Notes- PPE - Summary of Component of Cost for PPE. Source: Auditing Book of Espenilla & Asuncion,Ngina, PDF

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COMPONENTS OF COSTo Purchase Price including Import Duties and Non- refundable Purchase Taxes and any Directly Attributable Cost of bringing the asset to working conditions for its intended use. o Any Trade Discounts and Rebates are deducted in arriving at the Purchase PriceDIRECTLY ATTRIBUTABLE COS...

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COMPONENTS OF COST o Purchase Price including Import Duties and Nonrefundable Purchase Taxes and any Directly Attributable Cost of bringing the asset to working conditions for its intended use. o Any Trade Discounts and Rebates are deducted in arriving at the Purchase Price DIRECTLY ATTRIBUTABLE COSTS 1. Cost of Testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced (such as samples produced when testing the equipment). 2. Cost of Site Preparation 3. Professional fees of architects and engineers 4. Estimated Cost of Dismantling and Removing the asset and Restoring the site, to the extent that it is recognized as a provision (has obligation to incur such future cost) [“Asset Retirement Obligation] – this obligation is incurred in the act of acquiring a long term operating asset to restore costs in the future when the asset is retired. 5. Installation and Assembly Cost 6. Initial Delivery and Handling Cost 7. Cost of Employee Benefits arising directly from the Construction or Acquisition of the PPE. LAND 1. Purchase Price or Acquisition Cost 2. Survey Cost 3. Cos to Register the Land and Other Cost of Transferring the Title in the name of the buyer. 4. Legal Fees (Attorney’s Fees) and other Expenditures for Establishing clean Title. 5. Commission Cost paid to Real estate brokers or agents. 6. Escrow Fees 7. Liabilities on the Land assumed by the buyer - Real Property Taxes in arrears (unpaid up to the date of acquisition) and other Liens, Mortgages or Encumbrances and Interest on such mortgage assumed by the buyer. 8. Payments to Tenant to convince them to vacate the premises. 9. Cost to Relocate or Reconstruct property belonging to others in order to acquire possession of the Land. 10. Amount paid for Option to buy the acquired land. If the land is not acquired, amount is immediately expensed. Earnest Money Deposit is a down payment (partial payment) thus, Capitalizable. 11. Costs of Clearing, Draining, Filling, Grading, Levelling, Surveying and subdividing the land and any other additional Permanent Land Improvements that have an indefinite life, therefore, not subject to depreciation. 12. When land has been purchased for the purpose of Constructing a Building, all costs incurred prior to the excavation for the new building are considered land costs. 13. Special Assessments for Local Improvements, such as Public Roadways, Pavements, Street Lights, Sewers and Drainage Systems, are usually charged to Land account because they are relatively permanent in nature and are maintained and replaced by the local government body. These Public Improvements increase the value of the Land. 14. Demolition Cost on unwanted structures on the purchased land.

LAND IMPROVEMENTS o Part of the Blueprint of the building –BUILDING o Not Part of the Blueprint- Land Improvement 1. Cost of a new company parking lot including the amount paid for paving, fencing and lighting. 2. Costs of sidewalks, pavements, parking lot and driveways – expenditures incurred not in connection with the construction of the building. 3. Costs of landscaping and underground sprinklers. 4. Costs incurred for water systems and drainage systems. BUILDING o Cost Chargeable to Building when PURCHASED 1. Purchase Price or Acquisition Cost 2. Legal Fees (Attorney’s Fees) and other Expenditures for Establishing clean Title. 3. Commission Cost paid to Real estate brokers or agents. 4. Liabilities on the Land assumed by the buyer - Real Property Taxes in arrears (unpaid up to the date of acquisition) and other Liens, Mortgages or Encumbrances and Interest on such mortgage assumed by the buyer. 5. Payments to Tenant to convince them to vacate the premises. 6. Cost of Remodeling or Renovating rooms and offices. 7. Cost of Replacing or repairing the roof, floors, wall coverings, electrical wiring and plumbing. o Cost of Building when CONSTRUCTED 1. Contract Price of construction paid to contractor 2. Building Permit and License 3. Architect’s or contractor’s Fee 4. Fees paid for Supervision 5. Excavation Costs 6. Construction Cost (materials, labor, and overhead costs incurred during construction, as well as Professional Fees and Building Permit. 7. Cost of Service Equipment, such as elevators and escalators, and fixtures, such as cabinets, shelves and partitions, made permanent part of the building structure. 8. Expenditures incurred during the construction period such as interest on construction loans (Borrowing Cost) and Insurance. 9. Costs of Temporary Structures used as construction offices and to house construction materials and tools (Storeroom) 10. Costs of temporary Safety Fence installed around construction site and costs of subsequent removal thereof. Construction of permanent fence after the construction of the building is charged to Land Improvement account. 11. Safety Inspection Fees 12. Demolition Cost on unwanted structures on the purchased land. *It is preferable to capitalize any demolition costs of unwanted structures on the acquired land as part of the cost of the new building constructed since the demolition of the old building is a direct result of the decision to construct the new building (PIC Q&A 2012-02)

SPECIAL NOTES: 1. Insurance a. Taken during construction - part of the cost of the building. b. Not taken and there is a claim a claim for damages – claims for damages shall be treated as expense. 2. Building Fixtures (shelves, cabinets, partitions) a. Immovable – part of the cost of the building b. Movable – charged to furniture and fixtures and depreciated over their useful life. 3. Savings or Loss on Construction – not recognized as an addition or deduction to the cost of the self-constructed asset. If there are savings on construction, the company will eventually benefit through reduce depreciation expense, conversely if there is loss on construction, the company will eventually incur additional expense through increased depreciation expense. MACHINERY AND EQUIPMENT 1. Purchase Price or Acquisition Cost 2. Cost of Adjustment to machinery for operational efficiency and to increase capacity 3. Insurance paid while in Transit. 4. Fees paid to Consultants for advice on the acquisition of the machinery and equipment. 5. Cost of Import Duties and Nonrefundable Taxes incurred in connection with the acquisition. However, VAT on the purchase of M&E is not capitalizable as part of its cost. VAT is charged to input tax and offset against output tax. 6. Cost of special foundations, if required. 7. Construction of base (Cost of safety rail and platform surrounding the machine) 8. Cost of water device to keep machine cool. 9. Freight, Handling, Storage and other cost related to the acquisition. 10. Costs of Assembling, Installing, Testing the equipment, conducting Trial Runs and other cost necessary in preparing the machinery for use. 11. Unloading Charge 12. Initial estimate of the Cost of Dismantling and Removing the machinery and Restoring the site on which it is located for which the entity has a present obligation. Acquisition of Land and Old Building and the: (a) Old building is to be demolished so as to make room for the construction of the new building during the same period. (b) Old building is to be demolished but the construction of the new building is to be made next accounting period.

Treatment of the Demolition Cost

Part of the cost of the new building. Part of the cost of the Land or included in the new building using a clearing account.

Old and New Installation Cost: The undepreciated old installation cost is expensed. New Installation cost is (a) The machinery is charged to the NEW asset. moved to new location. The undepreciated old installation cost is expensed. New Installation cost is charged to the NEW asset. In addition, (b) The machinery is the removal cost is also charged to removed and retired. expense.

LEASEHOLD IMPROVEMENT - Improvements to leased property that will become part of the property of the lessor at the end of the lease. o Costs Chargeable to Leasehold Improvement: 1. All costs incurred by the tenant to introduce physical improvements on the leased property. (Installation of light fixtures, carpets or partition walls) MODES OF PPE ACQUISITION AND THEIR ACQUISITION COST 1. CASH PURCHASE (cash basis) - The acquisition cost (amount to be capitalized) is equal to the purchase price or cash equivalent paid including import duties and nonrefundable purchase taxes, net of any discounts and rebates. -plus incidental costs such as freight, installation cost and other cost necessary in bringing the asset to its working condition. 2. PURCHASE ON ACCOUNT (net method) - The acquisition cost shall be the cash price (invoice price) less any cash discounts available, whether taken or not. 3. INTALLMENT BASIS/ DEFERRED PAYMENT BASIS - The acquisition cost shall be the “cash price equivalent” where determinable. If not, the cash price is assumed to be equal to the PV of Total Cash payments to be made using an appropriate prevailing discount rate. - The difference between the acquisition cost and the total installment payments is recognized as interest expense over the period of credit unless it is a capitalizable borrowing cost under PAS 23. 4. SHARE ISSUE/SHARE-BASED PAYMENT (PFRS 2) - The acquisition cost of PPE shall be recorded in the following order: a. FMV of the Property Received (Gain on exchange is credited to Share Premium while loss is debited to Share Discount) b. FMV of the Capital Stock Issued (Gain on exchange is credited to Share Premium while loss is debited to Share Discount) c. Par Value of the Shares Issued (No gain or loss) 5. ISSUANCE OF BONDS - The acquisition cost of PPE shall be recorded in the following order: a. FV of the Bonds Payable Issued b. FV of the Property Received c. Face Value of the Bonds Payable Issued 6. DONATION/GRANT/NON-RECIPROCAL EXCHANGE - The acquisition cost shall be the FMV of the asset received. - If the grant is from non-related party (outsider), the transaction is recognized as an “income-generating” transaction, thus is recognized as income in the profit or loss (unless conditional, where the income is initially deferred subject to the fulfilment of the attached condition). NON-SHAREHOLDER: either credit to Subsidies (if not restrictions imposed) or liability account until the restrictions are met. If the restrictions have already been lifted or met, then the liability shall then be transferred to income, or to donated capital. Incurrence of payment of direct expenses (payment for transfer of title to the corporation, real estate taxes in arrears and transfer taxes) shall be added to the cost of the Asset Received. - If the grant is from a related party (insider), the transaction is recognized as a capital transaction (appropriately accounted for as donated capital – additional paid-in capital), thus should not result to recognition of income in the profit or loss.

SHAREHOLDER: The FV should be credited to Share Premium or Donated Capital. Incurrence of payment of direct expenses (payment for transfer of title to the corporation, real estate taxes in arrears and transfer taxes) shall be deducted from Donated Capital 7. DONATION THAT QUALIFY AS GOVERNMENT GRANT (PAS 20) - FMV of Government Grants including Non-monetary grants and shall not be recognized until there is reasonable assurance that: (a) The entity will comply with the conditions attaching to them; and (b) The grants will be received. *Receipt of the grant does not in itself provide conclusive evidence that the conditions attaching to the grant have been or will be fulfilled. 8. SELF-CONSTRUCTED ASSET - The acquisition cost shall be the actual cost of construction including where applicable, borrowing cost under PAS 23 9. EXCHANGE TRANSACTION o EXCHANGE WITH COMMERCIAL SUBSTANCE - Acquisition cost: FMV of Asset Received = FMV of the consideration given up (plus cash payments made or minus cash received. o EXCHANGE WITHOUT COMMERCIAL SUBSTANCE -Acquisition Cost: Asset Received = Book Value of the asset given up ( plus cash paid or minus cash received) * If the asset given up is impaired on the exchanged date, impairment on the asset given-up shall be recognized first before the exchange. Thus, the Acquisition Cost: Asset Received = Book Value of the asset given up, after the impairment loss (plus cash paid or minus cash received) 10. TRADE-IN -The new asset is recorded in the following order of priority: (a) FV of the asset given plus cash payment. Fair Value of the asset given XX Less: BV of the asset given XX Gain or Loss (fully recognized) XX (b) Trade in Value of the asset given plus cash payment (in effect, this is the FV of the asset received) Trade-in value of the asset given XX Less: BV of the asset given XX Gain or Loss (fully recognized) XX *Computation of the trade in value of the old asset: Cash Price without trade-in (list price) XX Less: Cash Price with trade-in XX Trade in Value or Allowance XX...