PAS 16 - PPE

• PPE are tangible asset that is

  1. held for use in production or supply of goods and services, held for rentals to others or for admin purposes
  2. are expected to be used during more than one period
• spare parts, stand - by equipment, and servicing equipment are recognized as PPE when they meet the definition of PPE. Otherwise, it is classified as inventory
• Molds, tools, and dies are aggregated and applied the recognition criteria to the aggregate value. If it does not meet the criteria and definition of PPE. such items are classified as inventory
• Items of PPE acquired for safety or environmental reasons qualify for the recognition as asset because they enable an entity to derive future economic benefit
• Items included in the cost of PPE are;

  1. Cost of purchase
  2. Directly Attributable Cost
  3. the initial estimate of the cost of dismantling and removing the item and restoring the site on which it is located (present obligation @ PV)
• formula of PV for cost of dismantling (one time payment)

  PV = FV 1 / (1 + r)
• What do you call to the cost necessary to bring the asset to the location and condition necessary for it to be capable of operating intended by the management?

  Directly Attributable Cost
• Directly Attributable Cost include;

  1. Cost of employee benefits
  2. Cost of site preparation
  3. initial delivery and handling cost
  4. cost of testing
• Cost not included in the item of PPE

  1. not directly attributable cost
  2. cost incurred in using or redeploying the asset
  3. cost incurred from incidental operation before or during the construction or development activity
• Mean of acquisition: Credit Purchase

  Acquisition cost: invoice price less cash discounts whether taken or not
• Mean of acquisition: Deferred Settlement or Installment Basis


  Acquisition Cost

  1. Cash price equivalent
  2. PV of future cash flows
• Formula of PV of ordinary annuity in calcu

  (1 + rate)/ = (number of periods) minus 1, divide by rate multiply by CASH FLOW
• Formula of PV of annuity due in calcu(1+rate) ÷ =(number of periods) minus 1, divide by rate, plus 1, times CASH FLOW
• Means of Acquisition: Issuance of shares

  Acquisition Cost

  1. FV of asset received
  2. FV of shares issued
  3. face value of shares issued
• Means of acquisition: Issuance of bonds

  Acquisition Cost

  1. FV of asset received
  2. FV of shares issued
  3. Face value of bonds issued
• acquired through exchange

  acquisition cost

  1. FV of asset given up +- boot
  2. FV of asset received
  3. CA of asset received +- boot
• It is the present value of the cash flow an entity expect to arise from the continuing use of asset and from its disposal.

  Entity - specific value
• entity specific value shall reflect post - tax
•     Gain or Loss is not recognized if the exchange lacks commercial substance
• how to compute gain on exchange?

  FV of asset given up less CA of asset given up
• acquired through trade in

  1. FV of asset given up(trade in) + cash given
  2. FV of asset received
• when the FV of the old equipment is not reliably measurable, the entity may use trade-in value of the old equipment which is computed as follows:

  
  

  Cash price of new equipment without trade-in

  Less: CP of new equipment with trade-in
• Purchase price of PPE acquired by way of donation

  FV of asset receives
• credit to journal entry of donation;

  1. if non owner - income from donation
  2. if owner - equity or donated capital
• the cost incurred in the donation and how to account

  1. if in connection w/ donation and transfer of ownership - charged to the credited account
  2. if directly attributable to the asset - debited to the asset account
• subsequent expenditures are capitalized if they result to;

  1. extension of UL
  2. increase in productive capacity
  3. improvement in efficiency
• Repairs and maintenance are not capitalized and recorded as an expense on the period they are incurred
• replacement of parts are may be made;

  1. at regular interval
  2. less frequently
  3. one time
• the cost of replacing part of such item is recognized in the carrying amount if the criteria is met. the replaced parts are derecognized
• each major inspections is recognized in the CA of PPE as a replacement if the criteria is met. any remaining CA of the previous inspection is derecognized.
• if the building is classified as inventory or Investment property under FV model, not subject to depreciation and no need to separate land and building.

  if it is a PPE or a Investment property, subject to depreciation
• If the building is unusable and is likely to be demolished right away, it is appropriate to allocate the entire purchase price to the land.
•    cost of an asset or other amount substituted for cost, less its residual value

  Depreciable amount
•   the estimated amount that an entity would currently obtain from disposal of asset

  salvage value
• Factors determining Useful Life

  -        expected usage of asset

  -        expected physical wear and tear

  -        technical or commercial obsolescence

  -        legal or similar limits
• Depreciation is recognized even if: - the asset becomes idle

  -        the asset retired from active use

  -        its fair value exceed its carrying amount
• Demolition cost is considered as cost of bringing the asset to its intended condition and location therefore, such demolition costs should be capitalized to the cost of the new building
• costs incurred for demolition of an existing building to give way for the construction of the replacement building

  Demolition Cost
• The asset if fully depreciated when its residual value is already equal to or greater than its carrying amount
• Straight-line Method

  1.   results in constant charge over the useful life if the asset’s residual value does not change
  2. appropriate when depreciation is a function of time rather than a function of units