Government Accounting - Ppe

A CCOUNTING FOR P ROPERTY , P LANT AND E QUIPMENT

Property, Plant and Equipment – are tangible assets that are: 1. purchased, constructed, developed or otherwise acquired; 2. held for use in the production or supply of goods or services or to produce program outputs; 3. for rental to others; 4. for administrative purposes; 5. expected to be used during more than one reporting period; and 6. not intended for resale in the ordinary course of operations. Criteria for Recognition: a. it is probable that the future economic benefits or service potential associated with the item will flow to the entity; b. the cost or fair value of the item can be measured reliably; c. beneficial ownership and control clearly rest with the government; d. the asset is used to achieve government objectives; and e. it meets the capitalization threshold of P15,000. Measurement at Recognition  PPE that qualifies for recognition as an asset shall be measured at cost.  Where the PPE is acquired through a non-exchange transaction, its cost shall be measured at its fair value as at the date of acquisition.  The cost of an item of PPE comprises: a. Purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; b. Any 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 management. Costs of employee benefits arising directly from the construction or acquisition of the item of PPE Costs of site preparation Initial delivery and handling costs Installation and assembly costs Costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment) Professional fees. c. The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired, or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.  The following are examples of costs that are expensed rather than recognized as elements of cost of a PPE: 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  The different modes of acquiring PPE includes purchase, construction, exchange transaction, non-exchange transaction, transfer and finance lease.  Tangible items below the capitalization threshold of P15,000 shall be accounted as semi-expendable property, and shall be recognized as expenses upon issuance to end-user.

Total cost: Invoice price Delivery cost Installation cost Test run cost Total Less: Withholding Tax Net Amount Paid



45,000 3,000 1,500 1,000 50,500 3,140 37,460

When an asset is acquired on account subject to a cash discount, the cost of the asset is equal to the purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.

Example 2: An entity purchased a threshing machine on account at P200,000, with credit terms of 2/10, n/30.



If promotional items are received upon purchase of the PPE, the allocation of cost for the promo items received shall be as follows: a. If the promotional item received is the same as the PPE purchased, the total purchase cost shall be allocated to the total quantity purchased plus the promotional item. b. If the promotional item received is different from the PPE purchased, the cost of the promo item shall be its fair value. It shall be deducted from the total cost of the items purchased and the balance shall be allocated to the total quantity purchased.

Example 3: An entity purchased a motor vehicle at P330,000. A window-type air-conditioning unit with fair value of P20,000 was received as promotional item.

Illustrative Accounting Entries Purchase of PPE - PPE acquired through purchase are charged against appropriations/ allotments or special budget for capital outlay. PPE can be purchased on cash basis, on account, on installment basis, with promotional items, and at a lump sum price. Example 1: An entity purchased a photocopying machine with the following costs:

Page 1 of 4



In case the acquisition of PPE is at a “lump sum price”, the cost shall be apportioned to the asset acquired in order to have proper basis for computing depreciation. The purchase cost shall be distributed based on the relative fair value of the assets acquired.



The cost of several PPE purchased at lump sum price per set/group/lot shall be allocated to each PPE based on the breakdown of cost reflected in the invoice, if any. In the absence of such breakdown, the allocation of cost shall be based on the relative fair value of the assets acquired.

Example 4: An entity purchased a computer set with printer, table and chair at a lump sum price of P55,000. The invoice reflected the following cost component:

Construction of PPE During the construction period, all expenses incurred in relation to the construction of the PPE shall be taken up in the books as Construction in Progress (CIP) with the appropriate asset classification. As soon as the construction is completed, the “Construction in Progress” account shall be reclassified to the proper asset account. Likewise, all expenses such as interests, license fees, etc., during the construction period shall be capitalized. If the project is to be constructed by administration, the procurement of labor and materials shall be in compliance with the provisions of R.A. No. 9184 and its Revised Implementing Rules and Regulations.

Page 2 of 4

Since the condition (construction of school building) was fulfilled, the following adjustment shall be made:

Intra-agency Transfers of PPE - These shall be recognized at the carrying amount of the asset received. The receiving department/office shall recognize the asset at its original historical cost less accumulated depreciation and accumulated impairment loss. a.

PPE purchased and transferred in the same year

Example: Entity A-Central Office transferred on December 15, 2014 to Regional Office (RO) No. I a Lexmark Printer purchased on January 12, 2014 with an acquisition cost of P40,000 and accumulated depreciation of P7,600.

Donation of PPE  Cost of PPE acquired through donation without condition shall be taken up at its fair value at the date it is acquired. All expenses incurred in connection with the donated asset, such as delivery and installation costs, shall be included in the Example: A bus was donated to Entity A with a fair value of P1,000,000. Duties and taxes paid were P10,000; thus, the total cost amounted to P1,010,000. The donation received shall be recognized as follows:

b.

PPE purchased in Prior Year (PY) and transferred in Current Year (CY)

Example: On December 15, 2014, the Entity A-Central Office transferred to Entity ARO No. I a Lexmark Printer purchased on December 20, 2013 with acquisition cost of P40,000, estimated useful life of five years, residual value of five percent (5%), and accumulated depreciation of P7,600.



Where a PPE is acquired through donation with conditions or restrictions, a liability account shall be recognized until the conditions or restrictions have been fulfilled.

Example: A land was donated to Entity A with a condition that a school building will be constructed to operate as an elementary school for 20 years. The land has a fair value of P950,000 at the time of donation. The building has a residual value of 5% and an estimate useful life of 20 years. Building was available for use on June 1, 2014.

Assume that the school building constructed by administration costing P600,000 has been inspected and accepted by Entity A. (Note: Assume that the transactions on the construction of the building were already recognized.)

Page 3 of 4

Inter-agency transfer of PPE – Transfer from one government entity to another shall be recognized by the recipient entity at net carrying value. The transferor shall derecognize the PPE account upon transfer. Example: Entity A transferred to Entity B a computer purchased last year with acquisition cost of P40,000 and accumulated depreciation of P7,600.

Grants - 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. They shall be measured at 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. The grant qualifies as a trust receipt and the agreement stipulates that any PPE acquired shall be donated to the recipient entity upon completion of the projects. Illustrative Entries:

In accordance with PPSAS 17, public infrastructures shall be recognized as PPE in the entity’s financial statements. These shall be recorded in the books of accounts as Infrastructure Assets such as road networks, sewer system, water and power supply systems, communication networks, etc. Reforestation Projects With the implementation of PPSAS, reforestation projects are recognized as Land Improvements, Reforestation Projects in the books of accounts of the DENR or other entity concerned.  The following constitutes the initial costs of Land ImprovementsReforestation Projects: a. Survey, Mapping and Planning (SMP) b. Nursery Operation and Seedling Production or Procurement c. Plantation Establishment (Site preparation, hauling of seedlings and planting)  Only directly attributable cost shall be recognized as part of the initial cost of the project constituting the Construction in Progress-Land Improvements  Subsequent expenditures such as costs for the maintenance and protection incurred within the duration of the reforestation project, i.e., construction of fire lines, strip brushing, replanting, providing pest control, patrolling, shall be capitalized.  Costs for the maintenance and protection incurred after the duration or turn-over of the reforestation project shall be charged to Repairs and Maintenance-Land Improvements.  The cost of replacing trees shall be expensed where small numbers of trees are being replaced in any one particular area. Repairs and Maintenance Minor repairs shall be directly charged to expense account “Repairs and Maintenance” of the specific PPE. Major repairs shall be added to the carrying amount of the PPE and shall be depreciated over the remaining life of the PPE. Where cost cannot easily be differentiated between a minor or major repair, it shall be treated as expense. Derecognition of PPE

Infrastructure Assets Besides the five criteria for recognizing PPE, infrastructure assets have the following additional characteristics: a. Part of a system or network; b. Specialized in nature and do not have alternative uses; c. Immovable; and d. May be subject to constraints on disposal. Page 4 of 4