Property Plant and Equipment

Property, Plant and Equipment is the non-current asset and as such it cannot be converted into cash within 01 year time period from the reporting period. It is a tangible asset and is used to drive future economic benefits from its use. Due to the use of the tangible assets, they may lose its value that is why these assets are depreciated over the life of the assets.

In a manufacturing company, the property, plant and equipment will be in high numbers while in service providing entity; these assets will be very low. First type of entity is called capital intensive while the other entity is called labor intensive.

Initial Measurement

IFRS (International Financial Reporting Standard)

  • Under IFRS, property, plant and equipment are recorded initially at cost. In later years, it can be recorded at revaluated amount or at cost taking account of depreciation.
  • US GAAP (Generally accepted accounting practices) – In ASC 360, PP&E are required to be stated initially at cost. If the asset is under construction, certain interest costs are allowed to be capitalized with the cost of the fixed assets.

Subsequent Measurement

PP&E should be measured at:

  • Revaluation model
  • Cost – accumulated depreciation – impairment

Cost

Cost of the asset means all the cost in bringing the asset to its working condition for its intended use.

The cost of the assets includes:

  1. Original purchase price
  2. Delivery charges
  3. Handling charges
  4. Site preparation cost
  5. Installation cost
  6. Engineer fees
  7. Architecture fees

Exchange of PP&E

In case, the asset is acquired by exchanging the other assets whether similar or different in nature, it should be recorded at the fair value.

Useful Life

Useful life refers to the periods or years over which the economic benefits from the use of the asset can be obtained.

Residual Value

It refers to the amount which the fixed asset expects to receive from sale at the end of its useful life. It is also called scrap value or salvage value.

Depreciable amountmeans cost minus residual value.

Depreciation Expenses

It is the amount by which PP&E is reduced every year due to use, technical obsolescence and wear & tear. It is represented in the income statement over accrual basis of accounting and is added back to the earning for the period in preparing statement of cash flows.

Accumulated depreciation

It is the collection of depreciation expense for several periods. All items of PP&E are presented over the face of balance sheet by deducting this amount from the cost. It is also called Allowance for depreciation. It is a contra asset account.

Carrying value

It is the value over which an asset is presented over the face of the balance sheet. The formula to calculate carrying value of an asset is as follows:

Carry value = Cost – accumulated depreciation – accumulated impairment losses

Impairment losses

By impairment losses, we mean losses due to flood or fire and which cannot be taken in the depreciation head.