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Module-2-PPE

Module 2 focuses on Property, Plant, and Equipment (PPE), highlighting its nature, recognition, and presentation as non-financial assets in financial reporting. The intended learning outcomes include articulating the characteristics of PPE, integrating various depreciation methods, and solving measurement problems using cost and revaluation models. Key points include that PPE is initially measured at cost, can be presented under either a cost or revaluation model, and is subject to various depreciation methods.

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Fabila Nylyam
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5 views

Module-2-PPE

Module 2 focuses on Property, Plant, and Equipment (PPE), highlighting its nature, recognition, and presentation as non-financial assets in financial reporting. The intended learning outcomes include articulating the characteristics of PPE, integrating various depreciation methods, and solving measurement problems using cost and revaluation models. Key points include that PPE is initially measured at cost, can be presented under either a cost or revaluation model, and is subject to various depreciation methods.

Uploaded by

Fabila Nylyam
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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2.

Intended Learning Outcomes (ILOs)


Mabuhay and welcome to Module 2: Property, plant, and equipment.
Class, the Property, plant, and equipment (PPE) account is another type of
non-financial asset and is a major component of the entity’s financial
reporting.
As future CPAs, you need to fairly present Property, plant, and equipment in
the financial statements.
But before we start, let us first read the ILOs.
Reminder: Always have a calculator, paper, and pen while studying every
module. It is a good thing that you practice the illustrations in your own
handwriting. As they say, practice makes perfect.
Intended Learning Outcomes (ILOs):
At the end of the topic, the students are expected to be able to:
Psychomotor:

1. Articulate the nature, recognition, and presentation of Property,


plant, and equipment.

Affective:

2. Integrate the depreciation methods used such as straight-line


method, composite method, variable output, the sum of the years’
digit method, and Double-declining method to collaborative
activities.

Cognitive:

3. Solve the measurement of property, plant, and equipment using


the cost model and revaluation model.

2.1 Nature, recognition and presentation of PPE


According to International Accounting Standards (IAS) No. 16,
Property, plant, and equipment 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.
The major characteristics in the definition of property, plant, and equipment
are:

1. The property, plant, and equipment are tangible assets, meaning


with physical substance.
2. The property, plant, and equipment are used in business, meaning
used in production or supply of goods or services, for rental
purposes and for administrative purposes.
3. The property, plant, and equipment are expected to be used over a
period of more than one year.

Assets of this nature include:

1. Property not subject to depreciation or depletion such as land.


2. Property subject to depreciation or amortization such as land
improvements, building, machinery, equipment, furniture, and
leasehold improvements.
3. Property subject to depletion such as wasting assets (mineral and
oil deposits).

Recognition of property, plant, and equipment:


An item of property, plant, and equipment shall be recognized as an asset
when:

1. It is probable that future economic benefits associated with the


assets will flow to the entity.
2. The cost of the asset can be measured reliably.

Presentation of Property, plant, and equipment:


Property, plant, and equipment are reported in the Statement of Financial
Position under Noncurrent assets at Carrying Amount (Cost model) or
revalued carrying amount (Revaluation model).
Cost model – Cost less related accumulated depreciation and accumulated
impairment is equaled to the carrying amount.
Revaluation model - It means that property, plant, and equipment are
carried at a revalued carrying amount. The revalued carrying amount is the
fair value at the date of revaluation less any subsequent accumulated
depreciation and accumulated impairment loss.
Depreciation expense, Amortization expense, and Impairment loss are
reported in the Income statement.
2.2 Measurement of Property, plant, and equipment

Property, plant, and equipment are:

1. Initially measured at cost.


2. Subsequently, it can be either a cost model or the revaluation
model.

Cost 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.

2.2.1 Cash price


The cash price is equivalent to the cost of the property or equipment.
If cash price is not given, then compute for the fair value or the present
value of the consideration.

Note: Generally, the fair value of the consideration is the equivalent cash
price of the asset.
Question: Assuming aside from the note, the entity also paid P50,000. What
is the cost of the equipment?

2.2.2 Land with an old building


The fair value of old the building demolished is recorded as
Loss.
It is further deducted from the purchase price of the land.

Hence, from the P5,000,000 purchase price, P4,650,000 is only recognized


as the cost of the land.

2.2.3 In exchange for old asset


A gain or loss on the exchange of old PPE from a new PPE is recognized for
the difference between the cash price equivalent and the carrying amount of
old property and cash given.
If the cash price equivalent is not given, you must compute the fair value of
the noncash asset consideration plus any cash consideration.

2.2.4 Borrowing costs


According to PAS 23 paragraph 6,
Borrowing cost may include:
1. interest expense calculated by the effective interest method under
PAS 39,
2. finance charges in respect of finance leases recognized in
accordance with PAS 17 Leases,
3. and exchange differences arising from foreign currency borrowings
to the extent that they are regarded as an adjustment to interest
costs.

PAS 23 requires that borrowing costs directly attributable to the acquisition,


construction, or production of a 'qualifying asset' (one that necessarily takes
a substantial period of time to get ready for its intended use or sale) are
included in the cost of the asset.

Other borrowing costs are recognized as an expense.


A qualifying asset is an asset that takes a substantial period of time to get
ready for its intended use or sale. [PAS 23.5]
It could be:

1. Property, plant, and equipment and investment property during the


construction period,
2. Intangible assets during the development period,
3. or "made-to-order" Inventories.

2.2.5 Specific borrowing


IAS 23 stated, where funds are borrowed specifically, costs eligible for
capitalization are the actual costs incurred less any income earned on the
temporary investment of such borrowings.

Since the P5,000,000 loan is specifically for the construction of the building, the
annual interest incurred of P600,000 less any interest income from the loan is
capitalized as the cost of the building.
2.2.6 General borrowings
According to PAS 23, paragraph 14, where funds are part of a general pool,
the eligible amount is determined by applying a capitalization rate to the
expenditure on that asset.
The capitalization rate will be the weighted average of the borrowing costs
applicable to the general pool.

Since the 2 loans are for general purposes of the company and not just for the
construction of the building, a portion only of the annual interest is capitalized as
the cost of the building. In this case, only P1,449,000 based on the pro-rata amount
of P10,500,000 average expenditure.

2.3 Depreciation
All property, plant, and equipment are depreciated with the exception of
land.
The land is the only PPE that generally appreciates its value over the years.
Depreciation is the process of allocating depreciable amount of an amount
over useful life.
The objective of depreciation is to have each period benefiting from the use
of the asset bear an equitable share of the asset cost.

The above formula is generally used under the straight-line method.


Depreciation is reported in the income statement while Accumulated
depreciation is a contra PPE account and is deducted to the acquisition cost
of the PPE to arrive at the carrying amount of the PPE.

2.3.1 Accumulated depreciation and carrying amount.

2.3.2 Straight line method


2.3.3 Composite method

Notes: The composite rate is not rounded-off using MS Excel. But, if the problem is
silent in your next assessments, use 4 decimal places for the composite rate.

2.3.4 Variable depreciation method


2.3.5 Sum of the years' digit method
2.3.6 Double declining method
The total depreciation or the Accumulated depreciation at the end of 2026
should be equal to the cost less residual value. In this case, it is P1,080,000.
Hence, the depreciation expense for the year 2026 is computed on a work
back basis: P160,180.66 - 120,000 = P40,180.66.

2.4 Summary
1. Property, plant, and equipment 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.
2. Property, plant, and equipment initially measured at cost and
subsequently measured at either cost model or revaluation model.
3. Under the Cost model, Property, plant, and equipment are reported
at carrying amount. Cost less related accumulated depreciation and
accumulated impairment is equaled to the carrying amount.
4. Under the Revaluation model, Property, plant, and equipment are
reported at revalued carrying amount. The revalued carrying
amount is the fair value at the date of revaluation less any
subsequent accumulated depreciation and accumulated impairment
loss.
5. Generally, the depreciation method used to depreciate Property,
plant, and equipment is the straight-line method, composite
method, variable output, sum-of-the-years’ digit, and double-
declining method.

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