Property plant and equipment balance sheet

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Property plant and equipment are 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 their purchase shows that the management believes in the company’s long-term outlook and profitability. PP&E assets are expected to generate economic benefits.

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

Table of contents

• What is Property Plant and Equipment (PP&E)?
  • PP&E Formula
  • Recognition of Property Plant and Equipment (PP&E)
  • PP&E Calculation Example
  • Measurement after Recognition of Property Plant and Equipment
    • #1 – Cost Model
    • #2 – Revaluation Model
  • Depreciation of PP&E
  • Impairment of PP&E
  • Derecognition of Property Plant and Equipment
  • PP&E Disclosure
  • Conclusion
  • Recommended Articles

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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 its cost 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. Suppose 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 theCapitalized 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 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. Suppose the asset is acquired in exchange for another asset. In that case, the cost will be measured at its fair value unless there is an absence of a commercial element or the fair value of both the asset received and the asset given is not quantifiable. If the asset obtained via an exchange transaction is not recorded at the fair value, then it’s the cost determined based on the asset’s carrying amount.
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 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:

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 depreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more, and impairment, as long as the asset’s fair value can be measured.

• Under this, the revaluation of property plant and equipment should be carried out regularly to ensure that the carrying amount does not differ materially from its fair value at the balance sheet date. If an item is revalued, then the entire class of assetsClass Of AssetsAssets are classified into various classes based on their type, purpose, or the basis of return or markets. Fixed assets, equity (equity investments, equity-linked savings schemes), real estate, commodities (gold, silver, bronze), cash and cash equivalents, derivatives (equity, bonds, debt), and alternative investments such as hedge funds and bitcoins are examples.read more should be revalued.
• If the revaluation of assetsThe Revaluation Of AssetsAssets revaluation is an adjustment made in the carrying value of the fixed asset, either upwards or downwards, depending upon the fair market value of the fixed asset. Its purpose includes selling the asset to another business unit, merger and acquisition.read more increases in value, the same should be credited to other comprehensive income and accumulated in equity under the revaluation surplus. However, the increase shall be recognized in P&L A/c to the extent that it reserves a revaluation decrease of the same asset previously recognized in P&L.
• A decrease arising from revaluation should be recognized as the expense to the extent that it exceeds any amount previously credited to the revaluation surplus relating to the same asset.
• The revaluation surplus shall be transferred to retained earningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company.read more when the revalued asset is retired or disposed of.

Depreciation of PP&E

The depreciation amount should be allocated systematically 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 annual. If expectations differ from previous estimates, the changes shall be accounted for as a change in an accounting estimate.

• The depreciation method can be considered based on the pattern in which the asset’s future economic benefits are expected.
• The depreciation method shall be reviewed annually; has there been a significant change in the expected consumption pattern of future economic benefits; the depreciation pattern should be changed prospectively as a change in estimate.
• Depreciation shall be recognized in profit or loss unless it is included in the carrying amount of another asset.
• There are various methods of depreciation like the Straight line methodStraight Line MethodStraight Line Depreciation Method is one of the most popular methods of depreciation where the asset uniformly depreciates over its useful life and the cost of the asset is evenly spread over its useful and functional life. read more, WDV methodWDV MethodThe Written Down Value method is a depreciation technique that applies a constant rate of depreciation to the net book value of assets each year, resulting in more depreciation expenses recognized in the early years of the asset's life and less depreciation recognized in the later years of the asset's life.read more, accelerated depreciation methodAccelerated Depreciation MethodAccelerated depreciation is a way of depreciating assets at a faster rate than the straight-line method, resulting in higher depreciation expenses in the early years of the asset's useful life than in the later years. The assumption that assets are more productive in the early years than in later years is the main motivation for using this method. read more, double declining methodDouble Declining MethodThe Double Declining Balance Method is one of the accelerated methods used for calculating the depreciation amount to be charged in the company's income statement. It is determined by multiplying the book value of the asset by the straight-line method's rate of depreciation and 2read more, etc.

Impairment of PP&E

Compensation from the third party for PP&E impairment shall be included in P&L when compensation is receivable. A recoverable amount is higher than an asset’s fair value, reduced by its selling cost and utility. Property plants and equipment should not be valued higher than the recoverable amount.

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 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 its accumulated depreciation; reconciliation of the carrying amount at the beginning, and the end of the period.

• It shall also disclose restrictions on title and items pledged as security for liabilities; expenditures to construct PP&E during the period; contractual commitments to acquire assets. Compensation from third parties for impairment.
• In case of revaluation – the effective date of revaluation; whether an independent valuer is involved; for every revalued class of PP&E, the carrying amount at which the asset would have been recorded under the cost model and the revaluation gain, including changes in the same during the reporting periodReporting PeriodA reporting period is a month, quarter, or year during which an organization's financial statements are prepared for external use uniformly across a period of time in order for the general public and users to interpret and evaluate the financial statements.read more and any limitation on paying out the balance to shareholders.

Conclusion

The importance of PP&E varies from company to company based on the nature of the industry. Property plants and equipment represent 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.

Recommended Articles

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 –

What is Property plant and equipment on a balance sheet?

Is property plant and equipment an asset on a balance sheet?

How is property plant and equipment valued on the balance sheet?

How should property and equipment be reported on a company's balance sheet?