PAS 16: Property, Plant and

Equipment (PPE)
CONCEPTUAL FRAMEWORK & ACCOUTING STANDARDS

RA Moises
I. Introduction to PAS 16
• Definition of PPE
• Objective of PAS 16
• Scope of the standard (inclusions & exclusions)
 Introduction to PAS 16
Definition of Property, Plant, and Equipment (PPE)

Property, Plant, and Equipment (PPE) are tangible assets that:

1.Are held for use in the production or supply of goods or services, for rentals
or for administrative purposes.
2.Are expected to be used during more than one accounting period.
 Introduction to PAS 16
Definition of Property, Plant, and Equipment (PPE)

Key traits:
• Tangible (physical form)
• Used in operations (not held for sale)
• Long-term use (non-current asset)

Example: A delivery truck used by a logistics company — not for sale, not
consumed immediately, used to generate revenue.
 Introduction to PAS 16
Objective of PAS 16

The main purpose of PAS 16 is to:

• Prescribe the accounting treatment for PPE.
• Ensure users of financial statements receive reliable and relevant
information about:
• The carrying amount of PPE
• Changes in that value over time (due to depreciation, impairment,
revaluation, etc.)
 Introduction to PAS 16
Objective of PAS 16

PAS 16 deals with:

• Recognition
• Measurement (initial and subsequent)
• Depreciation
• Derecognition
• Disclosure
 Introduction to PAS 16
Scope of PAS 16

Inclusions (What’s Covered):

• Land
• Buildings
• Machinery
• Equipment
• Furniture
• Vehicles
• Tools used in operations
 Introduction to PAS 16
Scope of PAS 16

Inclusions (What’s Covered):

These are used in producing goods, providing services, or administrative

functions.
 Introduction to PAS 16
Scope of PAS 16

Exclusions (Covered by Other Standards):

Excluded Item Standard That Applies

Investment Property PAS 40
Biological Assets PAS 41
Exploration and Evaluation Assets PFRS 6
Non-current assets held for sale PFRS 5
Leased Assets PFRS 16 (if applicable)
Intangible Assets (e.g., patents) PAS 38
 Class Discussion Prompts
• Why is it important to distinguish PPE from inventory or intangible
assets?
• Can a company-owned property be classified under different
standards depending on use?
• What challenges do companies face in identifying qualifying
assets?
II. Recognition of PPE
• Criteria for recognition
• Examples of qualifying assets
 II. Recognition of PPE
Under PAS 16, an item of Property, Plant, and Equipment can only be
recognized as an asset if it satisfies two critical criteria:
1. Probable Future Economic Benefits
2. Cost Can Be Measured Reliably
 II. Recognition of PPE
Criteria for Recognition

1. Probable Future Economic Benefits

• The asset must provide future economic benefits to the company.
• Benefits can be:
• Revenue generation (e.g., production machinery used to make
products)
• Cost reduction (e.g., energy-efficient equipment reducing operating
costs)
• Administrative efficiencies (e.g., computers used in office tasks)
 II. Recognition of PPE
Criteria for Recognition

Key test:
Is it more likely than not (probable) that the asset will generate economic
inflow?

Example:
A delivery vehicle purchased by a business clearly contributes to earning
revenue through transporting goods.
 II. Recognition of PPE
Criteria for Recognition

2. Cost Can Be Measured Reliably

• The cost must be measurable with reasonable accuracy.
• This includes the purchase price and directly attributable costs:
• Delivery and handling charges
• Installation and assembly costs
• Initial testing and inspection costs
• Reliable measurement typically means supported by documentation
(invoices, contracts, quotations).
 II. Recognition of PPE
Criteria for Recognition

Example:
A manufacturing company purchases machinery, and invoices clearly show
costs for purchase, delivery, and installation. All costs are documented and
measurable, meeting the criterion.
 II. Recognition of PPE
Examples of Qualifying Assets

Assets typically recognized under PPE include:

Asset Category Specific Examples

Land & Buildings Factories, warehouses, office buildings
Machinery & Equipment Manufacturing machinery, production lines
Vehicles Delivery vans, trucks, company cars
Furniture & Fixtures Office desks, cabinets, store fixtures
Tools & Instruments Specialized tools used in production or repair
 Class Discussion Prompts
• Why must both criteria be satisfied for asset recognition?
• How do companies estimate “probable future economic
benefits”?
• Can you give examples from everyday life or from your
workplace/school where recognition criteria were clear or
unclear?
III. Initial Measurement
• Measured at cost
• Components of cost
 III. Initial Measurement
Initially, PPE must be recognized at its cost.

This measurement helps accurately capture the asset’s value at the point it’s
first recognized.
 III. Initial Measurement
Measured at Cost

Cost includes all expenditures necessary to bring the asset to the location and
condition ready for its intended use.

The total cost typically includes:

Cost = Purchase Price + Directly Attributable Costs + Estimated
Dismantling Costs
 III. Initial Measurement
Components of Cost Explained

① Purchase Price
• Amount paid for the asset itself.
• Includes:
• Import duties
• Non-refundable taxes (e.g., VAT if non-recoverable)
• Less: discounts, rebates, or trade allowances.
 III. Initial Measurement
Components of Cost Explained

Example:
A company imports machinery priced at ₱2 million.
Import duties of ₱100,000 and non-refundable VAT of ₱240,000 are added.
Total cost = ₱2,340,000
 III. Initial Measurement
Components of Cost Explained

② Directly Attributable Costs

These costs must directly contribute to bringing the asset to operational
condition.
Common examples:
• Delivery and handling charges
• Installation, assembly, and site preparation costs
• Professional fees (architects, engineers)
• Initial testing and commissioning costs (less any proceeds from testing)
 III. Initial Measurement
Components of Cost Explained

Example:
You buy equipment for ₱500,000, plus delivery ₱20,000, installation ₱30,000,
and initial testing ₱10,000.
Total cost = ₱560,000
 III. Initial Measurement
Components of Cost Explained

③ Initial Estimate of Dismantling and Restoration Costs

• Estimated costs to dismantle, remove, or restore the site at the end of the
asset’s useful life.
• These future obligations are included at their present value.
• Often seen in mining, oil & gas, and leasing industries.
 III. Initial Measurement
Components of Cost Explained

Example:
An oil company must dismantle drilling rigs after operations. Estimated future
cost of ₱500,000 (present value) is added to initial asset cost.
 III. Initial Measurement
Exclusions from PPE Cost

Certain expenditures should NOT be included in the initial cost of PPE and
should be expensed immediately:
• Administration and general overhead costs
• Employee training expenses
• Advertising and promotional costs
• Initial operating losses
• Costs of opening a new facility
• Costs from abnormal waste or inefficiencies
 III. Initial Measurement
Exclusions from PPE Cost

Example:
Costs incurred to train employees in operating new machinery must be
expensed, not capitalized.
 III. Initial Measurement
Why Does This Matter?

Proper initial measurement ensures:

• Accurate calculation of depreciation.
• Fair and truthful financial representation.
• Compliance with accounting standards.
 Class Discussion Questions:
• Why are administrative costs excluded from PPE costs?
• How do companies determine the present value of future
dismantling costs?
• Can you identify common mistakes businesses make in the initial
measurement of PPE?
IV. Measurement After
Recognition
• Cost Model
• Revaluation Model
 IV. Measurement After Recognition
After initial recognition, PAS 16 allows two methods for measuring PPE:
1.Cost Model
2.Revaluation Model

Companies must choose one method and apply it consistently to similar

assets.
 IV. Measurement After Recognition
Cost Model

Under the Cost Model, PPE is carried at:

Cost less Accumulated Depreciation and Accumulated Impairment Losses

Key Points:
• Depreciation is charged systematically over the asset’s useful life.
• Impairment losses (PAS 36) reduce the carrying amount if the asset’s
recoverable amount declines below its carrying value.
 IV. Measurement After Recognition
Cost Model

Example:
• Equipment initially purchased for ₱1,000,000.
• Depreciation after 2 years: ₱200,000; Impairment loss: ₱50,000.
• Carrying amount = ₱750,000 (₱1M - ₱200k - ₱50k)
 IV. Measurement After Recognition
Revaluation Model

Under the Revaluation Model, PPE is carried at:

Fair value at date of revaluation less subsequent depreciation and
impairment

Conditions for Applying Revaluation:

• Fair value must be measurable reliably.
• Must perform regular revaluations (frequent enough to ensure carrying
amount approximates fair value).
 IV. Measurement After Recognition
Accounting for Revaluation Surplus:

When assets are revalued:

• Increase in value is recorded in Other Comprehensive Income (OCI) as a
Revaluation Surplus.
• Decrease in value:
• First reduces any previous surplus for the same asset.
• Excess decreases beyond surplus are recorded as expense in Profit or
Loss.
 IV. Measurement After Recognition
Accounting for Revaluation Surplus:

Revaluation surplus transfer:

• Surplus is transferred directly to retained earnings when the asset is
derecognized (e.g., sold or scrapped) or as it’s depreciated.
• This transfer never goes through Profit or Loss.
 IV. Measurement After Recognition
Revaluation Example:

Scenario Original Cost Revalued Fair Value Accounting Treatment

Initial Purchase ₱1,000,000 - Initially recorded at cost

₱200,000 gain → OCI
Revaluation after 3 yrs ₱1,000,000 ₱1,200,000
(Revaluation surplus)
₱100,000 loss → reduces
Subsequent Revaluation ₱1,200,000 ₱1,100,000
surplus in OCI
 IV. Measurement After Recognition
Cost vs. Revaluation Model

Aspect Cost Model Revaluation Model

Valuation basis Historical cost Fair value (current market value)

Complexity Simpler, less costly More complex, requires appraisal

Frequency of valuation Not required after initial Regular intervals required

Impact on financials Stable carrying amount Can cause volatility in equity

 Class Discussion Questions:
• Why might a company choose the revaluation model despite its
complexity?
• How could regular revaluation benefit investors or financial
statement users?
• Can switching models frequently create confusion or
inconsistency?
V. Depreciation
•Start when the asset is available for use
•Stop when asset is derecognized or classified as held for sale
•Depreciation methods
 V. Depreciation
Depreciation allocates the cost of PPE systematically over its useful life,
matching expenses with the revenues generated by the asset.
 V. Depreciation
When to Start and Stop Depreciation

Start Depreciation when:

• The asset is available for use (ready and capable for its intended purpose).
• Actual use isn’t necessary; availability triggers depreciation.

Example: Equipment installed on Jan 1, ready for use, but operations begin Feb
1—Depreciation starts Jan 1.
 V. Depreciation
When to Start and Stop Depreciation

Stop Depreciation when:

• The asset is derecognized (sold, scrapped, fully depreciated).
• The asset is classified as held for sale (PFRS 5).
 V. Depreciation
Depreciation Methods

Different methods reflect varying patterns of asset usage or benefit

 V. Depreciation
① Straight-Line Method
• Equal depreciation each period.
• Simple and widely used.
• Suitable for assets with consistent benefits (e.g., buildings, furniture).

Formula:
 V. Depreciation
② Reducing Balance Method
• Higher depreciation early, decreasing over time.
• Reflects rapid initial usage or faster obsolescence (e.g., computers,
vehicles).

Formula (typical):
Depreciation expense = Carrying Amount × Depreciation Rate
 V. Depreciation
③ Units of Production Method
• Depreciation based on actual usage/output.
• Suitable for machinery tied directly to production levels (e.g., production
machines, vehicles based on mileage).

Formula:
 V. Depreciation
Review of Useful Life and Residual Value Annually

• Companies must reassess useful life and residual value annually.

• Changes result in prospective adjustments to depreciation.

Example: Initially: useful life = 10 years; after 2 years, revised to 8 years total.
Depreciation adjusted from year 3 onward.
 V. Depreciation
Component Depreciation
• Significant parts of an asset with different lifespans must be depreciated
separately.
• Ensures accurate allocation of cost over each component’s useful life.

Example:
An airplane:
• Airframe: 20-year lifespan
• Engine: 7-year lifespan
Depreciated separately according to each component’s life.
 Class Discussion Questions
• Why must depreciation start once available for use, even if not
actually in use?
• How do companies choose the appropriate depreciation method?
• What are practical challenges in applying component
depreciation?
VI. Impairment
•Apply PAS 36 (Impairment of Assets)
•Test when there is an indication of impairment
 VI. Impairment
Impairment occurs when an asset’s carrying amount exceeds its recoverable
amount, reflecting that the asset might not generate expected future economic
benefits.

Under PAS 16, impairment is dealt with specifically by applying PAS 36

(Impairment of Assets).
 VI. Impairment
When to Test for Impairment?

Assets must be tested for impairment:

• Whenever there’s an indication or evidence suggesting the asset’s value
may have decreased significantly.
• Indicators may include:
• Physical damage or obsolescence
• Market value decline
• Significant technological changes
• Poor economic performance of the asset
• Regulatory changes affecting asset use
 VI. Impairment
When to Test for Impairment?

Example:
A factory damaged by flooding would trigger an immediate impairment test.
 VI. Impairment
How is Impairment Determined?

Under PAS 36, impairment is assessed by comparing:

• Carrying Amount (the asset’s book value)
• Recoverable Amount (the higher of fair value less costs to sell or value-in-
use)
 VI. Impairment
How is Impairment Determined?

If Carrying Amount > Recoverable Amount, the asset is impaired.

Impairment Loss Calculation:

Impairment Loss = Carrying Amount - Recoverable Amount
 VI. Impairment
Accounting for Impairment Loss

• Impairment loss reduces the carrying amount directly.

• Recorded immediately as an expense in the Profit or Loss statement.
• Depreciation in future periods is adjusted to reflect the new carrying amount.

Example:
Equipment’s carrying amount = ₱1,000,000
Recoverable amount = ₱800,000
Impairment loss = ₱200,000 (expense immediately)
 VI. Impairment
Reversal of Impairment

• If conditions causing impairment improve, PAS 36 allows reversal.

• The reversal cannot exceed the asset’s original carrying amount had
impairment not occurred.
• Reversal is recognized immediately in profit or loss.
 VI. Impairment
Why Impairment Matters

• Ensures assets are not overstated in financial statements.

• Provides accurate financial position to users of financial statements.
• Enhances transparency and reliability.
 Class Discussion Questions
• Can you think of a situation in your workplace/school where
impairment could occur?
• Why might companies hesitate to recognize impairment losses?
• How can impairment tests benefit investors or management
decisions?
VII. Derecognition
• When asset is disposed of or no future benefits expected
• Gain/loss = Proceeds – Carrying amount
• Recognized in profit or loss
 VII. Derecognition
Derecognition means removing the asset from the balance sheet when the
company no longer expects future economic benefits or has disposed of it.
 VII. Derecognition
When to Derecognize PPE?

PPE should be derecognized when:

• Disposed of (sold, scrapped, donated, exchanged).
• No future economic benefits are expected (e.g., equipment becomes
unusable, obsolete, or fully damaged).

Example:
A delivery truck is sold, or machinery becomes permanently unusable.
 VII. Derecognition
Calculating Gain or Loss on Derecognition

Gain or loss upon derecognition is calculated as:

Gain/Loss = Proceeds from disposal - Carrying amount

• Proceeds: Amount received from sale or disposal.

• Carrying amount: Asset’s book value at the disposal date (cost minus
accumulated depreciation and impairment).
 VII. Derecognition
Example:

Carrying amount of vehicle: ₱300,000

Sale proceeds: ₱350,000
Gain = ₱50,000 (recognized in profit or loss)

Carrying amount: ₱300,000

Sale proceeds: ₱250,000
Loss = ₱50,000 (recognized in profit or loss)
 VII. Derecognition
Recognition in Financial Statements

• Gains or losses are recognized immediately in the Profit or Loss statement.

• Not recorded directly in equity or OCI (Other Comprehensive Income).
 VII. Derecognition
Special Cases

• If an asset is exchanged for another asset, PAS 16 provides guidance on how

to measure the transaction.
• Disposal costs (e.g., dismantling, legal fees) reduce net proceeds from
disposal.
 VII. Derecognition
Measurement of Exchanged Assets

When assets are exchanged, the new asset received should be measured at
either:
1.Fair value of the asset received, or
2.Fair value of the asset given up
—whichever is more reliably measurable.

If neither fair value can be reliably measured, the new asset is measured at the
carrying amount of the asset given up.
 VII. Derecognition
Recognition of Gain or Loss

A gain or loss from an exchange transaction is calculated as follows:

Gain/Loss = Fair value of asset received (or given up) - Carrying amount of asset
given up

This gain or loss is recognized immediately in the profit or loss statement.

 VII. Derecognition
Practical Example

Situation:
• Company exchanges old machinery (carrying amount: ₱500,000) for new
machinery.
• Fair value of old machinery: ₱600,000 (reliably measurable).
 VII. Derecognition
Practical Example

Measurement:
• New machinery recorded at ₱600,000 (fair value of old machinery given up).

Gain/Loss:
• Gain: ₱600,000 – ₱500,000 = ₱100,000
• Recognized immediately in profit or loss.
 VII. Derecognition
When Fair Value Is Not Reliable

• If neither asset’s fair value is measurable, no gain or loss is recognized.

• New asset is recorded at the carrying amount of the asset given up.
 VII. Derecognition
Why Derecognition Matters

• Ensures accurate reflection of assets and liabilities.

• Clearly communicates financial performance.
• Avoids overstating PPE on financial statements.
 Class Discussion Questions
• Can you provide examples from your workplace/school when PPE
was derecognized?
• How do disposal methods (e.g., selling vs. scrapping) affect the
calculation of gain or loss?
• Why is immediate recognition of gains or losses important for
stakeholders?
VIII. Disclosure Requirements
•Measurement basis used
•Depreciation methods and useful lives
•Gross carrying amount and accumulated depreciation
•Reconciliation of carrying amount (opening balance, additions, disposals, etc.)
 VIII. Disclosure Requirements
PAS 16 requires comprehensive disclosures about PPE to ensure transparency,
reliability, and comparability of financial statements.

These disclosures help users understand how PPE affects a company’s

financial performance and position.
 VIII. Disclosure Requirements
Key Disclosure Requirements:

1. Measurement Basis Used

Clearly state whether PPE is measured using the cost model or the
revaluation model.

If revaluation is used, include:

• Date of the revaluation.
• Independent valuer information (if applicable).
• Methods and assumptions used to determine fair value.
 VIII. Disclosure Requirements
Key Disclosure Requirements:

Why important?
Allows users to compare the company’s PPE values to competitors using
similar or different bases.
 VIII. Disclosure Requirements
Key Disclosure Requirements:

2. Depreciation Methods and Useful Lives

• Clearly disclose the depreciation method(s) used (e.g., straight-line, reducing
balance, units of production).
• Disclose the useful lives or depreciation rates for each class of assets.

Example:
• Buildings: Straight-line, useful life = 40 years.
• Vehicles: Reducing balance, depreciation rate = 20%.
 VIII. Disclosure Requirements
Key Disclosure Requirements:

Why important?
Clarifies how PPE costs are allocated and affects profitability comparisons.
 VIII. Disclosure Requirements
Key Disclosure Requirements:

3. Gross Carrying Amount and Accumulated Depreciation

For each class of PPE, companies must disclose:

• Gross carrying amount (cost or revalued amount before depreciation).
• Total accumulated depreciation and impairment losses.
• Net carrying amount (gross amount less accumulated depreciation and
impairment).
 VIII. Disclosure Requirements
Key Disclosure Requirements:

Example:
Accumulated
Asset Gross Carrying Amount Net Carrying Amount
Depreciation
Buildings ₱10,000,000 ₱2,000,000 ₱8,000,000
Machinery ₱5,000,000 ₱3,000,000 ₱2,000,000
 VIII. Disclosure Requirements
Key Disclosure Requirements:

Why important?
Gives clarity on asset aging, replacement needs, and asset efficiency.
 VIII. Disclosure Requirements
Key Disclosure Requirements:

4. Reconciliation of Carrying Amount

PAS 16 requires a detailed reconciliation showing movements during the period

for each class of PPE, including:
 VIII. Disclosure Requirements
Key Disclosure Requirements:

• Opening balance
• Additions (new purchases)
• Disposals (sales, scrapping)
• Depreciation charge for the period
• Impairment losses recognized/reversed
• Revaluation increases/decreases (if applicable)
• Transfers between classes or to/from other standards (e.g., investment
property)
 VIII. Disclosure Requirements
Key Disclosure Requirements:

Example reconciliation:
Reconciliation (Machinery) Amount
Opening balance ₱2,500,000
Additions ₱800,000
Disposals (₱300,000)
Depreciation (₱400,000)
Impairment (₱100,000)
Closing balance ₱2,500,000
 VIII. Disclosure Requirements
Key Disclosure Requirements:

Why important?
Provides transparency on changes impacting PPE, making financial statements
reliable and understandable.
 Class Discussion Questions
• Why do financial statement users need detailed disclosures about
PPE?
• How can inadequate disclosure affect stakeholder decision-
making?
• Can you think of additional disclosures that might improve user
understanding?