PAS 16: Property,

Plant and Equipment

Property, plant and equipment are:
a. Tangible assets (have physical substance);
b. Used in business (used in the production or supply of goods or services, for
rental, or for administrative purposes); and
c. Long-term in nature (expected to be used for more than one period).

Examples of PPE:
a. Land used in business
b. Land held for future plant site
c. Building used in business
d. Equipment used in the production of goods
e. Equipment held for environmental and safety reasons
g. Major spare parts and long-lived stand-by equipment
h. Furniture and fixture
i. Bearer plants
Recognition
An item of PPE is recognized 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. (PAS 16.7)

The following are not PPE:

a. Land held for speculation
b. Land held for an undetermined future use
c. Land and/or building classified as investment property under PAS 40 Investment Property
d. Property held for sale in the ordinary course of business
e. Assets classified as held for sale under PFRS 5
f. Biological assets related to agricultural activity, other than bearer plants
g. Intangible assets
h. Minor spare parts and short-lived stand-by equipment
Initial Measurement
An item of PPE is initially measured at cost. Cost comprises the following:
a. Purchase price, including import duties, non-refundable purchase taxes, less trade discounts and
rebates.
b. Direct costs of bringing the asset to the location and condition necessary for it to be used in the
manner intended by management.
c. Initial estimate of dismantlement, removal and site restoration costs for which the entity incurs an
obligation by acquiring or using the asset other than to produce inventories.

The following are not part of the cost of an item of property, plant and equipment:
a. Costs of opening a new facility
b. Costs of introducing a new product or service (including costs of advertising and promotional
activities);
c. Costs of conducting business in a new location or with a new class of customer (including costs of staff
training); and
d. Administration and other general overhead costs
e. Costs incurred while an item capable of operating in the manner intended by management has yet to
be brought into use or is operated at less than full capacity;
f. Initial operating losses, such as those incurred while demand for the item's output
Acquisition on cash basis
ABC Co. acquired factory equipment overseas on cash basis for ₱100,000. Additional costs incurred include
the following: commissions paid to brokers on the purchase, ₱5,000; import duties, ₱25,000; non-refundable
purchase taxes, ₱10,000; freight cost of transferring the equipment to ABC Co.’s premises, ₱1,000; costs of
assembling and installing the equipment, ₱2,000; costs of testing the equipment, ₱1,500; administration and
other general overhead costs, ₱4,200; and advertisement and promotion costs of the new product to be
produced by the equipment, ₱3,800.
The samples generated from testing the equipment were sold at ₱500.
The initial cost of the equipment is computed as follows:

Purchase price (cash price equivalent) ₱ 100,000

Commissions to brokers 5,000
Import duties 25,000
Non-refundable purchase taxes 10,000
Transportation cost 1,000
Assembling and installation costs 2,000
Testing costs 1,500
Net proceeds from samples generated (500)
Initial cost of equipment ₱ 144,000

The administration and other general overhead costs and advertisement and
promotion costs are expensed outright.
Factory Equipment ₱ 144,500
Cash ₱ 144,500
to record capitalizable costs of equipment

Cash ₱ 500
Factory equipment ₱ 500
to record sale of samples generated from testing

General and administrative costs ₱ 4,200

Advertising expense 3,800
Cash ₱ 8,000
to record non-capitalizable costs
Acquisition on Account
DEF Co. acquired an equipment for ₱112,000 on account with a credit term of 2/15, n/30. Any discount is
computed based on the purchase price. The purchase price is inclusive of 12% value-added tax (VAT). ABC
Co. is VAT-registered and any input VAT paid is refundable through deduction from the monthly output VAT
remitted to the Bureau of Internal Revenue (BIR).
Additional costs incurred include:
₱10,000 cost of training staff who will be operating the equipment, and
₱15,000 cost of relocating the equipment to a new location after it was installed in the location originally
intended by management.
Purchase price inclusive of VAT 112,000
Divided by: 112%
Purchase price exclusive of VAT 100,000
Cash discount based on purchase price (2% × ₱112,000) (2,240)
Cash price equivalent 97,760
 Equipment ₱ 97,760
Input VAT 12,000
Accounts payable ₱ 109,760

If payment is made within the discount period, the entry is as follows:

Accounts payable ₱ 109,760

Cash ₱ 109,760

If payment is made beyond the discount period, the entry is as follows:

Accounts payable ₱ 109,760

Purchase discount lost 2,240
Cash ₱ 112,000
Special Cases of Acquisition

Deferred settlement
• Cash price equivalent (or present value of deferred payments)
• Any difference from total amount paid recognized as interest expense
• If short term, invoice price less discount, whether taken or not
Deferred settlement – with cash price equivalent
On January 1, 20x5, GHI Co. purchased furniture with an installment price of ₱130,000 and a cash price
equivalent of ₱100,000 by paying ₱10,000 down payment and issuing a one-year noninterest-bearing
note of ₱120,000 payable in equal semi-annual installments on July 1 and December 31, 20x5.

Furniture and fixture (cash price) ₱ 100,000

Discount on notes payable (squeeze) 30,000
Cash (down payment) ₱ 10,000
Notes payable (face amount) 120,000
Deferred settlement – no cash price equivalent
On January 1, 20x5, ABC Co. purchased fixtures with an installment price of ₱130,000 by
paying ₱10,000 down payment and issuing a three-year noninterest bearing note of
₱120,000 payable in three equal annual installments starting December 31, 20x5. The
prevailing rate for the note as of January 1, 20x1 is 12%.

Cash down payment ₱ 10,000

Present value of note payable:
Future cash flows (₱120,000 ÷ 3) 40,000
Multiply by PV of an ordinary annuity of ₱1 @ 12%, n = 3 × 2.401831 96,073
Total Initial Cost of Fixtures ₱106,073

Furniture and fixture (cash price) ₱ 106,973

Cash (down payment) ₱ 10,000
Notes payable (face amount) 96,073
Special Cases of Acquisition

Issuance of bonds
• Fair value (or present value) of the bonds issued
• Fair value of asset received
• Face value of the bonds issued

Issuance of shares
• Fair value of asset received
• Fair value of shares issued
• Par value or stated value of shares issued
Land with a current market value of P2,400,000. The book value of the land in the accounts of the
seller was P1,305,000. In exchange for the land, the company issued 20,000 ordinary shares with
par value of P100 and an estimated market value of P140 per share.

Land ₱ 2,400,000
Ordinary Share Capital ₱ 2,000,000
Share Premium 400,000
Special Cases of Acquisition

Donated asset
• If from a shareholder, at fair value of the asset received to be recorded as “Donated Capital”, any
additional cost deducted from share premium
• If from a non-shareholder, at fair value of the asset received plus directly attributable costs,
recorded as “Income from Donations”

Illustration:
A cabinet donated by a shareholder. The cabinet has an appraised value of P50,000. Delivery and
handling costs amounts to P1,500 to bring the cabinet to the company’s premises.

Furniture and Fixtures ₱51,500

Donated Capital ₱50,000
Cash 1,500
Exchange of assets

If with commercial substance:

• Fair value of asset given up plus additional cash payment and/or minus cash received
• Fair value of asset received plus additional cash payment and/or minus cash received
• Book value of asset given up plus additional cash payment and/or minus cash received

Lacks commercial substance:

• Book value of asset given up

Commercial substance exists when (a) the cash flows of the asset received differ from the cash flows of
the asset given up, and the difference is significant relative to the fair value of the asset given up and (b)
the entity-specific value of the portion of the entity’s operations affected by the transactions changes as a
result of the exchange and the change is significant relative to the fair value of the asset exchanged
Illustration:
A brand-new set of monobloc chairs in exchange for used chairs which costs P150,000. Additional cash of
P50,000 was paid. The fair value of the old chairs was determined to be P180,000, while the fair value of the
new chairs is P250,000. The exchange has commercial substance.

Furniture and Fixtures (New) ₱230,000

Furniture and Fixtures (Old) ₱150,000
Cash 50,000
Gain on Exchange 30,000
Self-constructed assets
• Direct costs of materials
• Direct costs of labor
• Indirect costs (i.e. overheads, indirect materials, indirect labor)
• Normal wastes and capitalizable borrowing costs shall be included as
• part of the cost of the asset. However, abnormal wastes and any initial
• operating losses or profits that arise during construction