PPE (Land, Machinery, Land Imp & Building)

- held for use in the production/supply of goods/services, for rental to others or for administrative purposes.
- expected to be used during more than one accounting period.

INITIAL MEASUREMENT:
- at COST, amount of cash/cash equivalent paid or fair value of other consideration given to acquire an asset at
the time of its acquisition/construction or where applicable, the amount attributed to that asset when initially
recognized in accordance with specific requirement of other PFRS.

Components:
- Purchase Price including import duties, nonrefundable purchase taxes and any directly attributable costs of
bringing the asset to its working condition.

* Trade discount and rebates are deducted in arriving at purchase price.

DIRECTLY ATTRIBUTABLE COSTS:

1. Cost of Testing
2. Cost of Site Preparation
3. Professional fees of architects and engineers
4. Est. cost of dismantling & removing the asset and restoring the site
5. Installation & Assembly cost
6. Initial Delivery & Handling Costs
7. Costs of Employee benefits arising directly from construction/acquisition of PPE

MODES OF ACQUISITION:
1. Acquisition on Cash Basis – the amount to be capitalized is equal to the cash price/cash equivalents
paid at the acquisition date plus incidental costs such as freight, installation cost and other cost
necessary in bringing the asset to working condition for its intended cost.
2. Acquisition on Account – cost is equal to the invoice price less discount whether taken or not.
3. Acquisition on deferred settlement terms – cost of asset is equal:
a. if there is available cash price – cash price/cash equivalent paid at the acquisition date.
Difference between the cash price equivalent & total payment is recognized as interest over the
period of credit unless such interest is recognized in the Current Asset of the item under PAS23.
b. no available cash price – Present Value of payments using an imputed interest rate
4. Issuance of shares (RII)/(IR)
(OWN SHARE)
a. FMV of property received
b. FMV of capital stock issued
c. Par Value of the shares issued (no gain/loss)
(OTHER’s SHARE)
a. FMV of property given up
b. FMV of property received
5. Issuance of bonds (IRI)
a. Fair Value of Bonds issued
b. Fair Value of property received
c. Face Value of Bonds issued

EXCHANGE TRANSACTIONS:
1. With Commercial Substance
- Asset should be recorded @ FMV of the asset received even though there is cash payment involved.
- Gain/Loss on exchange is equal to CA less FV of asset given up @ time of disposal

2. Without Commercial Substance

- is measured at the CA of asset given up.
- No gain or loss is recognized.

COST OF MACHINERY
*when purchased:
1. Nonrefundable sales tax
2. Cost of water device to keep machine cool
3. Cost of adjustment to machinery for operational efficiency and to increase capacity
4. Construction of base (cost of safety rail and platform surrounding the machine)
5. Purchase Price
6. Insurance while in transit
7. Freight, handling, storage and other cost related to acquisition
8. Installation cost (site preparation)
9. Cost of Testing & Trial Run, and other cost necessary in preparing the machinery for use.
10. Fees paid to Consultants for advice on acquisition of the machinery
11. Unloading charge
12. Initial estimate of cost of dismantling and removing the machinery & restoring the site on which it is
located.
*OLD & NEW INSTALLATION COST:
a.The machinery is moved to new location – Undepreciated old installation cost is expensed. New
installation cost is charged to the new asset.
b.Machinery is removed and retired – Undepreciated old installation cost is expensed. (New installation
cost is charged as capitalizable cost and removal cost is expensed).

*NON-RECOVERABLE PURCHASE TAX (VAT):

- not capitalizable but charged to input tax to be offset against output tax.

*ROYALTY PAYMENT ON MACHINES:

- included as part of manufacturing Overhead in the company’s income statement, if the same is based on units
produced. If based on units produced and sold, it should be treated as selling expense.

LAND ACCOUNT:
ITEMS TREATMENT
1) Used as plant site PPE (PAS 16)
2) Held for currently undetermined used Investment Property (PAS 40)
3) Held for long-term capital appreciation Investment Property (PAS 40)
4) Held as site for building being constructed/ developed for future use Investment Property (PAS 40)
5) Leased out under operating lease Investment Property (Pas40)
6) Definitely as future plant site Owner-occupied Property (PPE)
7) Sold in the ordinary course of business Current assets – inventory
8) Held for sale under PFRS 5 Non-current Asset held for sale
and treated as current
asset
COST CHARGEABLE TO LAND:
1. Draining cost and filing the land
2. Survey cost
3. Unpaid real property taxes on the land up to date of acquisition assumed by the buyer.
4. Option cost of the land acquired (if not acquire, option cost is treated as expense)
5. Purchase Price
6. Cost of permanent improvement (cost of grading and leveling)
7. Commission cost paid to brokers/agents
8. Legal fees to close escrow
9. Cost to relocate/reconstruct property of others occupying the land
10. Cost to register the land and other cost of transferring the title in the name of the buyer.
11. Payments to tenants to convince them to vacate the premises
12. Legal fees and other expenditures for establishing clean title.
13. Cost of clearing unwanted old structures, less proceeds from salvage excluding demolition cost
14. Liabilities on the land assumed by the buyer

*SPECIAL NOTES:
1) Land Improvement
a. NOT SUBJ. TO DEPRECIATION – (cost of surveying, clearing, grading, leveling & subdividing),
capitalizable cost of the land.
b. DEPRECIABLE – (fences, water system, drainage system, side-walks, pavements &
landscaping),
 If part of the blueprint of the building – Building
 If not part – Land improvement
2) Special Assessment – capitalized as part of land
3) Real Property Tax – expensed when incurred
*unpaid real property tax accruing as of date of acquisition assumed by buyer – capitalizable cost.

BUILDING ACCOUNT:
ITEMS TREATMENT
1) Used as plant site PPE (PAS 16)
2) Being constructed/developed for use as am investment property Investment Property (PAS 40)
3) Owned by company and leased out under operating lease Investment Property
4) Owned and leased out under finance lease Not to be reported in the books
5) Sold in ordinary course of business Inventory
6) Held for sale under PFRS 5 NCA held for sale
COST CHARGEABLE TO BUILDING
*when purchased:
a. Purchase Price
b. Legal fees and other expenses incurred in connection with the purchase
c. Liabilities on the building assumed by buyer
d. Renovation and remodeling cost on the building to make it suitable for its intended use
e. Unpaid real property tax on the building up to date of acquisition assumed by the buyer
f. Payments to tenants to convince them to vacate the premises
*when constructed:
a. Fees paid for supervision
b. Building permit and license
c. Architect fee
d. Construction cost (materials, labor employed and overhead incurred during construction)
e. Expenditures for service equipment and fixtures made a permanent part of the structure
f. Expenditures incurred during the construction period such as interest on construction, loans and
insurance.
g. Cost of demolishing old building less salvage value
1) Old building to be demolished to make room for the construction of new building during same period
– Part of cost of NEW BUILDING
2) Construction is to be made next accounting period – LAND
h. Excavation cost
i. Cost of security fences while construction and other temporary buildings to house construction materials
and tools.

*SPECIAL NOTES:
1) INSURANCE
a) taken during construction – cost of building
b) not taken and there is claim for damages – claim is treated as expense
2) BUILDING FIXTURE
a) Immovable – cost of building
b) Movable – Furniture and Fixtures and depreciated using useful life.

*COST OF NEW BUILDING CONSTRUCTED ON SITE OF A PREVIOUS BUILDING:

1) Old building is unusable or to be demolished right away – purchase price is allocated entirely to land (cost
of old building)
2) Old building is usable but the entity will not use the old building prior to demolition. New building will be
classified as:
a) PPE – allocate purchase price to the land and building based on relative fair value
b) Inventory – Land and building will be classified as one item under inventory
c) Investment Property:
1. @cost model – as 2 separate items under investment property allocated using relative
FV
2. @FV model – as one item under investment property
3) Old building is usable and was used by the company as owner occupied property – New building will be
classified as:
a) PPE
b) Inventory allocate purchase price to land and building using relative FV

c) Investment Property

BORROWING COST (PAS 23)

- interest and other cost that an entity incurs in connection with the borrowing of funds.
1) Asset financed by SPECIFIC borrowing – actual borrowing costs incurred during the period less any
investment income on the temporary investment = capitalizable BC
2) Asset financed by GENERAL borrowing – Average BC vs. Actual BC, whichever is LOWER.
a) Cap. Rate = Total interest (general)
Total general borrowings
b) Weighted average expenditures
c) Weighted expenditures related to general = WA Exp. less principal related to specific X Cap. rate
d) Average vs. Actual, whichever is lower.
*NOTE:
 if total expenditure is less than or equal to specific borrowing – used specific rate (SR X WA Exp.)
 if total expenditure is greater than specific borrowing – used cap. rate (CR X WA Exp.)
 Expenditures incurred evenly during the year
WA Exp. = Total Expenditure/2
 An investment income earned form idle fund is not deducted.