OPERATIONAL ASSETS After determining whether an item qualifies as
PPE or not, the next question is how much
PROPERTY, PLANT AND EQUIPMENT
Operational Assets are the assets that are used in
the production of goods or services.
For Financial Reporting purposes, operational
assets are usually classified in two categories
1. Property, Plant and Equipment (PAS 16)
2. Intangible Assets (PAS 38)
Basically, there are 3 criteria that must be met in
order for an item to be classified as PPE.
 It must have physical substance. Meaning
you can perceive it with your senses
(tangible)
 The life or the use of the asset must be
more than one year. Because of this
criteria, PPE is classified as a Noncurrent
Asset.
 They must be used in business. For the
main revenue generating activity of the
Company.
E5 - 1
Long-term capital appreciation - REMOVED
 It's Investment Property. Because the
purpose is capital appreciation.
 Investment Properties are accounted for
under a different standard (PAS 40)
Land held for sale in the ordinary course of
business – REMOVED
 Accounted for as Inventory under PAS 2.
Because it is held for sale in the
ORDINARY COURSE of business.
Undetermined future use - REMOVED
 Considered as Investment property
 Investment Properties include items used
for Capital Appreciation, Rentals,
Undetermined Use.
Land developing for immediate sale - REMOVED
 It is a noncurrent Asset Held for Sale. Pero
under siya ng Current Assets.
should you value the PPE?
 Under PAS 16, PPE must be initially
measured at COST
 Therefore, the initial cost of an operational
asset includes the PURCHASE PRICE and all
EXPENDITURES NECESSARY to bring the
asset to its desired condition and location for
use.
The main issue is the expenditures.
When it comes to expenditures, you have to
options.
CAPITALIZE or EXPENSE
 if the expenditure is considered necessary,
then it will be capitalized and added to the
cost of the asset.
 Kung unnecessary naman or incidental lang,
then it will be recorded as an expense.
E5-3
Land D
 If necessary, kasali yung cost
 In the process of clearing, nakabenta ka daw ng
timber and gravel.
 The proceeds effectively reduce the cost of
site preparation kaya siya deducted sa cost.
It will not be recorded as other income
kundi deduction sa cost ng asset
Land J
 First is the Purchase Price na 2,800,000
 Next is Broker's Fee or Commission. It’s
necessary. It needs to be paid to acquire the
land.
 Next may dalawang Option Price.
 It's the money paid to give the potential
buyer time to consider purchasing the
item. Kung baga, reservation fee. At this
time, di pwede ibenta ni seller sa iba yung
lupa.
 Option Price paid for the land acquired is
therefore capitalized. Because it was
necessary.
 Pero yung option price for the land that was
not acquired is EXPENSED. Kasi avoidable
sana siya. Di mo naman nabili yung lupa so
gumastos ka ng option money para sa wala.
Expensed.
 Delinquent taxes
 In this case, hindi kasi binayaran ni previous
owner taxes niya ng 2019. Tapos ikaw yung
nagbayad
 So kung tutuusin, naging part siya ng
consideration/purchase price. Kasi you
assumed the obligation. Therefore,
capitalize.
 Next is yujg property taxes for 2020.
 Typically, this would be expensed
 up to August 30, si previous owner dapat
nagbayad. Pero you are the one who paid. So
part siya ng consideration. Capitalize.
 Pero yung taxes ng September to December,
expensed na. Kasi ikaw na yung may-ari at that
date. It was no longer part of the necessary
costs to acquire. Naging cost to maintain and
use nalang siya.
TAKE NOTE: Capitalization of expenditures
stop the moment the asset is ready for its intended
use. Meaning any expenditure na nagastos mo
after the acquisition is already expensed as
incurred.
 Cost of relocating squatters.
 They need to be relocated in order for you to
use your asset properly. Therefore capitalized.
3 COMPONENTS OF PPE
 Purchase Price
 Directly Attributable Costs (necessary
costs)
 Present Value of an Asset Retirement
Obligation
MODES OF ACQUIRING PPE
 Cash purchase
 Donation
DONATION
 To record something there must be Value
Received and Value Parted With
 It's the same with unilateral obligations, may
COC.
 When you receive PPE through Donation. It
will be measured at Fair Value
 The PPE will be debited and you credit the
account "Donated Capital"
TAKE NOTE: legal expenses to transfer title
will not be capitalized as Cost. Instead it will be
treated as a reduction from Donated Capital.
E5-3
 If you would notice the legal costs were not
included.
 journal entry:
Land 1,045,000
Donated Capital 920,000
Cash 125,000
 1M ang fair value tapos less the legal cost of
80k. Yun ang credit kay donated capital
 Cash is credited for 125k because you paid 80k
for legal expensesband 45k for grading and
levelling costs.
E5 – 4 : BASKET PURCHASE
 Also known as lump-sum purchase
 basket price - mix of items has a single price
The accounting issue here is allocating the
basket price among the different assets purchased.
 In allocating, we use their relative fair
values as basis for proportions.
 Yung vendor's original cost. Disregarded yun.
 Add mo muna lahat ng Fair Values nila. The
total is 832,500
 Based on that total, determine the share of each
asset
 For example kay Land, it is 499,500
divided by 832,500. That is 60%
 Once you arrive at their relative shares, GRINDER
multiply mo yung fraction or percentages sa
basket price  The Cost usually includes Irrecoverable
 So for Land it is 700,000 x 60% Purchase Taxes.
 Pero VAT is recoverable kasi.
 Therefore the share in cost is 420,000
 Naipapasa siya so it will not be included in
 Then simply do the same for the rest of the
cost.
assets
 The safety rails and cooling devices are
E5-5 necessary.
 They are needed for you to use the PPE
 Sometimes when we purchase PPE, pwedeng properly and therefore capitalized.
Deferred Payments or utang muna
 And usually we are granted discounts when we MOLDER
pay promptly.
 The VAT is disregarded.
 The discount will always be deducted from
 Pero kung Percentage Tax yun, kasali
cost WHETHER THE DISCOUNT IS TAKEN
 VAT lang talaga ang hindi kasi naipapasa.
OR NOT.
 Training Cost hindi kasali
 In a managerial accounting point of view,
 It is expensed because of the simple reason
the reason is because it is the manager's
that the company has no control over the
job to reduce cost efficiently
employees.
 So kapag mas malaki binayaran ng
 and that is why training costs are never
company dahil late nagbayad si Manager,
capitalized.
it is his inefficiency.
 They could have acquired it for less pero
dahil sa kanya napagastos pa ang
company.

CHOPPER

 The transportation and insurance is necessary

to bring the asset to its location and condition.
Or to prepare it for use.

CUTTER

 The discount is still deducted kahit di siya na-

avail for reasons.
 Import duties are necessary.
 Kung di mo yan babayaran, di yan
irerelease ng Bureau of Customs at di mo
magagamit yung asset
 The Insurance was disregarded because
Subsequent Cost na kasi siya.
 The asset was acquired in October 1
 The Insurance paid was already for after
the acquisition already.
 Expense as incurred na ang subsequent
costs. General rule yun