6/18/23, 11:48 PM PPE Part 1

FAR07 – PROPERTY, PLANT AND EQUIPMENT (PART 1)

RELATED STANDARDS: PAS 16 – PROPERTY, PLANT & EQUIPMENT

TOPIC OUTLINE

LECTURE NOTES
DEFINITION
Property, Plant and Equipment are tangible assets that are: (a) held for use in the production or
supply of goods and services; (b) for rental to others; (c) for administrative purposes that are
expected to be used for more than one year.
Important notes from the definition:
1. Characteristics of PPE
a. Tangible items or with physical form
b. Used in business (the summary of a-c of the definition)(c) Long-term in
natureCharacteristics of PPE
2. In relation to the definition for rental to others:
a. (a) The lease should be operating lease, otherwise if it is a finance lease it is
considered to be the asset of the lessee.
b. (b) Also, the item of PPE should not be land and/or building (e.g. equipment). Land
and/or building rented out under operating lease is classified as investment property not
PPE.
SCOPE
The following items are excluded from the scope of PAS 16:
1. PPE held for sale (PFRS 5 / PAS 2)
2. Biological assets other than bearer plants (PAS 41)
3. Exploration and evaluation assets (PFRS 6)
4. Mineral rights and mineral reserves such as oil,
natural gas, and similar non-regenerative
resources. NOTE: PAS 16 applies to PPE used to develop or maintain the assets described
above.
RECOGNITION
An item of property, plant and equipment shall be recognized as an asset when:
a. It is probable that future economic benefits associated with the asset will flow to the entity.
b. The cost of the asset to the entity can be measured reliably.

NOTE:
1. Spare parts, stand-by equipment and servicing equipment are recognized as PPE if they are
expected to be used for more than one period otherwise they are classified as inventory.
2. Safety and environmental equipment are recognized as PPE although they do not directly
increase the economic benefit of other existing assets, they are necessary to obtain the
future economic benefits from other assets.

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INITIAL MEASUREMENT
The cost of an item of property, plant and equipment comprises.
a. Cost of purchase
b. Cost 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.
c. Initial estimate of the cost 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. (MEASURED AT PRESENT VALUE OF FUTURE
CASH FLOWS)
COST OF PURCHASE
Inclusions:
(a) Purchase price / acquisition cost
(b) Import duties
(c) Irrecoverable taxes
(d) Freight cost
NOTE: Generally, VAT is not capitalized since it is a type of recoverable tax unless the entity is
non-VAT registered, it is capitalized.
Exclusions:
(a) Trade discounts
(b) Rebates and other similar deductions

NOTE: Acquisition costs vary depending on the means of acquiring the PPE.

NOTES:
1. No gain or loss on exchange if without commercial substance
2. An exchange has commercial substance when:
a. The cash flows of the asset received differ from the cash flows of the asset transferred
and the difference is significant relative to the fair value of the asset exchanged.
b. The entity-specific value of the portion of the entity's operations affected by the
transaction changes as a result of the exchange and the change is significant relative to

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the fair value of the asset exchanged. Entity-specific value is the present value of the
cash flows an entity expects to arise from the continuing use of an asset and from its
disposal at the end of its useful life or expects to incur when settling a liability.

DIRECTLY ATTRIBUTABLE COSTS

Inclusions:
a. Cost of employee benefits arising directly from the construction or acquisition of the item of
property, plant and equipment.
b. Cost of site preparation
c. Initial delivery and handling cost
d. Installation and assembly cost
e. Professional fees
f. Cost 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.
Exclusions:
a. Cost of opening a new facility
b. Cost of introducing a new product or service, including cost of advertising and promotion
c. Cost of conducting business in a new location or with a new class of customer, including cost
of staff training
d. Administration and other general overhead cost
e. Cost 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 loss
g. Cost of relocating or reorganizing part or all of an entity's operations.
h. Income from incidental operations
i. Savings on self-constructed assets

NOTE: (a) – (h) is recognized in profit or loss while (i) is not recognized on the books.
CLASSES OF PPE
PROPERTY
Cost of Land improvements
1. Permanent fences, water systems and sidewalks
2. Cost of trees and other landscaping
3. Streetlights and parking lots

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NOTE: the above costs are chargeable as costs of land improvements provided they are not part
of the blueprint. Otherwise, it is included of the constructed building.
Cost of Land
1. Purchase price
2. Attorney fees and other expenditures for establishing clean title
3. Broker commission
4. Escrow fees
5. Fees for registration and transfer of title
6. Cost of relocation or reconstruction of property belonging to others in order to acquire
possession.
7. Mortgages, encumbrances and interest on such mortgages assumed by the buyer
8. Unpaid taxes up to date of acquisition assumed by the buyer
9. Cost of survey
10. Cost of clearing, grading and demolishing unwanted old building, less proceeds from salvage
11. Payments to tenants to induce them to vacate the premises
12. Cost of permanent improvements, cost of grading, leveling, and landfill.
13. Cost of option to buy the acquired land. If the land is not acquired, the cost of option is
expensed outright.
14. Special assessment

PLANTPLANT
Cost of Building Improvements
1. Cost of elevator, escalator and similar items.
2. Ventilation systems, plumbing and lighting systems.
3. Immovable fixtures attached to the building.

NOTE: the above costs are chargeable as costs of building improvements provided they are not
part of the blueprint. Otherwise, it is included of the constructed building.
Cost of Purchased building
1. Purchase price
2. Legal fees incurred in connection with the purchase
3. Unpaid taxes up to date of purchase assumed by the buyer
4. Interest, liens and other encumbrances assumed by the buyer
5. Payments to tenants to induce them to vacate the building
6. Any renovating or remodelling costs incurred to put the building purchased in a condition
suitable for the intended use.
Cost of Self-constructed Building
1. Material used, labor employed and overhead directly attributable to construction
2. Building permit or license
3. Architect fee
4. Superintendent fee
5. Cost of excavation
6. Cost of temporary building used as construction office and tools or materials shed
7. Expenditures incurred during the construction period such as borrowing cost and insurance
8. Expenditures for service equipment and fixtures made a permanent part of the structure.
9. Cost of temporary safety fence around construction site and cost of subsequent removal
thereof. However, the construction of a permanent fence after the completion of the building
is recognized as land improvement.
10. Safety inspection fee

NOTE:
Land and building purchased on a lump-sum price
The acquisition cost of land and building acquired on a lump-sum price is allocated to both land

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and building based on their relative fair values at purchase date regardless of the intention on the
old building. If the building is unusable, the acquisition cost is allocated to the land only.
What is to be allocated to the land and building would be the cost of the land numbers 1, 3, 4, 6, 7,
8, 11 and 13
The cost of demolition shall be capitalized as cost of the new building. Any proceeds from sale of
salvaged materials are deducted from cost of demolition. Only the demolition costs is capitalized.
The allocated cost of the demolished building shall be recognized of loss.
EQUIPMENT
Cost of Equipment
1. Purchase price
2. Freight, handling, storage and other cost related to the acquisition
3. Insurance while in transit
4. Installation cost, including site preparation and assembling
5. Cost of testing and trial run, and other cost necessary in preparing the machinery for use
6. Initial estimate of cost of dismantling and removing the machinery and restoring the site on
which it is located, for which the entity has a present obligation.
7. Fee paid to consultants for advice on the acquisition of the machinery.
8. Cost of safety rail and platform surrounding machine.
9. Cost of water device to keep machine cool.

If a machinery is moved to a new location in order to increase the future service potential of the
asset, the undepreciated cost of the old installation cost is expensed and the new installation cost
is charged to the new asset. Cost of training the employee who will operate the machine is not
capitalized but expensed outright.
If a machinery is removed and retired to make room for the installation of a new one, the removal
cost not previously recognized as a provision is charged to expense on the theory that this is part
of the service related to the retirement of the old machinery.
The value added tax or VAT on the purchase of machinery is not capitalizable but charged to input
tax to be offset against output tax unless the entity is non-VAT registered. However, any
irrecoverable purchase tax is capitalized as cost of the asset.

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