property plant and equipment

A company asset that is vital to business operations but cannot be easily liquidated. The value of property, plant and equipment is typically depreciated over the estimated life of the asset, because even the longest-term assets become obsolete or useless after a period of time.

Depending on the nature of a company's business, the total value of PP&E can range from very low to extremely high compared to total assets. International accounting.

Example

A business with a high amounts of PP&E would be a shipping company, because most of its assets would be tied into its fleet of ships and administrative buildings. On the other hand, a management consulting firm would have less PP&E, because a consultant would only need a computer and an office in a building to run its operations.This item is listed separately in most financial statements because PP&E is treated differently in accounting statements. This is because improvements, replacements and betterments can pose accounting issues depending on how the costs are recorded.

Initial Cost

Following expenditures are included in the cost of the asset.

1.         Purchase price (excluding refundable taxed)

2.         Directly attributable cost i.e. cost incurred directly to bring the asset to a location and condition that enable it to be used as intended by the management. Recognition of cost in the asset’s carrying amount must be stop as soon as the asset becomes available for use. Examples of directly attributable cost are given below:

a) Installation and assembly cost

b) Cost of testing that the asset is functioning properly. However if any item is produced from this testing, sale proceeds of this item should be deducted from the cost of testing.

c) Borrowing cost should be recognized in the cost of the asset according to Summary of IAS 23 (Borrowing Cost).. For further details of the treatment of borrowing cost, you can read the Summary of IAS 23 (Borrowing Cost).

1.         The ownership of an asset may come with an obligation to dismantle the asset, remove it and restore the site on which it is located at some stage in the future. These future costs must be estimated and included in the cost of the asset. It is worth noting that the fair value of the future cost is recognized in the carrying amount of the asset according to IAS 16 (Property, Plant and Equipment).

1.         Following costs are not included in the cost of the asset according to IAS 16 (Property, Plant and Equipment).

a) Administration cost

b) Advertising cost

c) Cost of training staff

d) Abnormal wastage

e) Cost of moving the asset to another location Subsequent Cost

Further costs are frequently incurred after the acquisition or construction of the asset. The cost can be categorized as follows:

•           Day to day servicing cost should be expensed out in the period they are incurred.

•           When part of an asset is replaced, cost of new part should be recognized in the carrying amount of the asset while cost of the item which is replaced should be derecognized.

•           Major inspections should be recognized in the carrying amount of the asset. For example, an air craft needs to be tested after every 3 years. This inspection cost should be added in the carrying amount of the air craft and should be depreciated over three years.

Subsequent Measurement

All property, plant and equipment should be depreciated with the exception of land. In certain cases land may have a useful life in which case it must also be depreciated.

Depreciable amount is depreciated over the useful life of the asset using a suitable method of depreciation. Depreciable amount is the cost less residual value. Residual value is expected proceeds on disposal less the expected cost of disposal. Useful life is the period over which the asset is expected to be available for use by the entity. There are many methods of depreciation that can be used but famous are straight line balance method and diminishing balance method. If a company decides that any one of the three factors (residual value, useful life, or method of depreciation) needs to be changed, this must be adjusted according to IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors). For further details, you can read the Summary of IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors). Every item of property, plant and equipment must be tested for impairment annually according to IAS 36 (Impairment of Assets). You can read it in detail in Summary of IAS 36 (Impairment of Assets).

Revaluation

The revaluation model involves revaluing the asset’s carrying amount to its fair value. If an entity uses the revaluation model for a particular asset, it will have to apply the revaluation model to all assets within the class of assets.If an asset is revalued upwards, the incremental amount over the carrying amount shall be recognized as “Revaluation Surplus” in the equity through “Statement of Other Comprehensive Income”. Carrying amount of the asset will also be increased with the same amount. This revaluation surplus will be realized to retained earnings over the remaining useful life of the asset or when the asset is disposed off according to IAS 16 (Property, Plant and Equipment). Depreciation will be charged on new carrying amount onwards.If an asset is revalued downwards, the differential amount of the carrying value and fair value shall be recognized as expense immediately. Depreciation will be charged on new carrying amount onwards.

Deferred Tax

If tax authorities do not treat an item of property, plant and equipment in the same way as IAS 16 (Property, Plant and Equipment) requires it to be treated, IAS 12 (Deferred Tax) comes in to interaction. Further details of treatment of IAS 12 (Deferred Tax) are given in the Summary of IAS 12 (Deferred Tax).