs such as broker’s commissions and non-refundable purchase taxes.

2.

Freight, handling charges, and insurance on the equipment while in transit

3. 4. 5. 6.

Cost of necessary special foundations or platform, Assembling and installation costs

Costs of testing and conducting trial runs The initial estimate of decommissioning and restoration costs for which the entity has a present obligation

Cost of equipment - continuation • 1.

The following costs are not included in the cost of an equipment: Cost of relocating the equipment after it has been put to the

location and condition originally intended by management.

2.

Cost of training personnel who will be responsible in operating the

equipment.

3.

Cost of dismantling and removing an old equipment belonging to

the entity prior to the installation of a new equipment.

Lump-sum purchase

•

The acquisition cost of a group of items of PPE acquired on a lump-

sum price (basket price) is allocated to the individual assets based on their relative fair values at the date of purchase.

Demolition costs •

The accounting treatment for demolition costs depends on the reason for the demolition.

Example:

Case: An old structure is demolished to make way for the construction of a new building. Accounting: The demolition costs are considered as costs of site preparation under PAS 16.; and therefore, capitalized as cost of the new building.

 Any proceeds from sale of salvaged materials from the demolition are deducted from the demolition cost that is capitalized to the new building.

Acquisition through exchange

•

If the exchange has commercial substance, the asset received from the exchange is measured using the following order of priority: a.

Fair value of asset Given up Plus cash Paid/ minus cash received

b.

Fair value of asset Received

c.

Carrying amount of asset Given up Plus cash Paid/ minus cash received

• If the exchange lacks commercial substance, the asset received from the exchange is measured at (c) above.

INTERMEDIATE ACCTG 1B (by: MILLAN)

Acquisition through issuance of own equity instrument or debt instrument The assets acquired is measured using the following order of priority:

1. 2.

Fair value of asset Received Fair value of instrument Issued

Acquisition by donation Items of PPE received as donation are measured at fair value and accounted for as:

a. b. c.

Income – if the donor is an unrelated party. Donated capital – if the donor is an owner (shareholder).

Government grant, in accordance with PAS 20 Accounting for Government Grants and Disclosure of Government Assistance. Accounting (see Chapter 17) – if the donor is the government.