PPE Part 2

6/18/23, 11:49 PM FAR
FAR08 – PROPERTY, PLANT AND EQUIPMENT (PART 2) RELATED STANDARDS: PAS 16 –

PROPERTY, PLANT & EQUIPMENT
TOPIC OUTLINE
LECTURE NOTES
SUBSEQUENT MEASUREMENT
After initial recognition, an entity chooses either cost model or revaluation model for subsequent
measurement of PPE.
NOTE: The model chosen applies to an entire class of PPE.
COST MODEL
Under the cost model, an entire class of PPE is carried at its cost less any accumulated
depreciation and any accumulated impairment losses.
CONCEPT OF DEPRECIATION
BASIC CONCEPTS
Depreciation is the systematic allocation of the depreciable amount of the property, plant and
equipment over the useful life.
NOTE: Depreciation focuses more on cost allocation rather than valuation and its purpose is to
have each period benefiting from the related asset an equitable share of the asset’s cost.
Commencement and Cessation
Depreciation of an item of PPE begins when it is available for use, meaning, when the asset is in
the location and condition necessary for it to be capable of operating in the manner intended by
management.
Depreciation of an item of PPE ceases when it is derecognized or becomes available for sale
whichever is earlier. (derecognition is to be discussed later on)
NOTE: Depreciation does not cease when the asset becomes idle temporarily.
Kinds of DepreciationKinds of Depreciation
1. Physical depreciation is related to the depreciable asset's wear and tear and deterioration
over a period.
2. Functional or economic depreciation arises from technical obsolescence or inadequacy of the
asset to perform efficiently.
NOTE: Obsolescence means the process of becoming no longer useful or outdated. Inadequacy
results when an asset is no longer appropriate because of an increased volume of operations.
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FACTORS OF DEPRECIATION
a. Depreciable Amount - is the cost of an asset or other amount substituted for cost less its
residual value.
b. Residual Value - is the estimated amount that an entity would currently obtain from disposal
of the asset, after deducting the estimated cost of disposal, if the asset were already of the
age and condition expected at the end of its useful life.
c. Useful Life - is either the period of time over which an asset is expected to be used by the
entity or the number of production or similar units expected to be obtained from the asset by
the entity.
NOTES:
1. Factors considered in determining useful life: (a) Expected usage of the asset; (b) Expected
physical wear and tear; (c) Obsolescence; (d) Legal limits for the use of the asset
2. Residual value and useful life are based on estimation and must be reviewed annually.
3. If residual value is greater than carrying amount, depreciation stops.
COMPUTATION OF DEPRECIATION
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 airframe, engines, fittings (seats and floor coverings) and tires of an
aircraft.
DEPRECIATION METHODS
PAS 16 requires management to choose the method that best reflects the expected pattern of
consumption of the future economic benefits embodied on the asset. PAS 16 PROHIBITS
depreciation method that is based on revenue.
UNIFORM OR FIXED CHARGE METHODS:

Under these methods, depreciation is a function of time or caused by passage of time rather than
as a function of usage.
1. STRAIGHT-LINE METHOD
Depreciation Expense is computed as:
DEP. EXP. = DEPRECIABLE AMOUNT ÷ USEFUL LIFE
OR
DEP. EXP. = DEPRECIABLE AMOUNT x STRAIGHT LINE RATE
NOTE: Straight-line rate is computed as (1 / useful life)
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2. COMPOSITE AND GROUP METHOD

Composite and group methods are similar in application except that composite method
applies to dissimilar items of PPE and group method applies to similar items of PPE.
Key Notes on Composite and Group Method:
a. Accumulated depreciation is maintained and related for the total group. Thus,
accumulated depreciation is not related to any individual items of PPE.
b. Depreciation expense is computed as:
DEP. EXP. = TOTAL COST x COMPOSITE/GROUP RATE
c. Relevant formulas:
COMPOSITE/GROUP RATE = TOTAL ANNUAL STRAIGHT-LINE DEPRECIATION ÷
TOTAL COST
COMPOSITE/GROUP LIFE = TOTAL DEPRECIABLE AMOUNT ÷ TOTAL ANNUAL
STRAIGHT-LINE DEPRECIATION
NOTE: Composite or group rate, once computed, is constant regardless of subsequent

replacement, additions or disposals.
d. Since accumulated depreciation account is not related to any individual items of PPE,
there is no gain or loss on disposal or sale of items of PPE.
VARIABLE CHARGE METHODS:

Under these methods, depreciation is a function of usage rather than a function of time.
Thus, depreciation is related to the estimated production capability of the asset and is
expressed in a rate per unit of output (OUTPUT METHOD) or per hour of use
(WORKING HOURS METHOD).
3. WORKING HOURS METHOD AND UNITS OF PRODUCTION METHOD The two methods
above are essentially the same except on the denominator used to compute depreciation.
Periodic depreciation computed under these methods varies in proportion of use. Thus, when
the asset is not used during the period, no depreciation is recognized.
Depreciation expense is computed as:
DEP. EXP. = (DEPRECIABLE AMOUNT ÷ TOTAL ESTIMATED OUTPUT/ HOURS) x
ACTUAL OUTPUT/HOURS DURING THE YEAR
NOTE: Depreciable amount divided by the total estimated output or hours is known as the
depreciation rate per output or per hour, respectively.
DECREASING CHARGE OR ACCELERATED METHODS:

The decreasing charge or accelerated methods provide higher depreciation in the earlier
years and lower depreciation in the later years of the life of the asset. Thus, these methods
result in a decreasing depreciation charge over the useful life. This is on the philosophy that
new assets are generally capable of producing more revenue in the earlier years than in the
later years.
4. SUM-OF-THE-YEARS-DIGITS (SYD) METHOD Under the sum of years' digits method, the
depreciation is computed by multiplying the depreciable amount by a series of fractions
whose numerator is the digit in the life of the asset and whose denominator is the sum of the
digits in the life of the asset.
Thus, depreciation is computed as:
DEP. EXP. = DEPRECIABLE AMOUNT x (DECREASING NO. OF YEARS ÷ SYD)
NOTE: SYD is computed as LIFE x [(LIFE + 1) ÷ 2]

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6/18/23, 11:49 PM FAR

FAR08 – PROPERTY, PLANT AND EQUIPMENT (PART 2) RELATED STANDARDS: PAS 16 –

UNIFORM OR FIXED CHARGE METHODS:

2. COMPOSITE AND GROUP METHOD

NOTE: Composite or group rate, once computed, is constant regardless of subsequent

VARIABLE CHARGE METHODS:

DECREASING CHARGE OR ACCELERATED METHODS:

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