ACTG 431 Week 3 Theory of Accounts (Part III) Property Plant AND Equipment PDF

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Week 3: Theory of Accounts (Part III) PROPERTY PLANT ANDEQUIPMENTProperty, 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.Pro...

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Week 3: Theory of Accounts (Part III) 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 is sometimes called fixed assets or plant assets. Property, plant, and equipment are assets with relatively long useful lives, and should therefore be classified as non-current asset. This category includes land, buildings, machinery and equipment, delivery equipment, and furniture. Except for land, plant assets decline in service potential over their useful lives.

RECOGNITION CRITERIA 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 can be measured reliably.

MEASUREMENT AT RECOGNITION An item of PPE 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. Cost consists of all expenditures necessary to acquire the asset and make it ready for its intended use.

Element of cost The cost of an item of PPE comprises: a. Purchase price, including import duties and nonrefundable purchase taxes, after deducting trade discounts and rebates. 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 the 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.

DIRECTLY ATTRIBUTABLE COSTS Examples of directly attributable costs that qualify for recognition include: 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. d. e. f.

Initial delivery and handling cost Installation and assembly cost Professional fees Costs 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.

COST NOT QUALIFYING FOR RECOGNITION Examples of costs that are expensed rather than recognized as element of cost of property, plant and equipment are: a. Cost of opening a new facility b. Cost of introducing a new product or service, including costs of advertising and promotion. c. Cost of conducting business in a new location or with a new class of customer, including costs of staff training. d. Administration and other general overhead costs. 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 losses. g. Costs of relocating or reorganizing part or all of an entity’s operations.

MEASUREMENT AFTER RECOGNITION 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 accumulated impairment loss. The revaluation model means that properly, plant and equipment are carried at revaluated 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.

ACQUISITON OF PROPERTY 1. Cash Basis. The cost of PPE is the cash price equivalent at the recognition date. The costs include cash paid plus directly attributable cost. Moreover, when the 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. 2. On account subject to cash discount. The cost of the asset is equal to the invoice price less discount, regardless of whether the discount is taken or not. If the discount is not taken, the same is charged to purchase discount loss account which is shown as other expense. 3. Installment basis. The cost of PPE shall be recorded at the cash price. The excess of the installment price and cash price is treated as interest to be amortized over the credit period. However, if cash price is not available, the asset is recorded at an amount equal to the present value of all payments using implied interest. 4. Issuance of share capital. The PPE 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. Fair Value or stated value of the share capital 5. Issuance of bond payable. The asset acquired by using bonds payable is measured in the following order. a. Fair Value of Bonds Payable b. Fair Value of Asset received c. Face amount of the Bonds Payable 6. Exchange. If a property is acquired in an exchange with commercial substance and there is no cash involved, the cost is measured at the following in the order of priority: a. Fair value of property given b. Fair value of property received c. Carrying amount of property given However, the exchange is recognized at carrying amount under the following circumstances: a. The exchange transaction lacks commercial substance b. The fair value of the asset given or the fair value of the asset received is not reliably measured. An exchange transition has a commercial substance when the cash flows of the asset received differ significantly from cash flows of the asset transferred. Trade In Trade in is a form of exchange for which properly is acquired by exchanging another property as part of payment and the balance payable in cash or another form of payment in accordance with agreed terms. As an exchange with commercial substance, the new asset is recorded at the following order of priority: a. Fair value of the asset given plus cash payment. b. Trade in value of the asset given plus cash payment (in effect, this is the fair value of the asset received).

7. Donation. At present, IFRS does not address donation or contribution. Philippine GAAP, however, provides that contributions received from shareholders shall be recorded at the fair value. Expenses incurred in connection with the donation such as registration fees and legal fees shall be charged to the donated capital account. However, directly attributable costs incurred subsequently, such as installation and testing cost necessary to bring the donated asset to the location and condition for the intended use shall be capitalized. 8. Donation/Government Grant. At pre, IFRS does not address donation or contribution. However, IFRS explicitly addresses government grant. In this regard, reference is made to local GAAP in relation to accounting for donation. Philippine GAAP provides that contributions received from shareholders shall be recorded at fair value with the credit going to donated capital. Expenses incurred in connection with the donation, like payment of registration fees and legal fees shall be charged to the donated capital account.

However, directly attributable costs incurred subsequently, such as installation and testing cost necessary to bring the donated asset to the location and condition for the intended use shall be capitalized. Philippine GAAP further provides that entities sometimes received from non-shareholders gifts or grants of funds or other assets that are restricted for property and equipment additions. Capital gifts or grants shall be recorded at fair value when received or receivable. Capital gifts or grants are generally subsidies and therefore recognized as income. In rare case when capital gifts or grants are not subsidies, the offsetting credit is a liability account until the initial restrictions are met. When the initial restrictions are met, the liability is transferred to income. 9. Construction. The cost of self-constructed asset is determined using the same principles as for an acquired asset. The cost of self-constructed PPE shall include: a. Direct cost of materials b. Direct labor c. Indirect cost and incremental overhead specifically identifiable or traceable to the construction. If the incremental overhead is not specifically identifiable, allocation of overhead may be done on the basis of direct labor or direct labor hours.

DERECOGNITION Derecognition means that the cost of PPE together with the related accumulated depreciation shall be removed from the accounts. PAS 16, par 67, provides that the carrying amount of an item of PPE shall be derecognized on disposal or when no future economic benefits are expected from the use or disposal. The gain or loss from the derecognition of an item of PPE shall be included in profit or loss. Gains shall not be included in revenue but treated as other income. On the other hand, loss on disposal is presented under other expenses section of the income statement. The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between the net disposal proceeds and the carrying amount of the item.

PROPERTY CLASSIFIED AS HELD FOR SALE PFRS 5, par 7, provides that an item of PPE is classified as “held for sale” if the asset is available for immediate sale in the present condition within one year from the date of classification as held for sale. Such asset shall be excluded from PPE and presented separately as current asset.

IDLE OR ABANDONED PROPERTY PFRS 5, par 13, provides that an entity shall not classify as held for sale a noncurrent asset that is to be abandoned. This is because the carrying amount would be recovered principally through continuing use. Temporary idle activity or abandonment does not prelude depreciating the asset as future benefits are consumed not only through usage but also through wear and tear and obsolescence.

OPTIONAL DISCLOSURES

Entities are encouraged to disclose the following information which may prove relevant to the needs of financial statement users: a. b. c. d.

The carrying amount of temporarily idle PPE. The gross carrying amount of any fully depreciated PPE still in use. The carrying amount of PPE retired from active use and classified as held for sale. When the cost model is used, the fair value of PPE when this is materially different from the carrying amount....