Intermediate Accounting - Finals

• Accounting for donated PPE


  A PPE received from donation is measured at fair value and accounted for as: Donated capital – if the donor is an owner (shareholder). This is presented in equity under share premium or additional paid-in capital. Any cost incurred attributable to the receipt of donation and transfer of ownership is offset to the donated capital account. Income – if the donor is an unrelated party. Any cost incurred attributable to the receipt of donation and transfer of ownership is offset to the income recognized. Government grant in accordance with PAS 20 – if the donor is the government.
• Property, Plant and Equipment

  • Land held for speculation
  • Land held for undetermined use
  • Land and/or building classified as investment property under PAS 40
  • Property held for sale in the ordinary course of business
  • Assets classified as held for sale under PFRS 5
  • Biological assets related to agricultural activity, other than bearer plants
  • Intangible assets
  • Minor spare parts and short-lived stand-by equipment
• The following are not PPE:
• Recognition


  An item of property, plant and equipment is only recognized if: it is probable that the future economic benefits associated with the asset will flow to the entity, and the cost of the asset can be measured reliably.
• Initial Measurement


  Items of property, plant and equipment should be measured at cost, which is the amount of cash or cash equivalent paid and the fair value of other consideration given to acquire an asset at the time of acquisition or construction.
• This includes:


  • Original purchase price including import duties and nonrefundable purchase taxes after deducting trade discounts and rebates
  • Any direct costs necessary to bring the asset to the location and condition for its intended use (e.g. site preparation, delivery and handling, installation, related professional fees for architects and engineers)
  • The estimated cost of dismantling and removing the asset and restoring the site
• Directly attributable costs


  • Cost of employee benefits arising directly from the construction or acquisition of the item of property, plant and equipment
  • Cost of site preparation
  • Initial delivery and handling cost
  • Installation and assembly cost
  • Cost of testing whether the asset is functioning properly
  • Professional fees
• Costs expensed outright


  • Cost of operating a new facility
  • Cost of introducing a new product or service (including costs of advertising and promotional activities)
  • Cost of conducting business in a new location or with a new class of customers (including costs of staff training)
  • Administration and other general overhead costs
  • Costs incurred in using or redeploying an item
  • Cost incurred while an item capable of operating in the manner intended by management has yet to be brought into use or operated at less than full capacity
  • Initial operating loss
  • Amounts related to certain incidental operations
• Capitalization of costs ceases when the PPE is in the location and condition necessary for it to be capable of operating in the manner intended by management. Therefore, costs incurred in using or redeploying a PPE are not capitalized.
• Modes of acquiring PPE

  • Lump-sum purchase of items of PPE
  • Demolition costs
  • Self-constructed assets
  • Issuance of equity instrument or share capital
  • Issuance of debt instrument or bonds payable
  • Exchange
  • Donation
• Classes of PPE


  A grouping of assets with similar nature and use in an entity's operations.
• Classes of PPE


  • Land
  • Land and buildings
  • Machinery
  • Ships
  • Aircraft
  • Motor vehicles
  • Furniture and fixtures
  • Office equipment
  • Bearer plants
• Land (Property)


  Is classified as PPE if it used in the entity's operations as "owner-occupied" property, e.g. land on which the entity's office building was constructed, land used as plant site, and land held for future plant site.
• Land not classified as PPE

  • Land being sold in the ordinary course of business – Inventory
  • Land held for sale under PFRS 5 – Noncurrent asset held for sale
  • Land held for long-term capital appreciation – Investment property
  • Land held for currently undetermined use – Investment property
  • Land held as site for a building being constructed or developed for future use as investment property – Investment property
  • Land leased out under operating lease – investment property
  • Land leased out under finance lease – derecognized in the lessor's books of accounts
• Cost of land


  • Purchase price including necessary costs such as broker or agent commission
  • Closing costs, such as titling costs, attorney's fees, and recording fees
  • Costs incurred in getting the land in the condition for its intended use, such as surveying, grading, filling, draining and clearing
  • Unpaid taxes up to date of acquisition assumed by buyer (taxes incurred after the date of acquisition is recognized as expense)
  • Assumption of any liens, mortgages, encumbrances and interest on such on such mortgages assumed by buyer
  • Special assessments for local government-maintained improvements, such as pavements, street lights, sewers and drainage systems
  • Option paid to acquire the land (options paid on items not acquired are expensed)
  • Payment to tenants to induce them to vacate the premises and costs of relocating and reconstructing property belonging to others
  • Initial estimate of restoration costs for which the entity has a present obligation
  • Any additional land improvements that have indefinite useful life, such as costs of draining, clearing, grading, leveling and filling, surveying, subdividing, and other permanent improvements
• Land improvement


  Enhancements to the land that have a definite useful life recognized separately from land and depreciated over their estimated useful lives.
• Examples of land improvements


  • Fences
  • Water System
  • Drainage systems
  • Sidewalks
  • Pavements
  • Cost of trees, shrubs and other landscaping
• Building (Plant)


  Classified as PPE if it used in the entity's operations as "owner-occupied", e.g. office building. Building being constructed or developed for future use as "owner-occupied" property is also classified as PPE.
• Buildings not classified as PPE

  • Building being sold in the ordinary course of business – Inventory
  • Building held for sale under PFRS 5 – Noncurrent assets held for sale
  • Building being constructed or developed for future use as investment property – Investment property
  • Building leased out under operating lease – Investment property
  • Building leased out under finance lease – derecognized in the books of accounts
• Cost of purchased building

  • Purchase price including other necessary costs such as broker's commission and legal fees
  • Unpaid taxes up to the date of acquisition
  • Mortgages, encumbrances and liens on the building assumed by the buyer
  • Option paid to acquire the building; option paid on items not acquired are charged to expense
  • Costs incurred to induce tenants to vacant premises
  • Any renovation or remodeling costs incurred to put a building purchased in a condition suitable for its intended use (prior to occupancy); any renovation or remodeling costs incurred subsequent to occupancy are normally expensed outright
• Building improvement


  Subsequent expenditures that either increase the useful life or improve the current state of a building.
• Examples of building improvements


  • Cost of elevator, escalator, or similar item that was not originally included in the purchased building or in the blueprint of a self-constructed building
  • Ventilation, plumbing and lighting systems installed after the occupancy of a purchased building or the completion of a self-constructed building
  • Immovable fixtures attached to the building which, if removed, would necessarily damage the building, e.g. partitions, compartments and cranes
• Equipment


  Refers to delivery and transportation equipment, office equipment, machinery, furniture and fixtures, furnishings, factory equipment, and similar fixed assets.
• Cost of equipment


  • Purchase price including other necessary costs such as broker's commissions and non-refundable purchase taxes
  • Freight, handling charges, and insurance on the equipment while in transit
  • Cost of necessary special foundations or platforms
  • Assembling and installation costs
  • Cost of testing and conducting trial runs, gross of proceeds from sale of samples produced during testing
  • The initial estimate of decommissioning and restoration costs for which the entity has present obligation
• Costs not included in the cost of equipment

  • Cost of relocating the equipment after it has been put to the location and condition originally intended by management – recognized as expense
  • Cost of training personnel who will be responsible in operating the equipment – recognized as expense
  • Cost of dismantling and removing old equipment, which belongs to the entity, prior to the installation of new equipment – recognized as expense except when the cost was previously recognized as liability
• Bearer plants


  A bearer plant is a living plant that: Is used in the production or supply of agricultural produce; Is expected to bear produce for more than one period; and has a remote likelihood of being sold as agricultural produce except for incidental scrap sales.
• Bearer plants are accounted for similar to self-constructed assets. PAS 16 uses the term "construction" to include activities that are necessary to cultivate bearer plants before they are in the location and condition intended by management.
• Lump-sum purchase of items of PPE

  Lump-sum price or basket price is allocated to the individual assets based on their relative fair values at the date of purchase. The main reason for allocation is subsequent measurement – some items are depreciable and some are not.
• PIC (Philippine Interpretations Committee) Interpretation on land and building


  If the building is usable, therefore we need to allocate the land and the building based on their relative fair value. If the building is unusable, the single cost is allocated to land only.
• Accounting for demolition costs depends on the intention of management when they acquired the building together with the land.


  • The old building is demolished immediately to make room for construction of a new building
  • A building is acquired and used in a prior period but demolished in the current period to make room for construction of a new building
• Self-constructed assets


  The cost of a self-constructed asset is determined using the same principles as for an acquired asset. It includes materials, labor, and overhead costs incurred during construction, architectural costs, supervision costs, and costs of building permit, excavation costs, insurance costs and safety inspection fees, costs of temporary structures built during construction, and borrowing cost to the extent that they are capitalizable under PAS 23 Borrowing Costs.
• Costs not included in the cost of self-constructed assets


  • Internal profits or savings on self-construction – these are not recognized
  • Cost of abnormal amounts of wasted materials, labor, or other resources due to inefficiencies – recognized as expense
  • Cost of uninsured hazards or claims for uninsured accidents – recognized as expense (only insurance expense paid may be capitalized as cost of self-constructed building)
  • Cost of private driveways, walks, permanent fences, parking lots and drainages and water systems that are not included in the building's blueprint – capitalized as land improvements
  • Income from incidental operations – recognized as income and does not affect the cost of PPE
• Other modes of acquiring PPE


  • Issuance of equity instrument or share capital
  • Issuance of debt instrument or bonds payable
  • Exchange
  • Donation
• Donation of PPE


  A PPE received from donation is measured at fair value and accounted for as: Donated capital – if the donor is an owner (shareholder). This is presented in equity under share premium or additional paid-in capital. Any cost incurred attributable to the receipt of donation and transfer of ownership is offset to the donated capital account. Income – if the donor is an unrelated party. Any cost incurred attributable to the receipt of donation and transfer of ownership is offset to the income recognized. Government grant in accordance with PAS 20 – if the donor is the government.