PAS 16 PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment

are tangible assets that are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and are expected to be used during more than one period.

property, plant and equipment

Accordingly, the major characteristics in the definition of _ are:
a. The property, plant and equipment are tangible assets, meaning with physical substance.
b. The property, plant and equipment are used in business, meaning used in production or supply of goods or services, for rental purposes and for administrative purposes.
c. The property, plant and equipment are expected to be used over a period of more than one year.

a. Land
b. Land improvements
c. Building
d. Machinery
e. Ship
f. Aircraft
g. Motor vehicle
h. Furniture and fixtures
i. Office equipment
j. Patterns, molds and dies
k. Tools
l. Bearer plants

Examples of property, plant and equipment

Initial measurement

An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at cost.

• Cost is the amount of cash or cash equivalent paid and the fair value of the other consideration given to acquire an asset at the time of acquisition or construction.

Elements of cost
The cost of an item of property, plant and equipment comprises:
a. Purchase price, including import duties and nonrefundable purchase taxes, after deducting discounts and rebates
b. Cost directly attributable to bringing the asset to the location and condition for the intended use
c. Initial estimate of the cost of dismantling and removing the item for which the entity has a present obligation.

Directly attributable costs

Examples of directly attributable costs that qualify for capitalization as cost of the asset include:

• Cost of site preparation

• Initial delivery and handling cost

• Installation and assembly cost

• Professional fees

• Costs of testing whether the asset is functioning properly.

Subsequent measurement

After initial recognition, an entity shall choose either the cost model or the revaluation model as the accounting policy for property, plant and equipment.

The entity shall apply such accounting policy to an entire class of property, plant and equipment.

The cost model means that property, plant and equipment are carried at cost less any accumulated depreciation and any accumulated impairment loss.

The revaluation model means that property, plant and equipment are carried at revalued carrying amount

The revalued carrying amount is the fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment loss.

The cost of asset acquired on a cash basis simply includes the cash paid plus directly attributable costs such as freight, installation cost and other cost necessary in bringing the asset to the location and condition for the intended use.

Acquisition on account

When an asset is acquired on account subject to a cash discount, the cost of the asset is equal to the invoice price minus the discount, regardless of whether the discount is taken or not.

Cash discounts are generally considered as reduction of cost and not as income.

Acquisition on installment basis

When payment for item of property, plant and equipment is deferred beyond normal credit terms, the cost is the cash price equivalent.

In other words, if an asset is offered at a cash price and at an installment price and is purchased at the installment price, the asset shall be recorded at the cash price.

The excess of the installment price over the cash price is treated as an interest to be amortized over the credit period.

Issuance of share capital

Philippine GAAP provides that if shares are issued for consideration other than actual cash, the proceeds shall be measured by the fair value of the consideration received.

Accordingly, where a property is acquired through the issuance of share capital, the property shall be measured at an amount equal to the following in the order of priority:
a. Fair value of the property received
b. Fair value of the share capital
c. Par value or stated value of the share capital

Issuance of bonds payable

PFRS 9, paragraph 6.1.1, provides the asset acquired by issuing bonds payable is measured in the following order of priority:
a. Fair value of bonds payable
b. Fair value of asset received
c. Face amount of bonds payable

Exchange
PAS 16, paragraph 24, provides that the cost of an item of property, plant and equipment acquired in exchange for a nonmonetary asset or a combination of monetary and nonmonetary asset is measured at fair value of the asset given in exchange plus any cash payment.

However, the exchange is recognized at carrying amount of the asset given in exchange plus any cash payment if the exchange transaction lacks commercial substance.

Commercial substance

is a new notion and is defined as the event or transaction causing the cash flows of the entity to change significantly by reason of the exchange.

Simply stated, an exchange transaction has commercial substance when the cash flows of the asset received differ significantly from the cash flows of the asset transferred.

Construction

The cost of self-constructed asset is determined using the same principles as for an acquired asset.

The cost of self-constructed property, plant and equipment includes:

1. Direct cost of materials

2. Direct cost of labor

3. Indirect cost and incremental overhead specifically identifiable or traceable to the construction.

4. - PAS 16, paragraph 22, provides that the cost of abnormal amount of wasted material, labor or overhead incurred in the production of self-constructed asset is not included in the cost of the asset.

Derecognition

means that the cost of the property, plant and equipment together with the related accumulated depreciation shall be removed from the statement of financial position.

PAS 16, paragraph 67, provides that the carrying amount of an item of property, plant and equipment shall be derecognized on disposal or when no future economic benefits are expected from the use or disposal.

The gain or loss arising from the derecognition of an item of property, plant and equipment shall be determined as the difference between the net disposal proceeds and the carrying amount of the item.

Depreciation

is defined as the systematic allocation of the depreciable amount of an asset over the useful life.

Depreciation is not so much a matter of valuation.

Depreciation is a matter of cost allocation in recognition of the exhaustion of the useful life of an item of property, plant and equipment.

Depreciation period

The depreciable amount of an asset shall be allocated on a systematic basis over the useful life.

Depreciation of an asset begins when it is available for use, meaning, when the asset is in the location and condition necessary for the intended use by management.

Depreciation ceases when the asset is derecognized.

Therefore, depreciation does not cease when the asset becomes idle temporarily.

Temporary idle activity does not preclude depreciating the asset as future economic benefits are consumed not only through usage but also through wear and tear and obsolescence.

Factors of depreciation

In order to properly compute the amount of depreciation, three factors are necessary, namely depreciable amount, residual value and useful life.

Depreciable amount is the cost of an asset or other amount substituted for cost, less the residual value.

Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately.

For example, it may be appropriate to depreciate separately the air frame, engine, fittings such as seats and floor coverings and tires of an aircraft.

Residual value

is the estimated net amount currently obtainable if the asset is at the end of the useful life.

The residual value of an asset shall be reviewed at least at each financial year-end and if expectation differs from previous estimate, the change shall be accounted for as a change in an accounting estimate.

Useful life is either the period over which an asset is expected to be available for use by the entity, or the number of production or similar units expected to be obtained from the asset by the entity.

Useful life is either the period over which an asset is expected to be available for use by the entity, or the number of production or similar units expected to be obtained from the asset by the entity.

The factors in determining useful life are:
a. Expected usage of the asset
b. Expected physical wear and tear
c. Technical or commercial obsolescence
d. Legal limit for the use of the asset, such as the expiry date of the related lease.

1. Straight line method

2. Production method

3. Diminishing balance or accelerated methods

Depreciation method
The depreciation method shall reflect the pattern in which the future economic benefits from the asset are expected to be consumed by the entity.

straight line method,

the annual depreciation charge is calculated by allocating the depreciable amount equally over the number of years of useful life.

In other words, straight line depreciation is a constant charge over the useful life of the asset.

The straight line approach considers depreciation as a function of time rather than as a function of usage.

The production or output method

assumes that depreciation is more a function of use rather than passage of time.

The useful life of the asset is considered in terms of the output it produces or the number of hours it works.

Thus, depreciation is related to the estimated production capability of the asset and is expressed in a rate per unit of output or per hour of use.

Diminishing balance or accelerated methods

provide higher depreciation in the earlier years and lower depreciation in the later years of the useful life of the asset.

Thus, these methods result in a decreasing depreciation charge over the useful life.

The accelerated methods include sum of years' digits method and double declining balance method.