5 Property Plant and equipment intermediate accounting Reviewer PDF

Preview

Summary

Property, Plant and Equipment PAS 16MAJOR CHARACTERISTICS IN THE DEFINITION OF PPE a. Tangible assets u With physical substance b. Used in business u Used in production or supply of goods or services u For rental purposes* (*meaning, rental of MOVABLE property) u For administrative purposes u Not in...

Description

Property, Plant and Equipment PAS 16 MAJOR CHARACTERISTICS IN THE DEFINITION OF PPE a. Tangible assets u With physical substance b. Used in business u Used in production or supply of goods or services u For rental purposes*(*meaning, rental of MOVABLE property) u For administrative purposes u Not included in PPE o Assets (including land) that are held for sale, or held for investment c. Expected to be used over a period of more than one year u PPE are classified as noncurrent assets EXAMPLES OF PPE (old term is Fixed Assets) u Land u Land improvements u Building u Machinery u Ship u Aircraft u Motor vehicle u Furniture and fixtures u Office equipment u Patterns, molds and dies u Tools u Bearer plants PPE does not apply to u Biological assets related to agricultural activity* u Mineral rights and mineral reserves (oil, natural gas, similar nonregenerative resources) *Note : bearer plants are PPE; when the nature of the business is agricultural APPLY PAS 16 PPE used to DEVELOP or MAINTAIN, e.g: u biological assets, and u mineral rights and mineral reserves PPE INCLUDES u Costs incurred initially to acquire or construct an item of PPE

u Costs incurred subsequently to add to, replace part of, or service the PPE SPARE PARTS AND SERVICING EQUIPMENT u USUALLY, o It is carried as inventory and recognized as expense when consumed u MAJOR spare parts and STAND-BY equipment o  qualify as PPE when the company expects to use them during more than one period. SAFETY AND ENVIRONMENTAL EQUIPMENT u considered as PPE although these do not directly increase the future economic benefits of any particular existing item of PPE u Example : installation of a new chemical handling process to comply with environmental requirements on the production and storage of dangerous chemicals MEASUREMENT AT RECOGNITION u AT COST o Cost  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 Cash equivalent paid Add: Fair Value Cost of PPE

XX XX XX

COST OF PPE INCLUDES u Purchase price includes: o import duties, o nonrefundable purchase taxes, o AFTER deducting trade discounts & rebates u Directly attributable costs (freight, installation cost and other costs necessary in bringing the asset to the location and condition for the intended use)

u 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 (meaning, as required by contract) DIRECTLY ATTRIBUTABLE COSTS u Costs of employee benefits arising directly from the construction or acquisition of the item of PPE u Cost of site preparation u Initial delivery and handling cost u Installation and assembly cost u Professional fees u Costs of testing whether the asset is functioning properly Costs not qualified for recognition as PPE EXPENSED u Cost of opening a new facility u Cost of introducing a new product/service (ads & promo) u Cost of conducting business in a new location (including staff training) u Administrative and other general overhead costs u Initial operating losses u Cost of relocating/reorganizing part or all of an entity’s operations Measurement after recognition (Accounting policy applied to an ENTIRE class of PPE) u Cost Model o PPE are measured at Cost Less: Accumulated depreciation Accumulated impairment loss Measurement after recognition

XX (XX) XX XX

FV at the date of revaluation Less: Subsequent accumulated depn Subsequent accumulated impairment loss Measurement after recognition

XX XX

XX

XX

WAYS OF ACQUIRING PPE u Cash basis u On account subject to cash discount u Installment basis u Issuance of share capital u Issuance of bonds payable u Exchange u Donation u Government grant u Construction Acquisition on a cash basis u Cost = the CASH PRICE EQUIVALENT at the recognition date. u When several assets are acquired at a basket price or lump sum price, it is necessary to apportion the single price to the assets acquired on the basis of relative fair value. Acquisition on account u Cost = invoice price minus the discount, regardless of whether the discount is taken or not u If discount is not taken, it is charged to purchase discount lost  other expense Acquisition on installment basis u 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.

XX

u Revaluation Model o PPE are carried at revalued amount

(XX)

Installment Price Less: Cash Price Excess  Interest to be

XX (XX) XX

amortized over the credit period(Discount on NP is debited upon acquisition) Acquisition on installment basis u If an asset is acquired by installment and THERE IS NO AVAILABLE CASH PRICE, the asset is recorded at an: o Amount = PV of all payments using an implied interest rate

c. Face value of bonds payable Exchange u With commercial substance (there’s a significant gain or loss on exchange) u Without commercial substance (no gain nor loss) WITH COMMERCIAL SUBSTANCE NO CASH IS INVOLVED

CASH IS INVOLVED

Down Payment Add: PV of NP Total Cost

XX XX XX

Cost is measured at the ff in the order of priority

Cost is equal to the ff

Note payable Less: PV of NP Implied Interest Implied interest  Discount on NP is debited

XX XX XX

a. FV of property given b. FV of property received c. CA of property given

P.O.V PAYOR

u The effective interest method is used in amortizing the discount on NP as interest expense Issuance of share capital u Where a property is acquired through the issuance of share capital, the property shall be Year

Payme nt

Intere st

Princip al

1.1.1 5 1.1.1 6

Prese nt Value 497,40 0

200,000

49,740

150,260

347,14 0

measured at an amount equal to the ff in the order of priority a. Fair value of property received b. Fair value of share capital c. Par value or stated value of the share capital Issuance of bonds payable u The asset acquired by issuing bonds payable is measured in the following order : a. Fair value of bonds payable b. Fair value of asset received

FV of asset given Add:Cash Cost

WITHOUT COMMERCIAL SUBSTANCE Item of PPE is measured at the Carrying Amount CA of asset given

P.O.V PAYOR XX XX XX

P.O.V. RECIPIENT / PAYEE

FV of asset given XX Less:Cas (XX h ) Cost XX If the exchange has commercial substance and is measured at fair value, any gain or loss on exchange is FULLY RECOGNIZED.

CA of asset given Add:Cash Cost

XX XX XX

P.O.V. RECIPIENT / PAYEE CA of XX asset given Less:Cas (XX) h Cost XX No gain or loss is recognized when exchange lacks commercial substance

u Commercial substance o Event or transaction causing the cash flows of the entity to change significantly by reason of the exchange.

o An exchange transaction has commercial substance when the cash flows of the asset received differ significantly from the cash flows of the asset transferred. Trade in u A form of exchange u Involves a nondealer acquiring the asset from a dealer u Involves a significant amount of cash  has commercial substance u The new asset is recorded at the following in the order of priority : 1. FV of asset XX given Add: cash paid XX Total Cost XX u and If FV of asset given in NOT clearly determinable 2. Trade in value of XX asset given Add: cash paid XX XX Total Cost  this is the FV of asset received FAIR VALUE APPROACH

FV of asset given Add:Cash Cost of new asset FV of asset given Less: CA of asset given Gain/Los s on exchang e

XX XX XX

XX

(XX)

XX

TRADE IN VALUE APPROACH (used if FV of asset given up is NOT clearly determinable) Trade in value of asset given XX Add:Cash Cost of new asset Trade in value of asset given Less: CA of asset given Gain/Lo ss on exchang e

XX XX

XX

(XX )

FAIR VALUE APPROACH

TRADE IN VALUE APPROACH (used if FV of asset given up is NOT clearly determinable) OR Cash price w/ trade in XX Less: Cash price w/ (XX) trade in Trade in value of asset given XX Less: CA of asset given (XX) Gain/Los s on XX exchang e

Donation *NOTE: IFRS does not address donation or contribution ; however it explicitly addresses government grant RECEIVED FROM RECEIVED FROM SHAREHOLDERS NONSHAREHOLDERS Recorded at FAIR Recorded at the VALUE when they FAIR VALUE of the are received or items received. receivable DONATED CAPITAL Credited to INCOME is credited. FROM DONATION * or Liability acct if NOT a subsidy; when restrictions are met, transferred to Income Expenses incurred in connection with donation (registration & legal fees)  charged to DONATED CAPITAL Installation & testing costs  CAPITALIZED

XX

Construction

u The cost of self-constructed PPE includes o Direct cost of materials o Direct cost of labor o Indirect cost and incremental overhead specifically identifiable or traceable to the construction u If the incremental overhead is NOT specifically identifiable, allocation of overhead may be done based on direct labor cost or direct labor hours. Saving or loss on construction u Price at which the constructed Actual cost < asset can be of purchased from constructio outside parties n NOT INCOME BUT SAVING u Any internal profit is eliminated in arriving at the cost of selfconstructed asset. u 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 u means that the cost of the PPE together with the related accumulated depreciation shall be removed from the accounts u No future economic benefits are expected from its use or disposal u Gain (loss) from the derecognition of an item of PPE  included in P&L u Net proceeds less Carrying amount = Gain (loss) FULLY DEPRECIATED PROPERTY u When CA is equal to zero or CA is equal to the residual value u The cost of fully depreciated asset remaining in service and the related accumulated depreciation SHALL NOT be removed from the accounts. PROPERTY CLASSIFIED AS HELD FOR SALE u If the asset is available for immediate sale in the present condition WITHIN ONE YEAR from the date of classification as held for sale u EXCLUDED from PPE but presented separately as CURRENT ASSET

u Measured at the lower of CA or FV less cost of disposal u Shall NOT be depreciated IDLE OR ABANDONED PROPERTY u An entity shall NOT classify as held for sale a noncurrent asset that is to be abandoned. u Rationale : the CA would be recovered principally through continuing use u TEMPORARY idle activity or abandonment DOES NOT preclude depreciating the asset  future benefits are consumed not only through usage but also through wear and tear, and obsolescence.

******NOTE********NOTE*********NOTE ****** Interest bearing note Noninterest bearing notes installme nt w/ cash price Noninterest bearing notes installme nt w/out cash price

Term noteNoninterest bearing note LUMPSUM

Amortize cost Date NP

Ratio NP/ total NP

Interest Expense NP*Ratio

Total NP

Discount on NP/ Total interest Expense Present Value (PV) of ordinary annuity Interes Principal Date Annual t Paymen t Multipl Annual y by payment int. less rate to Interest PV PV of Total subsequen must t year is be equal to equal the to principal of DONP last year Present Value of 1

D a t e

D a t e r e c ei v e d 1 st

p e

Int er es t ex pe ns e

M ult ipl ie

Be g. Ba l of D O NP

Pr es e nt v al u e Pr es e nt V al u e

De cr ea si

In cr e as

Di sc ou nt on NP

Present Value Decreasin g (PV less Principal) Always equal to zero

ri o d in t e r e st in c u rr e d

d by int . rat e to PV

ng su bt ra ct ed to int er es t ex p.

To tal m us t be eq ua l to tot al of D O NP *t he las t int er es t ex pe ns e m us t be eq ua l to th e su bs eq ue nt ye ar’ s D O NP ba la nc e

Al w ay s eq ua l to ze ro

in g (P V a d d In te re st ex p e ns e) Al w a ys e q u al to Fa ce v al u e of N P...