PROPERTY, PLANT AND EQUIPMENT Flashcards
What is Property, Plant, and Equipment?
PPE(aka fixed assets) are tangible assets that are held for use in 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.
- Assets held for sale ARE NOT PPE.
- PPE are NONCURRENT ASSETS.
- PPE is shown as a SEPARATE LINE ITEM on the
statement of financial position.
What PAS applies to PPE?
PAS 16
When is an item of PPE recognized? What costs are included and excluded upon recognition?
An item of PPE shall be recognized as an asset when:
- It is probable that future economic benefits associated with the asset will flow to the entity.
- The cost of the asset can be measured reliably.
Costs that are INCLUDED are:
1. Costs incurred initially including:
a. purchase price, import duties, taxes, discounts
b. cost directly attributable to bringing asset to its
location and condition necessary for it to be
capable of operating as intended.
c. Cost of DISMANTLING and REMOVING item and
restoring the site on which it is located, the
obligation for which the entity incurs.
- DIRECTLY ATTRIBUTABLE COSTS
a. Costs of employee benefits arising directly from the construction or acquisition of the item PPE
b. Cost of site preparation
c. Initial delivery and handling costs
d. Installation and assembly costs
e. Professional fees
f. Costs of testing the PPE
What is the treatment of spare parts and other equipment?
MAJOR SPARE PARTS AND OTHER EQUIPMENT may qualify as PPE if they are to be USED FOR MORE THAN ONE PERIOD. If so, it is depreciated over whichever is SHORTER BETWEEN:
- Useful life
- Life of related asset
How shall an entity measure PPE after initial recognition?
An entity shall choose either:
- Cost model
- Revaluation model
Explain the Cost model for PPE.
The cost model means that the PPE is CARRIED AT COST, LESS ANY ACCUMULATED DEPRECIATION and ANY ACCUMULATED IMPAIRMENT LOSS.
Explain the Revaluation model for PPE.
Revaluation model means that the PPE are carried at its REVALUED CARRYING AMOUNT.
What are different methods of acquiring PPE?
Below are the methods of acquiring PPE, each with its own separate method of valuation:
- Cash basis
- On account subject to discount
- Installment basis
- Issuance of share capital
- Issuance of bonds payable
- Exchange
- Donation
- Government Grant
- Construction
Explain the Cash basis acquisition of PPE and its journal entries.
In cash basis acquisition, the PPE is simply recognized at its CASH PRICE EQUIVALENT, including other directly attributable costs.
PPE xxx
Cash xxx
Explain the “On account” acquisition of PPE and its journal entries.
If the PPE is acquired on account, THE COST OF THE PPE IS EQUAL TO THE INVOICE PRICE LESS DISCOUNT, REGARDLESS OF WHETHER THE DISCOUNT IS TAKEN OR NOT.
It may be recognized using either the GROSS or NET method. GROSS METHOD PPE XXX AP XXX If payment is within discount period AP XXX PPE xxx CASH xxx
If payment is BEYOND discount period
AP XXX
Purchase discount lost XXX
CASH XXX
PPE XXX
NET METHOD
PPE xxx
AP xxx
If payment is within discount period
AP xxx
CASH xxx
If payment is beyond discount period
AP xxxx
Purchase discount lost xxx
cash xxxx
Explain the installment basis acquisition of PPE and its journal entries.
The PPE is recognized simply at CASH PRICE if it is given. If it is not given, the NPV of all installment payments using an implied interest rate shall be the basis of recording the PPE.
The excess of installment price over the cash price is treated as an interest to be amortized over the credit period.
Explain the “issuance of shares” acquisition of PPE and its journal entries.
If shares are issued for consideration of the PPE, THE FAIR VALUE OF THE CONSIDERATION shall be used in determining the PPE, in the following order of priority:
a. FV of PROPERTY RECEIVED
b. FV of SHARE CAPITAL
c. Par or STATED VALUE OF SHARE CAPITAL
Explain the “issuance of bonds payable” acquisition of PPE and its journal entries.
If bonds payable are issued for consideration of the PPE, the entity shall measure the financial liability AT FAIR VALUE PLUS TRANSACTION COSTS THAT ARE DIRECTLY ATTRIBUTABLE to the issuance of the financial liability, and is measured in the following order:
a. FV of BONDS RECEIVED
b. FV of ASSET RECEIVED
c. Face amount of BOND
Explain the “donation” acquisition of PPE and its journal entries.
The donated PPE is recognized at FV when received.
PPE xxx
Income from donation xxx
The income from donation account is debited when there is payment of fees like legal fees and registration upon receiving the donated PPE.
Explain the “government grant” acquisition of PPE and its journal entries.
See government grant deck.
Explain the “construction” acquisition of PPE and its journal entries.
When a PPE is self-constructed, the PPE cost shall include DM, DL and Overhead specifically identifiable/traceable to the construction. If not traceable, OH may be allocated.
Explain the “exchange” acquisition of PPE and its journal entries.
When a PPE is acquired through exchange, determine first whether the transaction HAS COMMERCIAL SUBSTANCE.
- If transaction HAS COMMERCIAL SUBSTANCE:
The exchange is measured AT FAIR VALUE.
Determine first whether CASH IS INVOLVED OR NOT.
If NO CASH INVOLVED, measure PPE in the following order of priority:
a. FV of property GIVEN
b. FV of property RECEIVED
c. CA of property GIVEN
IF THERE IS CASH INVOLVED, PPE is measured at:
a. FV of asset GIVEN PLUS CASH PAYMENT
b. FV of asset GIVEN MINUS CASH RECEIVED on the part of the RECIPIENT OF CASH.
- If transaction LACKS COMMERCIAL SUBSTANCE or the FV OF THE ASSET IS NOT RELIABLY MEASUREABLE:
The exchange is recognized at CARRYING AMOUNT OF THE ASSET GIVEN, PLUS/MINUS CASH, if any.
Plus cash, if payor
Minus cash, if payee/recipient
What does “commercial substance” in relation to acquisition of PPE by exchange mean?
It means that an event or transaction causes the cash flows of the entity to change significantly by reason of the exchange.
Explain the “trade-in” acquisition of PPE and its journal entries.
Trade-in is a form of exchange. It involves a NONDEALER acquiring asset from a DEALER, and it usually involves CASH, and therefore has commercial substance. The new PPE is recorded in the following order of priority:
a. FV of asset GIVEN plus cash payment
b. Trade-in value of asset given plus cash payment
What is the treatment of savings or loss on construction of a PPE?
It is not reflected in the amount of PPE constructed, but rather closed to income or loss.
When is the carrying amount of a PPE be derecognized?
- When there is no more future economic benefits expected from the use of the PPE
How is assessed value (taxation) used in valuation of land and building?
When initially recording land and building, ASSESSED VALUE IS NOT ITS FAIR VALUE, therefore, other options must be considered in its recording. However, the assessed value may be used in calculating the allocation to land and building when it is acquired using basket price.
In self-constructed asset, what shall be the basis when computing for OH allocation for the PPE wherein the OH cannot be calculated or is not given?
The Direct Labor shall be the basis in allocating OH for the PPE.
In acquisition by exchange, if the asset given has no FV but there is cash paid out, how shall the asset received be measured?
In the following order:
1. FV of asset received WITHOUT CASH PAID
T or F
In installing new machinery, the cost of removing the old machinery is added to the cost of new machinery.
FALSE. The cost of removing the old machinery is OUTRIGHT EXPENSED.
T or F
In installment acquisition of PPEs, cash price is similar to second hand market value.
True.
In acquisition of machinery, what is the treatment of allowances from supplier (because of quality issues)?
Treated as a a deduction from the initial cost of the new machine.
Under PIC interpretations, what is the treatment when land and an old building are purchased at a single cost?
- If the old building is USABLE, the single cost is allocated between land and building based on FV.
- If the old building is UNUSABLE, the single cost is allocated to land only.
Under PIC interpretations, what is the treatment when land and an old building are purchased at a single cost, and the old building is to be demolished immediately to make room for a new building?
- Any allocated carrying amount of the USABLE old building is recognized as a loss if the new building is to be accounted for as PPE or investment property
- Any allocated carrying amount of the UNUSABLE old building is CAPITALIZED as cost of the new building if it will be carried on as INVENTORY
- The demolition cost minus salvage value is capitalized as cost of the new building
- Net demolition costs are capitalized as cost of the land if no new building is to be constructed
Under PIC interpretations, what is the treatment when an entity has land and an old building, and the old building is to be demolished immediately to make room for a new building?
- The carrying amount of the old building is recognized as a loss.
- The net demolition cost is capitalized as cost of the new building.
What is the treatment of real property taxes?
These are EXPENSED OUTRIGHT.
However, if an entity purchases a real property and ASSUMES THE UNPAID REAL PROPERTY TAXES, it is CAPITALIZED, BUT ONLY THOSE UP TO THE DATE OF ACQUISITION.
What is the treatment of motor vehicle registration?
Motor vehicle registration fees ARE EXPENSED.
