Property, Plant and Equipment

ASPE: 3061

Property, Plant and Equipment

ASPE: 3061

Level Tested on CPA PEP

ExamLevel TestedImportance (low, medium, or high)
Core 1 Module Level AHigh 
Assurance ElectiveLevel AHigh 

Property, plant and equipment (PPE) are tangible assets that:

  1. are held for use to produce/supply goods and services, for rental to others, or for administrative purposes; and
  2. are expected to be used during more than one period.

The cost of PPE are recognized as PP&E asset only when:

  • probable that future economic benefits* associated with the item will flow to the entity; and
  • the cost of the item can be measured reliably
    • *benefits can be direct or indirect 
  • spare parts/servicing equipment = PP&E if meets the criteria in 1 and 2 above. If not, then classify as “inventory”
  • major spare parts/stand-by equipment = PPE when expected to be used more than one period or it can be used only in connection with an item of PPE
Measurement at recognition
  • PPE is initially measured at cost
  • Any 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 management.
  • Cost includes the following:
    • Purchase price import duties and non-refundable taxes, net of discounts and rebates
    • Estimate costs of dismantling, removing, or restring the site on which the PPE is located (Asset Retirement Obligation)
  • If land and building is acquired together. The cost should be prorated based on their relative fair market values
Directly attributable costs
  • Directly attributable costs include the following:
    • costs of employee benefits arising directly from the construction or acquisition of the item of property, plant and equipment;
    • costs of site preparation;
    • initial delivery and handling costs;
    • installation and assembly costs;
    • costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment); and
    • professional fees (legal, accounting)
Basket Purchases
  • The cost of each item of PPE as part of a basket purchase is determined by allocating the price paid for the basket to each item on the basis of its relative fair value at the time of acquisition.
Costs that are not Capitalized
  • the following are not capitalized:
    • costs of opening a new facility;
    • costs of introducing a new product or service (including costs of advertising and promotional activities);
    • costs of conducting business in a new location or with a new class of customer (including costs of staff training); and
    • administration and other general overhead costs.
Incidental Operations
  • Incidental operations = not necessary to bring the item to the location and condition necessary for it to be capable of operating in the manner intended by management
  • Net revenue or expense derived from an item of PPE prior to substantial completion is capitalized
Borrowing Costs
  • Interest costs directly attributable to a PPE can be capitalized when that PPE is acquired, constructed, or developed over time
  • Capitalizing interest is a policy choice (it is optional)
  • Capitalization of interest stops when PPE is substantially complete and ready for use

ABC Inc. made the following expenditures during the current fiscal year. Determine if it these expenditures should be classified as PP&E or should be included in expense account. Explain your conclusion. 

1.Acquisition of a piece of land that has a small building to construct a new building – do we need to separate the land and old building cost?
2.Demolition of the small building on the land to make it available for constructing a new building
3.Purchase of building permit to construct
4.Paving a parking lot 
5. Landscaping around the building
6.Purchase of new equipment
7.Sales tax on new equipment (refundable)
8.Installation of the new equipment
9.Minor repairs to the old equipment
Measurement after recognition

Carrying value = cost less any accumulated depreciation and any accumulated impairment losses

Deprecation Methods
  • Depreciation methods
    • Depreciation method should reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity
    • The depreciation method applied to an asset shall be reviewed at least at each financial year-end and (changes are accounted for as a change in estimate)
    • Examples of methods
      • straight-line method,
      • declining balance method
      • units of production method
Deprecation Calculation

Amortization expense under straight-line is the greater of:

  • (Cost – salvage value)/life of asset; and
  • (Cost – residual value)/useful life of asset
    • Life of asset = total life the asset can last (without regard to usefulness to entity)
    • Useful life = period asset will be available for use or units expected to be obtained from the asset
    • Salvage value = net realizable value @ end of its life
    • Residual value = net realizable value @ end of useful life
    • The residual value and the useful life of an asset shall be reviewed on a regular basis (any changes accounted for as change in estimate)
  • Depreciation of an asset begins when it is available for use; e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management.
  • Depreciation does not stop when the asset becomes idle or is retired from active use unless the asset is fully depreciated (when the asset becomes held for sale, depreciation stops)
  • Depreciation stops when Carrying Value≤ Residual Value
  • Amortization expense under declining balance method = (cost – accumulated depreciation)*depreciation rate
    •  This depreciation continues until the carrying amount equals the salvage value, and then depreciation stops.
  • Amortization expense under output method = (Cost – residual value)/Estimated production in lifetime * current period production

Example 1 – Straight line method with change in estimate

ABC Inc. purchased equipment for $25,0000 on January 1, 2017. The estimated useful life was determined to be 5 years. On Jan 1, 2018, the management revised the estimate of useful life to 10 years.

Salvage value = $2,500; Residual value = $5,000.

Compute depreciation expense for 2018. 


Example 2 – output method with change in estimate

ABC Inc. purchased equipment for $25,000 on January 1, 2017. The estimated useful life is 150,000 units. On Jan 1, 2018, the management revised the estimate of useful life to 120,000 units. In 2017, 25000 units are produced and in 2018 30,000.

Salvage value = $2,500; Residual value = $5,000.

Compute depreciation expense for 2018. 


Depreciation of significant components/parts
  • Each separable component part of a property, plant and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately when:
    • Practicable; and
    • estimates can be made of the lives of the separate components.
  • If both criteria are met, an entity allocates the cost of a PPE to its significant parts and depreciates each significant part separately
  • Example: Airplane (separately depreciate engine, airframe, cabin); Building (roof, windows)
Subsequent Costs
  • Betterment = enhance the service potential of a PPE
  • Service potential may be enhanced when
    • there is an increase in the output or service capacity
    • operating costs are lowered
    • useful life is extended
    • the quality of output is improved
  • Betterments are capitalized
  • Under ASPE there is no requirement to de-recognize the remaining carrying value of the item replaced
  • Repairs are expensed
    • Repair = cost incurred to maintain the service potential of a PPE 
  • If a cost has the attributes of both a repair and a betterment, the portion considered to be a betterment is included in the cost of the asset


Comparison to IFRS
  • incidental operations; under IFRS income from incidental operations are always included in the income statement
  • IFRS allows revaluation model
  • Straight Line Amortization calculation is different under IFRS
  • Under IFRS, significant components are separately amortized regardless of if it is practicable and the useful life of the significant component is estimable
  • IFRS doesn’t use betterments vs. repairs in determining subsequent capitalization
  • Under IFRS must derecognize the carrying value of the items replaced

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