PPE

• Property, plant and equipment (PPE)

  Tangible items 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
• Examples of PPE


  • Land
  • Land improvements
  • Buildings
  • Machinery
  • Furniture and fixtures
  • Office equipment
• Recognition criteria for PPE


  • It is probable that future economic benefits associated with the item will flow to the entity
  • The cost of the item can be measured reliably
• Spare parts, stand-by equipment and servicing equipment

  Can be recognized as PPE if they meet the definition of PPE
• Measurement of PPE at initial recognition

  1. Purchase price including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates

  2. Costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management

  3. Initial estimate of the cost of dismantling and removing the item and restoring the site
• Costs not included in the cost of PPE
• Types of PPE acquisition


  • Acquired by purchase
  • Self-constructed asset
  • Purchased under fair deferred payment contracts
  • Exchanged for a non-monetary asset
• PPE is subject to depreciation
• Depreciation is the process of allocating the cost of PPE as an expense in a systematic manner
• Different methods of depreciation include straight-line, units of production, declining balance, and group or composite
• Supplies are prepaid expenses and do not form part of the cost of equipment
• Land and building acquisition


  • Land purchase price: 145,000
  • Building construction cost: 5,780,000
  • Architects' professional fees: Directly attributable cost
  • Demolition cost of old building: 90,000
  • Proceeds from sale of scrap materials: 60,000
  • Total cost of building: 5,910,000
• Modes of acquisition


  The different ways an entity can acquire property, plant and equipment (PPE)
• Modes of PPE acquisition


  • Purchase
  • Self-construction
  • Deferred payment contracts
  • Exchange
• Acquisition by purchase


  1. Debit asset account

  2. Credit cash and any payables
• Acquisition by self-construction


  1. Materials used

  2. Labor costs incurred

  3. Overhead
• Overhead is normally allocated based on direct labor costs
• Overhead is normally applied to buildings for clients, with any incremental amount applied to buildings for own use
• Acquisition by deferred payment


  Record asset at present value of future payments
• Commercial substance of an exchange


  The exchange transaction results in changes to the timing and amount of the entity's future cash flows
• Accounting for exchange with commercial substance


  Recognize any gains or losses directly in the exchange transaction
• Accounting for exchange with no commercial substance


  Recognize any gains partially, but losses in full
• Calculating cost of new asset in an exchange

  New asset cost = List price - Trade-in allowance + Fair value of old asset
• Calculating gain/loss on disposal in an exchange


  Gain/loss = Fair value of old asset - Carrying value of old asset
• Borrowing costs


  Costs that are directly attributable to the acquisition, construction or production of a qualifying asset
• Qualifying asset


  An asset that necessarily takes a substantial period of time to get ready for its intended use or sale
• Capitalizing borrowing costs for specific borrowings


  Actual borrowing costs incurred less any investment income on temporary investment of those borrowings
• Capitalizing borrowing costs for general borrowings


  Weighted average of interest rates applied to average accumulated expenditures on the asset
• Capitalizable borrowing costs should not exceed actual borrowing costs
• Depreciation


  The systematic allocation of the asset's depreciable amount over its useful life
• Depreciable amount


  The difference between the asset cost and residual value
• Useful life


  The period of time over which the asset is expected to be used by the entity
• Residual value


  The amount expected to be recovered by an entity after the asset's used for life
• Depreciation calculation


  1. Determine asset cost

  2. Determine residual value

  3. Calculate depreciable amount

  4. Determine useful life

  5. Apply depreciation method
• Depreciation methods


  • Straight-line
  • Service hours
  • Output units
  • Sum of the years' digits
  • Declining balance
  • Double declining balance
• Depreciation


  • Part of manufacturing overhead or indirect cost for manufacturing companies
  • Part of operating expenses for administrative use
• Depreciation starts when the asset is available for use and stops when the asset is derecognized
• Depreciation stops when an asset is classified as held for sale
• Straight-line depreciation


  1. Calculate depreciable amount

  2. Divide by useful life to get annual depreciation
• Accumulated depreciation


  Increases each year by the annual depreciation amount