Property, plant, and equipment

Property, plant, and equipment is a heavy scorer in FAR because it never travels alone. One long-lived asset problem can test capitalization, a depreciation method, an impairment write-down, and a disposal gain in the same breath. Master the standard family around PAS 16 and you turn a feared topic into reliable points.

Initial cost under PAS 16

An item of PPE is initially measured at cost: the purchase price net of trade discounts, plus import duties and non-refundable taxes, plus every cost directly attributable to bringing the asset to the location and condition needed for its intended use (freight, site preparation, installation, professional fees, and testing), plus the initial estimate of dismantling and site restoration when the entity has a present obligation. Costs that are not directly attributable are expensed: general administration, staff training, advertising, and the costs of opening a new facility.

Worked example. Cabuyao Manufacturing buys a machine invoiced at P900,000 subject to a 5 percent trade discount, and pays freight of P20,000, installation and testing of P35,000, and staff training of P15,000.

Cost = (900,000 x 95 percent) + 20,000 + 35,000 = 855,000 + 20,000 + 35,000 = P910,000

The P15,000 training is expensed, not capitalized. Trade discounts always reduce the recorded price.

Subsequent costs. Capitalize a later expenditure only when it meets the recognition criteria, typically because it increases future economic benefits beyond the asset's originally assessed standard, such as a major upgrade or a replacement part. Routine repairs and maintenance that merely keep the asset in normal operating condition are expensed as incurred.

Cost model versus revaluation model

After recognition, an entity chooses one policy per class of PPE. Under the cost model, the asset is carried at cost less accumulated depreciation and impairment. Under the revaluation model, it is carried at fair value at the revaluation date less subsequent depreciation and impairment.

An upward revaluation is recognized in other comprehensive income and accumulated in equity as revaluation surplus (a downward revaluation first reverses any surplus, then hits profit or loss). As the revalued asset is used, the excess of depreciation on the revalued amount over depreciation on original cost may be realized piecemeal, transferred directly from revaluation surplus to retained earnings, never through profit or loss.

Worked example. A building has a carrying amount of P2,400,000 (cost P3,000,000 less accumulated depreciation P600,000) and is revalued to a fair value of P3,200,000.

Revaluation surplus = 3,200,000 fair value · 2,400,000 carrying amount = P800,000, recognized in other comprehensive income.

Depreciation

Depreciation allocates the depreciable amount (cost less residual value) over the useful life. Know four methods cold:

• Straight-line: depreciable amount divided by useful life, an equal charge each period.
• Units of production: depreciable amount times units this period divided by total expected units.
• Sum-of-the-years'-digits (SYD): depreciable amount times a declining fraction whose denominator is the sum of the life's digits.
• Declining balance: a fixed rate applied to the carrying amount, ignoring residual value until the carrying amount would fall below it.

A change in useful life, residual value, or method is a change in accounting estimate under PAS 8, applied prospectively: spread the current carrying amount over the remaining revised life. Never restate prior years.

SYD example. Equipment costs P660,000 with a P60,000 residual value and a 5-year life. Depreciable amount is P600,000; the SYD denominator is 5 + 4 + 3 + 2 + 1 = 15. Year 1 depreciation = 600,000 x 5/15 = P200,000.

The rest of the PPE standard family

Borrowing costs (PAS 23). Borrowing costs directly attributable to acquiring or constructing a qualifying asset are capitalized as part of its cost. When a specific loan funds construction, capitalize the interest incurred less any investment income earned on the temporary investment of idle proceeds. Borrow P8,000,000 at 8 percent for a full year and earn P40,000 on idle funds, and you capitalize 640,000 · 40,000 = P600,000.

Impairment (PAS 36). An asset is impaired when its carrying amount exceeds its recoverable amount, the higher of fair value less costs of disposal and value in use. The impairment loss is the excess. When an asset does not generate independent cash inflows, it is tested within its cash-generating unit, the smallest group of assets generating largely independent cash inflows. A reversal of a prior impairment is capped: it cannot raise the carrying amount above what it would have been, net of depreciation, had no impairment been recognized, and a goodwill impairment is never reversed.

Investment property (PAS 40) is land or a building held to earn rentals or for capital appreciation, not for use in production or for sale in the ordinary course of business. Held for sale (PFRS 5) assets are measured at the lower of carrying amount and fair value less costs to sell, and are no longer depreciated. Government grants (PAS 20) related to a depreciable asset are recognized in profit or loss over the periods and in the proportions in which depreciation on that asset is recognized, not all at once.

Derecognition. On disposal, the gain or loss is the net proceeds less the carrying amount. Sell equipment with a P280,000 carrying amount for P250,000 and you recognize a P30,000 loss.

Common traps

• Capitalizing training, advertising, or general overhead into the cost of PPE.
• Forgetting to deduct the trade discount before capitalizing the purchase price.
• Running a change in estimate retrospectively instead of prospectively over the remaining life.
• Applying the declining-balance rate to the depreciable amount instead of the carrying amount.
• Routing a revaluation increase or a piecemeal realization through profit or loss.
• Continuing to depreciate an asset already classified as held for sale.
• Recognizing an asset-related government grant fully in the year received.

Recap

Capitalize the price net of discounts plus every directly attributable cost and the restoration estimate, and expense the rest. Choose the cost or revaluation model by class, sending revaluation increases to other comprehensive income. Depreciate over the useful life by one of the four methods, and treat estimate changes prospectively. Round it out with PAS 23 borrowing costs, PAS 36 impairment to recoverable amount, PAS 40 investment property, PFRS 5 held for sale, and PAS 20 grants.