Property, Plant, And Equipment (Part 1)

PROPERTY, PLANT, and EQUIPMENT For supply of goods or services Tangible items For administrative purpose For Rentals Used in production. PAS 16 PROPERTY, PLANT, and EQUIPMENT PPE (PAS 16) If movable If immovable Investment Property Major Spare parts Classified as PPE (PAS 16) Held for use More than 1 year Also known as Owner Occupied Property Spare parts 1 year or less Are long-term tangible assets used to develop or maintain assets and helps generate income. Classified as supply / inventory. The cost of the asset can be measured reliably. Recognition The future economic benefits associated with the asset will flow to the entity. Exception: Safety and Environmental Equipment, although does not directly increase future economic benefit, it is necessary for other related assets. INITIAL MEASUREMENT: COST Purchase Price Directly Attributable cost These costs are incurred during Acquisition Date Import Duties Irrecoverable Purchase Taxes Asset Retirement Obligation Estimated Dismantling Cost Cost of removing the asset Restoration cost These are estimated costs at the end of PPE’s useful life that is computed through Present Value. How to compute Present Value is extensively discussed in Accounting Study Notes: Notes Receivable NOTE! DIRECTLY ATTRIBUTABLE COSTS 5. Delivery and Handling Cost 6. Cost of Testing 7. Cost of Preparation 8. Professional Fees 9. Installation cost 10. Assembly Cost 1. Employee Benefits directly related from acquisition of PPE. 2. Adjustment to increase efficiency and capacity. 3. Insurance while in transit. 4. Testing & Trial cost Excluded from the Cost of Purchase are Trade Discounts and Rebates. Irrecoverable Purchase Taxes are Non-recoverable Purchase tax such as Value Added Tax which is not capitalizable as cost of PPE. MEANS OF ACQUISITION ONE TYPE OF PPE CASH BASIS (only one PPE is acquired) Allocate cost using Fair Value. BASKET PRICE or LUMP SUM (two or more PPE is acquired by paying single sum of money) ACQUISITION OF PROPERTY Cost is the cash price or cash equivalent paid including necessary costs in bringing the asset to present location and condition. If basket price is not equal to the fair value, then allocate the basket price using the fraction of Fair Value. Example: ON ACCOUNT Subtract Cash Discount whether taken or not. PART 1 Priority 1: The cost is equal to Cash Price or Cash Price equivalent. DEFERRED SETTLEMENT It may be Installment Basis or One-time payment Present Value of 1 (One-time payment) Priority 2: Present Value of future cashflow Present Value of Ordinary Annuity of 1 (If payment is every end of the period) Present Value of Annuity Due of 1 (If payment is every beginning of the period) MEANS OF ACQUISITION ISSUANCE OF SHARES DONATION ACQUISITION OF PROPERTY PART 2 Priority 1: Fair Value of asset received. NOTE! Priority 2: Fair Value of the shares issued. Priority 3: Par Value of shares issued. If priority 1 is not given, use priority 2, and if priority 2 is not given, use priority 3. Source of Donation from Shareholder @ Fair Value credited to “Donated Capital”. from non-shareholder @ Fair Value credited to “Income”. from Government Deferred Income from Government Grant Priority 1: Fair Value of Bonds issued. ISSUANCE OF BONDS Priority 2: Fair Value of asset received. Priority 3: Face amount of Bonds Direct Materials used Direct Labor CONSTRUCTION Overhead Capitalizable Borrowing Cost NOTE! If priority 1 is not given, use priority 2, and if priority 2 is not given, use priority 3. MEANS OF ACQUISITION With Commercial Substance Priority 1: Fair Value of property given Priority 3: Book Value of asset given PART 3 EXCHANGE GAIN Add: Cash Paid Less: Cash Received Fair Value of property given. > Carrying Amount = GAIN Fair Value of property received > Carrying Amount = GAIN Fair Value of property given. < Carrying Amount = LOSS Fair Value of property received < Carrying Amount = LOSS (plus: Cash Paid) or (less: Cash Received) LOSS Less: Cash Received Priority 2: Fair Value of asset received. COST ACQUISITION OF PROPERTY Add: Cash Paid (plus: Cash Paid) or (less: Cash Received) NOTE! Without Commercial Substance COST is Carrying Amount of property given (plus: Cash Paid) or (less: Cash Received) No Gain or Loss If with commercial substance, in computing Cost of the PPE as well as Gain or Loss, notice above when to use Cash paid and Cash Received. MEANS OF ACQUISITION Priority 1: TRADE-IN Priority 2: Fair Value of Asset Received Example: ABC Company traded its old car with Original Cost of Php 5,000,000 and Accumulated Depreciation of Php 4,000,000 The seller says that the cash price Is Php 4,500,000 but if the buyer is willing to trade-in, then the cash price to be paid is reduced to Php 4,000,000. ACQUISITION OF PROPERTY PART 4 The seller recognizes the value of the old car as 500,000 while the company gave the old car recorded in its books as 1,000,000, therefore, the company lost Php 500,000 in trading. FINANCE LEASE Cost: Right of use of asset This topic will be extensively discussed under the topic of “LEASES.” Finance Lease – leasing company gives operating control of an asset to a business for an agreed period, and typically at the end of the contract, the lessee will become the owner of the asset at the end of the lease. [FundingOptions.com] COSTS CAPITALIZABLE TO LAND Purchase price. Legal Fees Survey Cost Special Assessment Land assumed by the buyer. Unpaid taxes assumed by the buyer. Cost of clearing unwanted structures. Cost of option to buy the acquired land. Escrow fee or Earnest Money deposit. Payment to tenants to vacate the premises. Fees for registration and transfer of title. Commissions paid to brokers or agents. NOTE! OPTION. If the land is not acquired, the option price is charged as outright expense. ESCROW FEE. It is the downpayment made by the buyer as evidence of good faith in buying the property. The amount whether partial or full is capitalizable as part of Cost of Land. NOTE! Land held for sale in the ordinary course of business is an inventory. On the other hand, Land held for sale alone is classified as non-current asset held for sale. Cost of permanent improvement (cost of filling the land, cost of grading and leveling, draining cost) Cost of relocation or reconstruction of property for others to acquire possession of the land. COSTS CAPITALIZABLE TO BUILDING PURCHASE OF NEW BUILDING SELF-CONSTRUCTED BUILDING Materials Construction Cost Labor Overhead Purchase price. Legal Fees Liabilities assumed by buyer. Architect Fee Unpaid Taxes assumed by buyer. Cost of Excavation Payments to tenants to vacate building. Superintendent Fee Renovating and Remodeling costs to bring the building to its intended use. Building Permit and licenses Temporary shelter for construction office. Temporary shelter for construction materials and tools Interest on construction loan (borrowing cost) Insurance expense while under construction Cost of temporary safety fences Permanent fence, if included as part of blueprint, then considered as cost of the building. On the other hand, if not included as part of blueprint, then considered as “Land improvement”. NOTE! Building held for sale in the ordinary course of business is an inventory. On the other hand, Building held for sale alone is classified as non-current asset held for sale. PHILIPPINE INTERPRETATION COMMITTEE (PIC) ACQUISITION OF LAND and BUILDING Q&A No. 2012 - 02 Cost of old building is part of the “Cost of land”. NO LONGER USABLE For purpose of building demolition alone, the cost is part of the Land. Demolition Expenses For purpose of constructing new building, the cost is part of the new building. Property, Plant, and Equipment OLD BUILDING Old Building is used temporarily Inventories Land Cost: Allocated Fair Value Building Cost: Allocated Fair Value Basket Price is the cost of Inventory. Investment Property Basket Price is the cost of Investment Property. USABLE Old Building is demolished right away Land Allocate the Purchase Price to land and old building using relative fair value. Building Cost: Allocated Fair Value Loss COSTS CAPITALIZABLE TO EQUIPMENT Purchase price. Storage Cost. Installation Cost Consultant Fees Cost of safety rails These costs are incurred during Acquisition Date Freight and handling cost. Cost of Testing and Trial run Insurance while equipment is in transit. Cost of water device to keep the machine cool. Initial Estimate of Cost of dismantling Initial Estimate of Cost of removing Initial Estimate of restoring the site These are estimated costs at the end of Equipment’s useful life that is computed through Present Value.