Property Plant and Equipment (PP&E)

What is Property Plant and Equipment (PP&E)?

Property plant and equipment (PP&E) are long-term tangible assetsTangible AssetsAny physical assets owned by a firm that can be quantified with reasonable ease and are used to carry out its business activities are defined as tangible assets. For example, a company's land, as well as any structures erected on it, furniture, machinery, and equipment.read more that are physical in nature. These are non-current assetsNon-current AssetsNon-current assets are long-term assets bought to use in the business, and their benefits are likely to accrue for many years. These Assets reveal information about the company's investing activities and can be tangible or intangible. Examples include property, plant, equipment, land & building, bonds and stocks, patents, trademark.read more that are used in the company’s operations for a longer part of the time. They are also called as the fixed assets of the companyFixed Assets Of The CompanyFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples.read more as it cannot be easily liquidated.

Property plant and equipment is considered a long-term capital investmentCapital InvestmentCapital Investment refers to any investments made into the business with the objective of enhancing the operations. It could be long term acquisition by the business such as real estates, machinery, industries, etc.read more and its purchase shows that the management has a belief in the long-term outlook and profitability in the company. PP&E assets are expected to generate economic benefits.

Examples of PP&E include Machinery, Equipment, Vehicles, Buildings, Land, Office Equipment, Furniture, Fixtures, etc.

Property Plant and Equipment (PP&E)

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Property Plant and Equipment (PP&E) (wallstreetmojo.com)

PP&E Formula

Net PPE = Gross PPE (+) Capital Expenditures (−) Accumulated Depreciation

INC Corp. owns machinery with a gross value of $ 10 million. Accumulated depreciation recordedAccumulated Depreciation RecordedThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset's purchase price and its carrying value on the balance sheet.read more so far was at $5 million. Due to the wear and tear of the machinery, the company purchased new equipment at the cost of $ 2 million.

Net PPE = $ 7 Million ($ 10 Million+ $ 2 Million – $ 5 Million)

Recognition of Property Plant and Equipment (PP&E)

The cost of PP&E shall be recognized as an asset only if it is probable that future economic benefits will flow to the entity, and the cost of it can be reliably measured.

PP&E that qualifies for recognition shall be measured at its cost. The initial cost may include the following:

  1. Employee costs directly attributable to construction or acquisition of PP&E; the cost of site preparation; initial delivery and handling costs; installation and assembly costs; the cost of testing assets’ functionality; professional fees, etc.;
  2. If payment for an item of PP&E is deferred beyond standard credit terms, the difference between the cash price equivalent and the total cash outflow is recognized as interest over the credit period unless the interest is capitalizedInterest Is CapitalizedCapitalized interest is the cost of borrowing incurred to acquire or construct the long term asset to be used in the business and is added in the asset's value to be shown in the balance sheet, instead of showing it as an interest expense in the company's income statement.read more.
  3. If the asset is acquired in exchange for another asset, the cost will be measured at its fair value unless there is an absence of commercial element or the fair value of both the asset received and the asset given is not quantifiable. If the asset obtained via exchange transaction is not recorded at the fair value, then it’s the cost determined based on the carrying amount of the asset given.
  4. Subsequent cost or capital expenditureCapital ExpenditureCapex or Capital Expenditure is the expense of the company's total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year.read more to PP&E can be added if the investment is made either in updating and maintaining existing equipment or purchasing new additional equipment.

PP&E Calculation Example

Sigma Inc. acquires a new asset. The purchase price of the asset is $ 800,000. Also, the company incurs the following costs:

  • Custom Clearance: 400
  • Rent of lorry (Note 1): 100
  • Site preparation and planning: 200
  • Labour Charges (Note 2): 100
  • Installation Charges: 50

Notes:

  1. A lorry has been acquired on rent and used by the business for transporting anything and not specifically obtained for this asset.
  2. Include $ 20,000 salaries of entity’s own employees working full time

Solution:

Property Plant and Equipment Illustration 1-1

Measurement after Recognition of Property Plant and Equipment

#1 – Cost Model

The Asset is measured at its cost reduced by accumulated depreciation and impairment loss, if any.

#2 – Revaluation Model

The Asset is recorded as per the revalued amount. I.e., the fair value of the asset at the time of revaluation, less depreciation, and impairment, as long as the fair value of the asset can be measured.

Depreciation of PP&E

The depreciation amount should be allocated on a systematic basis over the asset’s useful life. The residual valueResidual ValueResidual value is the estimated scrap value of an asset at the end of its lease or useful life, also known as the salvage value. It represents the amount of value the owner will obtain or expect to get eventually when the asset is disposed.read more and the useful life of an asset should be annually and, if expectations differ from previous estimates, the changes shall be accounted for as a change in an accounting estimate.

Impairment of PP&E

Property plant and equipment should not be valued higher than it’s the recoverable amountRecoverable AmountThe recoverable amount of an asset is the present value of the expected cash flows that will result from the asset's sale or use, and is determined as the greater of two amounts: the asset's fair value as reduced by related selling costs, and the asset's value in use.read more. Recoverable amount is higher of an asset’s fair value reduced by its selling cost, and it’s utility. Compensation from the third party for PP&E impairment shall be included in P&L when compensation is receivable.

Derecognition of Property Plant and Equipment

The carrying amount of PP&E shall be derecognized on disposal; or when no future economic benefits are expected from its use or disposal. The Gain or loss arising from derecognition shall be included in profit or loss.

PP&E Disclosure

The Financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more shall disclose for each class of PP&E its the basis for measuring its carrying amount; depreciation methods used; the useful lives or depreciation rates; the gross carrying amountCarrying AmountThe carrying amount or book value of asset is the cost of tangible, intangible assets or liability recorded in the financial statements, net of accumulated depreciation or any impairments or repayments. Accordingly, the carrying amount may differ from the market value of assets.read more and it’s accumulated depreciation; reconciliation of the carrying amount at the beginning, and the end of the period.

Conclusion

Property plant and equipment represents only one portion of the company’s assets. It is essential to monitor a company’s investment in PP&E, as it is vital for long-term success. The importance of PP&E varies from company to company based on the nature of the industry.

This article has been a guide to what is Property Plant and Equipment. Here we discuss how to recognize PP&E along with practical examples, calculations, and formulas. You may learn more about accounting from the following articles –