PAS 12 and PAS 16

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
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Standards (by: Zeus Vernon B. Millan)
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Standards (by: Zeus Vernon B. Millan)
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Standards (by: Zeus Vernon B. Millan)
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Standards (by: Zeus Vernon B. Millan)
Deferred taxes

• If the increase in deferred tax liability exceeds the increase in

deferred tax asset, the difference is deferred tax expense. If it is
the opposite, the difference is deferred tax income or benefit.
• A deferred tax asset is recognized only to the extent that it is
realizable.
• Deferred taxes are measured using enacted or substantially enacted
tax rates that are applicable to the periods of their expected reversals.
• Deferred tax assets and liabilities are not discounted.
• Deferred tax asset and liabilities are presented as non-current.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
PAS 16 Property, Plant and Equipment 

Learning Competencies

• State the recognition criteria, initial

measurement, and subsequent measurement of
PPE.
• Apply the principles of PAS 16 in basic
computations of a PPE’s cost, depreciation,
carrying amount, and revaluation surplus as
well as the gain or loss on its disposal.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Characteristics of PPE

a. Tangible assets – items of PPE have physical substance

b. Used in normal operations – items of PPE are used in
the production or supply of goods or services, for rental,
or for administrative purposes
c. Long-term in nature – items of PPE are expected to be
used from more than a year

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Examples of items of PPE

a. Land used in business

b. Land held for future plant site
c. Building used in business
d. Equipment used in the production of goods
e. Equipment held for environmental and safety reasons
f. Equipment held for rentals
g. Major spare parts and long-lived stand-by equipment
h. Furniture and fixture
i. Bearer plants

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Recognition

The cost of an item of property, plant and equipment shall be

recognized as an asset only if:
a. it is probable that future economic benefits associated with
the item will flow to the entity; and
b. the cost of the item can be measured reliably.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Initial measurement
• An item of PPE is initially measured at its cost.

Elements of Cost
1. Purchase price, including 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 the management.
3. Present value of decommissioning and restoration costs to
the extent that they are recognized as obligation
Conceptual Framework & Acctg.
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Standards (by: Zeus Vernon B. Millan)
Examples of directly attributable costs

• Costs of employee benefits arising directly from the construction or

acquisition of PPE;
• Costs of site preparation;
• Initial delivery and handling costs (e.g., freight costs);
• Installation and assembly costs;
• Testing costs, net of disposal proceeds of samples generated during
testing; and
• Professional fees.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Cessation of capitalizing costs to PPE

• Recognition of costs in the carrying amount of an item of

PPE ceases when the item is in the location and
condition necessary for it to be capable of operating in
the manner intended by management.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Measurement of Cost

• The cost of an item of PPE is the cash price equivalent at the

recognition date. If payment is deferred beyond normal credit
terms, the difference between the cash price equivalent and the total
payment is recognized as interest over the period of credit unless
such interest is capitalized in accordance with PAS 23 Borrowing
Costs.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Acquisition through exchange

• If the exchange has commercial substance, the asset received from

the exchange is measured using the following order of priority:

a. Fair value of asset Given up

b. Fair value of asset Received

c. Carrying amount of asset Given up

• If the exchange lacks commercial substance, the asset received from

the exchange is measured at (c) above.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Subsequent measurement

• Subsequent to initial recognition, an entity shall choose

either:
(a) the cost model or
(b) the revaluation model
as its accounting policy and shall apply that policy to an
entire class of PPE.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Cost Model

• After recognition, an item of PPE is measured at its cost

less any accumulated depreciation and any
accumulated impairment losses.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Depreciation

• Depreciation is the systematic allocation of the

depreciable amount of an asset over its estimated useful
life.
• When computing for depreciation, each part of an item
of PPE with a cost that is significant in relation to the
total cost of the item shall be depreciated separately.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Depreciation - continuation

• Depreciation begins when the asset is available for

use, i.e., when it is in the location and condition
necessary for it to be capable of operating in the manner
intended by management.
• Depreciation ceases when the asset is derecognized
or when it is classified as “held for sale” under PFRS 5,
whichever comes earlier.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Selection of depreciation method

• There are various methods of depreciation. The entity

shall select the method that most closely reflects the
expected pattern of consumption of the future
economic benefits embodied in the asset.
• However, a depreciation method that is based on
revenue that is generated by an activity that includes
the use of an asset is not appropriate.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
The Straight-line method of Depreciation

Straight line method – depreciation is recognized

evenly over the life of the asset by dividing the depreciable
amount by the estimated useful life.

Depreciation = (Historical cost – Residual value) ÷

Estimated useful life

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Changes in depreciation method, useful life, and residual value

• A change in depreciation method, useful life, or residual

value is a change in accounting estimate accounted for
prospectively.

• Prospective accounting means the change affects only the

current period and/or future periods. The change does
not affect past periods.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Revaluation Model

• After recognition as an asset, an item of PPE whose fair

value can be measured reliably shall be carried at a
revalued amount, being its fair value at the date of
the revaluation less any subsequent accumulated
depreciation and subsequent accumulated impairment
losses.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Revaluation surplus

Fair value* xx
Less: Carrying amount (xx)
Revaluation surplus – gross of tax xx

*The fair value is determined using an appropriate valuation technique,

taking into account the principles set forth under PFRS 13.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Frequency of revaluation

• For items with significant and volatile changes in fair

value, annual revaluation is necessary. For items
with insignificant changes in fair value, revaluation may
be made every 3 or 5 years.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Revaluation applied to all assets in a class

• If an item of PPE is revalued, the entire class of PPE to which

that asset belongs shall be revalued.
• The items within a class of PPE are revalued simultaneously
to avoid selective revaluation of assets and the reporting of
amounts in the financial statements that are a mixture of costs
and values as at different dates.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Subsequent accounting for revaluation surplus

• Revaluation is initially recognized in other comprehensive income

unless the revaluation represents impairment loss or reversal of impairment
loss, in which case it is recognized in profit or loss.

• Subsequently, the revaluation surplus is accounted for as follows:

1. If the revalued asset is non-depreciable, the revaluation surplus
accumulated in equity is transferred directly to retained
earnings when the asset is derecognized.
2. If the revalued asset is depreciable, a portion of the revaluation
surplus may be transferred periodically to retained earnings as the asset
is being used.

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
Derecognition

• The carrying amount of an item or PPE shall be derecognized:

a. on disposal; or
b. when no future economic benefits are expected from its use
or disposal

Conceptual Framework & Acctg.

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Standards (by: Zeus Vernon B. Millan)
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