Learning Objectives

 State the subsequent measurement of items of PPE.

 Define depreciation and state when depreciation commences and when it ceases.
 Account for the revaluation of items of PPE.
• Identify the cost of a natural resource.
• Account for the depletion of a natural resource.

Subsequent measurement – PPE

Subsequent to initial recognition, an entity shall choose either:

(a) the cost model or
(b) the revaluation model
as its accounting policy and shall apply that policy to an entire class of PPE.

Cost Model

After recognition, an item of PPE is measured at its cost less any accumulated depreciation and any
accumulated impairment losses.

Depreciation

Depreciation is the systematic allocation of the depreciable amount of an asset over its estimated useful
life.
When computing for depreciation, each part of an item of PPE with a cost that is significant in relation to
the total cost of the item shall be depreciated separately.
Depreciation begins when the asset is available for use, i.e., when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management.
Depreciation ceases when the asset is derecognized or when it is classified as “held for sale” under PFRS
5, whichever comes earlier.

Selection of depreciation method

There are various methods of depreciation. The entity shall select the method that most closely reflects
the expected pattern of consumption of the future economic benefits embodied in the asset.
However, a depreciation method that is based on revenue that is generated by an activity that includes the
use of an asset is not appropriate.

Common types of depreciation methods

Straight line method – depreciation is recognized evenly over the life of the asset by dividing the
depreciable amount by the estimated useful life.

Depreciation = (Historical cost – Residual value) ÷ Estimated useful life

Illustrative Problem: Straight Line Method

On January 1, 2021, ABC Co. acquired equipment with an estimated useful life of four years and a
residual value of $20,000 for a total purchase price of $100,000
 Initial Costs of Equipment 100,000
Received Value (20,000)
Depreciable Amount 80,000
Divided By: Estimated Useful Life 4
Annual Depreciation 20,000

The entry to record depreciation as follow:

Depreciation Expense 20,000
Accumulated Depreciation- Equipment 20,000

Accelerated Depreciation Methods

Under absolutely the depreciation method (decreasing -charge method), the precision charge decrease
over the useful life of the asset papa meaning, depreciation is higher in the early years of the asset 's
useful life and lower in later years.

This depreciation method is based on the philosophy that the revenue - generating capacity of the asset
declines due to passage of time. Thus, higher depreciation should be recognized in the early years of the
asset's useful life when higher revenues are generated. The following are application of accelerated
depreciation

1. Sum-of-the-years’ digits (SYD) depreciation - depreciation is computed by applying a series of

fractions to the depreciable amount of the asset.

Depreciation = (Historical cost – Residual value) x Fraction

SYD Life + 1
= Life x
denominator 2

Illustrative Problem: Sum-of-the-year’s digits Depreciation Method

On January 1, 2021, ABC Co. acquired equipment with an estimated useful life of four years and
a residual value of $20,000 for a total purchase price of $100,000

Initial Costs of Equipment 100,000

Received Value (20,000)
Depreciable Amount 80,000

SYD denominator = Life x [(Life +1)/2]

SYD denominator = 4 x [(4 +1)/2]

SYD denominator = 10
 Date Depreciable Amount SYD rate Depreciation Accu. Dep
Jan. 01, 2021 80,000.00
Dec. 31, 2021 80,000.00 4/10 32,000.00 32,000.00
Dec. 31, 2022 80,000.00 3/10 24,000.00 56,000.00
Dec. 31, 2023 80,000.00 2/10 16,000.00 72,000.00
Dec. 31, 2024 80,000.00 1/10 8,000.00 80,000.00

2. Double declining balance method - depreciation is computed by applying a fixed rate on the
carrying amount of the asset at the end of each period. Unlike for other depreciation methods,
the residual value is initially ignored when computing depreciation under the double declining
method.

Depreciation = Carrying amount x Rate

2
Double declining rate =
Life

3. 150% balance method – This is another variation of the double declining method which also the
depreciation is computed by applying a fixed rate on the carrying amount of the asset at the end
of each period and residual value is initially ignored

Illustrative Problem: Double Declining Balance Method

On January 1, 2021, ABC Co. acquired equipment with an estimated useful life of five years and
a residual value of $20,000 for a total purchase price of $100,000
Initial Costs of Equipment 100,000
Received Value (20,000)
Depreciable Amount 80,000

Double Declining Rate = 2/Life

Double Declining Rate = 2/5

Double Declining Rate = 40%

Date Carrying Amount Double Declining Rate Depreciation Accu. Dep

(a) = hist. cost - d (b) c=axb d = prev. bal.
+c
Jan. 01, 2021 100,000
Dec. 31, 2021 100,000 40% 40,000.00 40,000.00
Dec. 31, 2022 60,000 40% 24,000.00 64,000.00
Dec. 31, 2023 36,000 40% 14,400.00 78,400.00
Dec. 31, 2024 21,600 40% 1,600.00 80,000.00
Dec. 31, 2025 20,000 40% 0.00 80,000.00
Depreciation Method Based on Actual Physical Use.

Depreciation method based on actual physical uses appropriate find appreciation is a function of usage
rather than as function of time

1. Units of production method (Activity method or Variable-charge method)

The units-of-production method relates depreciation to the estimated production capability of
an asset and is expressed in a rate per unit of output or per hour of input.

Depreciation = (Historical cost – Residual value) x Rate

Illustrative Problem: Units of Production Method

On January 1, 2021, ABC Co. acquired software equipment with an estimated residual value of $20,000
For a total purchase cost of $ 100,000. The equipment has an expected total output of 160,000 units and
an expected total input of 40,000 hours.

the information an actual operation is presented below:

Year Units Produced Manufacturing Hours
2021 60,000.00 16,000.00
2022 30,000.00 8,000.00
2023 45,000.00 12,000.00
2024 25,000.00 4,000.00
160,000.00 40,000.00

a. If ABC Co. Uses the output method (based on units) the depreciation rate is computed as follow:

Depreciation Rate = (Historical cost – Residual value) / Estimated total units of output

Depreciation Rate = 80,000/160,000

Depreciation Rate = 0.50 per unit of output

Year Units Produced Depreciation Rate Depreciation Accu. Dep Carrying

(a) (b) c=axb d = prev. bal. + Amount
c (a) = hist. cost
-d
2021 60,000 0.5 30,000 30,000.00 70,000.00
2022 30,000 0.5 15,000 45,000.00 55,000.00
2023 45,000 0.5 22,500 67,500.00 32,500.00
2024 25,000 0.5 12,500 80,000.00 20,000-
160,000 80,000
b. If ABC Co. Uses the input method (based on hours) the depreciation rate is computed as follow:

Depreciation Rate = (Historical cost – Residual value) / Estimated total hours of input

Depreciation Rate = 80,000/40,000

Depreciation Rate = 2 per hour of output

Year Units Produced Depreciation Rate Depreciation Accu. Dep Carrying

(a) (b) c=axb d = prev. bal. + Amount
c (a) = hist. cost -
d
2021 16,000 2 32,000 32,000.00 68,000.00
2022 8,000 2 16,000 48,000.00 52,000.00
2023 12,000 2 24,000 72,000.00 28,000.00
2024 4,000 2 8,000 80,000.00 20,000.00
40,000 80,000

Composite Method and Group Method

Composite method of depreciation is a process of averaging the useful life of a number of property
units and appreciating the entire class of asset over a single life (e.g. all for five years), thus simply in
record keeping of asset and depreciation calculation

Group method is a variation of composite method. The only difference is that under the composite
method, dissimilar assets are grouped and appreciated as one.

Composite (group) life and rate are computed using the formula below:

Composite (Group) Life = Total Depreciation Amount / Total Annual Deprecation

Composite (Group) Rate Cost = Total Annual Depreciation / Total Cost

Illustrative Problem:

On January 1, 2021, ABC Co. purchased the following:

Cost Residual Value Useful Life
Machine Tools 20,000 2,000 3 Years
Meters Costing 16,000 1,000 5 years
Returnable Containers 30,000 - 6 years
Solution:
Asset Cost Residual Value Depreciable Useful Life Annual
(a) (b) Amount Depreciation
c=a-b
Machine 20,000 2,000 18,000.00 3 6,000.00
Tools
Meters 16,000 1,000 15,000.00 5 3,000.00
Costing
Returnable 30,000 0 30,000.00 6 5,000.00
Containers
Totals 66,000.00 63,000.00 14,000.00

Composite (Group) Life = Total Depreciation Amount / Total Annual Deprecation

= 63,000 / 14,000
= 4.5 years

Or

Composite (Group) Rate Cost = Total Annual Depreciation / Total Cost

= 14,000 / 66,000
= 21.21%

Depreciation = Total Depreciable Amount / Composite Life

= 63,000/4.5 years
= 14,000
or

Depreciation = Total Depreciable Amount x Composite (Group) Rate Cost

= 63,000 x21.21%
= 14,000

Leasehold improvements

Leasehold improvements are depreciated over the useful life of the improvements or the remaining
lease term, whichever is shorter.

An option to renew the lease is considered when determining the shorter between the useful life and
the remaining lease term if it is probable that the renewal option will be exercised.

Illustrative Problem: Leasehold Improvement

On January 1, 2021, ABC Co. Sign a 10 year lease for office space ABC has the option to renew the lease
for an additional five year. On or before January 1, 2030. During the first half of January 2022, ABC Co.
Incurred of the following costs:

 $ 900,000 for general improvement to the lease premises with an estimated useful life of 10 years.
 $ 100,000 for office furnitures and equipment with an estimated useful life of 10 years video
  $ 200,000 for movable assembly line equipment with useful life of five years .

At the time of leasehold improvement were finish, ABC Co. Is uncertain to the exercise of the renewal
option.

Depreciation on leasehold improvement is computed as follows:

Useful Life 10 Years

Remaining Lease Term as Of January 2,2022 9 Years
Extension of Lease - 9 Years

Shorter between useful life and lease term

The option for renewal is disregarded since it is not probable.

Cost of general improvement 900,000
Divided by 9 years
Annual Depreciation on Leasehold Improvement 90,000

Changes in Depreciation Method, Useful Life, and Residual Value

A change in depreciation method, useful life, or residual value is a change in accounting estimate
accounted for prospectively.

Prospective accounting means the change affects only the current period and/or future periods. The
change does not affect past periods.

Illustrative Problem: Change in Depreciation Method

On January 1, 2021, ABC Co. Acquired machinery for total cost of $20,000,000. the machinery is
depreciated using double declining method over a period of 10 years. on January 1, 2024, ABC Co.
change its depreciation method to a straight-line method.

Double Declining Balance Rate = 2/Life

Double Declining Balance Rate = 2/10
Double Declining Balance Rate = 20%

Depreciation expense for 2024 is computed as follows:

Carrying amount as of January 1, 2024
(20M x 80% x 80% x 80%) 10,240,000
Divided by remaining useful life (10 yrs. – 3 yrs.) 7
Straight line depreciation 1,462,857

Accounting for Replacements of Major Parts

The cost of the replacement part is recognized while the carrying amount of the replaced part is
derecognized.

If the carrying amount of the replaced part is indeterminable, the entity may use the cost of the
replacement as an indication of what the cost of the replaced part was at the time it was acquired or
constructed.
Illustrative Problem

ABC Co, acquired an aircraft from XYZ, Inc. On January 1, 2021 for a total cost of $ 6,000,000. The
aircraft is estimated to have a useful life of 10 years. ABC Co. uses straight line method of depreciation.
On January 1, 2025 a major part of the equipment was replaced for a total cost of $ 800,000.

a. Assume the total cost of the old part that is your place is$ 500,000. The entries to record the
replacement are as follows:

2025
Jan. 1 Accumulated Depreciation (500K x 4/10) 200,000
Loss of replacement (squeeze) 300,000
Delivery Equipment – aircraft (old part) 500,0002025
Jan. 1 Delivery Equipment – aircraft (new part) 800,000
Cash 800,000

b. Assume that is impracticable to determine the cost of the old part that is replaced. The entries to
record the replacement are as follows:

2025
Jan. 1 Accumulated Depreciation (800K x 4/10) 320,000
Loss of replacement (squeeze) 480,000
Delivery Equipment – aircraft (old part) 800,000

2025
Jan. 1 Delivery Equipment – aircraft (new part) 800,000
Cash 800,000

Revaluation Model

After recognition as an asset, an item of PPE whose fair value can be measured reliably shall be carried at
a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated
depreciation and subsequent accumulated impairment losses.

Revaluation surplus

If an asset’s carrying a modest increase as a result of a revaluation, the English shall be recognized in
other comprehensive income and accumulated in equity under the heading of revaluation surplus.

We will be using the following formula when revaluating items of PPE

Fair value* xx
Less: Carrying amount (xx)
Revaluation surplus – gross of tax xx

*The fair value is determined using an appropriate valuation technique, taking into account the principles
set forth under PFRS 13.

If an asset's carrying amount is decreased as a result of a revaluation, the decrease shall be recognized in
profit or loss.
However, the decrease shall be recognized in other comprehensive income to the extent of any credit
balance existing in the revaluation surplus in respect of that asset

Methods of recording revaluation

1. Proportional method - The gross carrying amount is adjusted proportionately to the change in the
carrying amount.

2. Elimination method - The accumulated depreciation is eliminated against the gross carrying amount
of the asset.

Illustrative Problem: Proportional Method

An equipment acquired on January 1, 2015 at the cost of $ 2,000,000 was expected to have a useful life of
10 years. On December 31, 2017, it was appraised to have a fair value of $ 1,750,000. The company
carries this asset in a class that is measured using revaluation model.

The computation of the carrying amount is as follows:

Fair value or revalued amount P1,750,000

Carrying value at 12/17/2017
(2,000,000 x 7/10) 1,400,000
Revaluation Surplus P 350,000

Cost Appraisal Increase

Gross $ 2,000,000 $ 2,500,000 $ 500,000
Accu. Dep. 600,000 750,000 150,000
Net $ 1,400,000 $ 1,750,000 $ 350,000

The increase in the carrying value of the asset is P350,000, which is equivalent to 25% of the previous
carrying value (350,000/1,400,000). Thus, the asset account is increased by 25% x P2,000,000 or
P500,000 and related accumulated depreciation you similarly increased by 25% x P600,000 or P150,000.

Illustrative Problem: Elimination Method

An equipment acquired on January 1, 2015 at the cost of $ 2,000,000 was expected to have a useful life of
10 years. On December 31, 2017, it was appraised to have a fair value of $ 1,750,000. The company
carries this asset in a class that is measured using revaluation model.

The computation of the carrying amount is as follows:

Fair value or revalued amount P1,750,000

Carrying value at 12/17/2017
(2,000,000 x 7/10) 1,400,000
Revaluation Surplus P 350,000
 Appr. CV Appraisal Decrase
Gross $ 2,000,000 $ 1,750,000 $ (250,000)
Accu. Dep. (600,000) - 600,00
Net $ 1,400,000 $ 1,750,000 $ 350,000

Accumulated depreciation balance was eliminated and at the same time, reduce the equipment of account
balance by 250,000, leaving a balance of P1,750,000 (P2,000,000 - 250,000), which is equal to its fair
value at the date of revaluation.

Natural resources

Natural resources, often called wasting assets, include petroleum, minerals, and timber. They have two
main features:
1. The complete removal (physical consumption) of the asset, and
2. The replacement of the asset only by an act of nature.

Cost of natural resources

1. Purchase price including direct costs and restoration costs.
2. Exploration and evaluation costs – to the extent that they are capitalized in accordance with the
entity’s accounting policy.
3. Development costs – amounts paid to prepare the resource site for mining. These include drilling
costs and costs of construction of tunnels, shafts and wells.

Depletion
Depletion is the systematic allocation of the depletion base of a natural resource over the period the
natural resource is extracted.

Depletion base is the capitalized cost of the natural resource less its residual value.

Depletion is normally computed using the units-of-production method (activity method or variable-charge
method).

Illustrative Problem:
In 2021, ABC Mining Corp. acquired the right to use 1,000 acres of land to mine for gold. The lease cost
is P50,000,000, and the related Exploration costs on the property amounted to $ 10 million. it is the policy
of ABC Mining Corp. to capitalize all costs of exploration and evaluation of mineral resources. Intangible
development costs for drilling, tunnels, shafts, and well incurred before opening the mine amounted to $
85 million. At the end of the mine's economic useful life, ABC Mining Corp. is required by legislation to
restore the site. estimated restoration costs have a fair value of $5,000,000. ABC mining Corp. estimates
the mine will provide approximately 100 billion ounces of gold. ABC extracted 300,000 ounce of gold in
2022.

Requirement: Compute for the depletion charge in 2022

Solution:
Acquisition cost 50,000,000
Exploration costs 10,000,000
Intangible Development 85,000,000
Restoration Cost (Fair Value) 5,000,000
Total Cost of Natural Resources 150,0000,000
Depletion in 2022 is computed as follows:

Depletion rate per unit = Depletion base / Total Estimated Deposits

= 150,000,000 / 100,000,000
= 1.50

Depletion = Depletion rate per unit x actual units extracted

= 1.50 x 300,000
= 450,000

The entry to record the depletion in 2022 is as follows:

2022
Dec. 31 Work-in-Process Inventory 450,000
Accumulated Depletion 450,000

The accumulated depletion is treated as a contra-asset account to the wasting asset to derive its carrying
amount

Resource Deposit – Gold Mine, at Cost 150,000,000

Accumulated Depletion (450,000)
Carrying Amount 149,550,000

Video References:
https://www.youtube.com/watch?v=hKq-h6qZybc&list=PLqGhhQ3Ku9CbBHu7_Hq_l-TK4h5-rd-
1K&index=11
https://www.youtube.com/watch?v=WqbK3oPYIVg&list=PLqGhhQ3Ku9CbBHu7_Hq_l-TK4h5-rd-
1K&index=12
https://www.youtube.com/watch?v=Z7SfSVmychY
https://www.youtube.com/watch?v=TCWFsRFPo9Q