Which of the following comprise the cost of an item of property, plant, and equipment?

IAS 16 establishes principles for recognising property, plant and equipment as assets, measuring their carrying amounts, and measuring the depreciation charges and impairment losses to be recognised in relation to them. Property, plant and equipment are tangible items that:

• are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
• are expected to be used during more than one period.

Property, plant and equipment includes bearer plants related to agricultural activity.

The cost of an item of property, plant and equipment is recognised as an asset if, and only if:

• it is probable that future economic benefits associated with the item will flow to the entity; and
• the cost of the item can be measured reliably.

An item of property, plant and equipment is initially measured at its cost. Cost includes:

• its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates;
• 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; and
• the estimated costs of dismantling and removing the item and restoring the site on which it is located, unless those costs relate to inventories produced during that period.

In April 2001 the International Accounting Standards Board (Board) adopted IAS 16 Property, Plant and Equipment, which had originally been issued by the International Accounting Standards Committee in December 1993. IAS 16 Property, Plant and Equipment replaced IAS 16 Accounting for Property, Plant and Equipment (issued in March 1982). IAS 16 that was issued in March 1982 also replaced some parts in IAS 4 Depreciation Accounting that was approved in November 1975.

In December 2003 the Board issued a revised IAS 16 as part of its initial agenda of technical projects. The revised Standard also replaced the guidance in three Interpretations (SIC‑6 Costs of Modifying Existing Software, SIC‑14 Property, Plant and Equipment—Compensation for the Impairment or Loss of Items and SIC‑23 Property, Plant and Equipment—Major Inspection or Overhaul Costs).

In May 2014 the Board amended IAS 16 to prohibit the use of a revenue‑based depreciation method.

In June 2014 the Board amended the scope of IAS 16 to include bearer plants related to agricultural activity.

In May 2017, when IFRS 17 Insurance Contracts was issued, it amended the subsequent measurement requirements in IAS 16 by permitting entities to elect to measure owner-occupied properties in specific circumstances as if they were investment properties measured at fair value through profit or loss applying IAS 40 Investment Property.

In May 2020, the Board issued Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16) which prohibit a company from deducting from the cost of property, plant and equipment amounts received from selling items produced while the company is preparing the asset for its intended use. Instead, a company will recognise such sales proceeds and related cost in profit or loss.

Other Standards have made minor consequential amendments to IAS 16. They include IFRS 13 Fair Value Measurement (issued May 2011), Annual Improvements to IFRSs 2009–2011 Cycle (issued May 2012), Annual Improvements to IFRSs 2010–2012 Cycle (issued December 2013), IFRS 15 Revenue from Contracts with Customers (issued May 2014), IFRS 16 Leases (issued January 2016) and Amendments to References to the Conceptual Framework in IFRS Standards (issued March 2018).

What Is Property, Plant, and Equipment (PP&E)?

Property, plant, and equipment (PP&E) are long-term assets vital to business operations. Property, plant, and equipment are tangible assets, meaning they are physical in nature or can be touched; as a result, they are not easily converted into cash. The overall value of a company's PP&E can range from very low to extremely high compared to its total assets.

Key Takeaways

• Property, plant, and equipment (PP&E) are long-term assets vital to business operations and the long-term financial health of a company.
• Equipment, machinery, buildings, and vehicles are all types of PP&E assets.
•  (PP&E) are also called fixed or tangible assets, meaning they are physical items that a company cannot easily liquidate.
• Purchases of PP&E are a signal that management has faith in the long-term outlook and profitability of its company.
• Investment analysts and accountants use the PP&E of a company to determine if it is on a sound financial footing and utilizing funds in the most efficient and effective manner.

Property, Plant and Equipment (PP&E)

Understanding Property, Plant, and Equipment (PP&E)

Property, plant, and equipment are also called fixed assets, meaning they are physical assets that a company cannot easily liquidate or sell. PP&E assets fall under the category of noncurrent assets, which are the long-term investments or assets of a company. Noncurrent assets like PP&E have a useful life of more than one year, but usually, they last for many years.

Examples of property, plant, and equipment include the following:

• Machinery
• Computers
• Vehicles
• Furniture
• Buildings
• Land

Noncurrent assets like PP&E are the opposite of current assets. Current assets are short-term, meaning they are items that are likely to be converted into cash within one year, such as inventory.

PP&E and Noncurrent Assets

Although PP&E are noncurrent assets or long-term assets, not all noncurrent assets are property, plant, and equipment. Intangible assets are nonphysical assets, such as patents and copyrights. They are considered to be noncurrent assets because they provide value to a company but cannot be readily converted to cash within a year. Long-term investments, such as bonds and notes, are also considered noncurrent assets because a company usually holds these assets on its balance sheet for more than one fiscal year. PP&E refers to specific fixed, tangible assets, whereas noncurrent assets are all of the long-term assets of a company.

Calculating PP&E

To calculate PP&E, add the amount of gross property, plant, and equipment, listed on the balance sheet, to capital expenditures. Next, subtract accumulated depreciation from the result. In most cases, companies will list their net PP&E on their balance sheet when reporting financial results, so the calculation has already been done.

As a formula, it would be:

Net PPE = Gross PPE + Capital Expenditures − AD where: AD = Accumulated depreciation \begin{aligned} &\text{Net PPE}=\text{Gross PPE}+\text{Capital Expenditures}-\text{AD}\\ &\textbf{where:}\\ &\text{AD}=\text{Accumulated depreciation} \end{aligned} ​Net PPE=Gross PPE+Capital Expenditures−ADwhere:AD=Accumulated depreciation​

Significance of PP&E

Investment analysts and accountants use the PP&E of a company to determine if it is on a sound financial footing and utilizing funds in the most efficient and effective manner.

A company investing in PP&E is a good sign for investors. A fixed asset is a sizable investment in a company's future. Purchases of PP&E are a signal that management has faith in the long-term outlook and profitability of its company. PP&E are a company's physical assets that are expected to generate economic benefits and contribute to revenue for many years. Investment in PP&E is also called a capital investment. Industries or businesses that require a large number of fixed assets like PP&E are described as capital intensive.

PP&E may be liquidated when they are no longer of use or when a company is experiencing financial difficulties. Of course, selling property, plant, and equipment to fund business operations is a signal that a company might be in financial trouble. It is important to note that regardless of the reason why a company has sold some of its property, plant, or equipment, it's likely the company didn't realize a profit from the sale. Companies can also borrow off their PP&E, (floating lien), meaning the equipment can be used as collateral for a loan.

Accounting for PP&E

PP&E is recorded on a company's financial statements, specifically on the balance sheet. PP&E is initially measured according to its historical cost, which is the actual purchase cost and the costs associated with bringing assets to its intended use. For example, when purchasing a building for retail operations, the historical cost could include the purchase price, transaction fees, and any improvements made to the building to bring it to its destined use.

The value of PP&E is adjusted routinely as fixed assets generally see a decline in value due to use and depreciation. Depreciation is the process of allocating the cost of a tangible asset over its useful life and is used to account for declines in value. The total amount of a company's cost allocated to depreciation expense over time is called accumulated depreciation.

However, land is not depreciated because of its potential to appreciate in value. Instead, it is represented at its current market value. The balance of the PP&E account is remeasured every reporting period, and, after accounting for historical cost and depreciation, is called the book value. This figure is reported on the balance sheet.

Limitations of PP&E

PP&E are vital to the long-term success of many companies, but they are capital intensive. Companies sometimes sell a portion of their assets to raise cash and boost their profit or net income. As a result, it's important to monitor a company's investments in PP&E and any sale of its fixed assets.

Since PP&E are tangible assets, PP&E analysis doesn't include intangible assets such as a company's trademark. For example, Coca-Cola's (KO) trademark and brand name represent sizable intangible assets. If investors were to only look at Coca-Cola's PP&E, they wouldn't see the true value of the company's assets. PP&E only represents one portion of a company's assets. Also, for companies with few fixed assets, PP&E has little value as a metric.

Example of PP&E

Below is a portion of Exxon Mobil Corporation's (XOM) quarterly balance sheet as of September 30, 2018.

We can see that Exxon recorded $249.153 billion in net property, plant, and equipment for the period ending September 30, 2018. When compared to Exxon's total assets of over $354 billion for the period, PP&E made up the vast majority of total assets. As a result, Exxon would be considered a capital intensive company. Some of the company's fixed assets include oil rigs and drilling equipment.

Why Should Investors Pay Attention to PP&E?

PP&E are assets that are expected to generate economic benefits and contribute to revenue for many years. Purchases of PP&E are a signal that management has faith in the long-term outlook and profitability of its company.

How Is PP&E Accounted for?

PP&E is recorded on a company's financial statements, specifically on the balance sheet. To calculate PP&E, add the amount of gross property, plant, and equipment, listed on the balance sheet, to capital expenditures. Next, subtract accumulated depreciation. The result is the overall value of the PP&E. It's often referred to as the company's book value.

What Are Noncurrent Assets?

Noncurrent assets are a company's long-term investments for which the full value will not be realized within the accounting year. They are allocated over the number of years the asset is used. They appear on a company's balance sheet under "investment"; "property, plant, and equipment"; "intangible assets"; or "other assets".

Which should be included in the cost of an item of property, plant, and equipment?

Which of the following items are included in property, plant, and equipment?

What are the three components of the cost of property, plant, and equipment?

Which of the following is included in the initial cost of an item of PPE?