Let’s talk about business assets. You know, any resources your business own to run your business smoothly are usually categorized into to parts current assets (like coffee beans for your cafe) & non-current assets (like coffee machine for your cafe), so, here coffee machine for your cafe is Property, Plan & Equipment (called as PPE).
Just like you can’t run your cafe without a coffee machine, you can’t run your business without PPE.
What Exactly IS Property, Plant, and Equipment (PPE)?
First let’s understand what Property, Plan and Equipment (PPE) is defined by IFRS, “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.”
In simple terms, PPE are long-term, tangible assets any company owns and which are used to produce goods, supply services, rent to other companies or individuals or for administrative use on the office itself. Let’s try to understand it in this way:
- Long-term: They are expected to be used at least for more than a year (one operating cycle).
- Tangible: PPE are tangible in nature, means you can physically touch it, it takes space, like buildings, machines, computers, delivery vans unlike, goodwill or patents (these are called intangible assets)
- Used in Operations: The main purpose of PPE is to help run the business and not to be sold quickly.
Normally, PPE needs a large chunk of physical investments, like (you buying a coffee machine for your business) but eventually helps you to generate revenue for several years.
How to Calculate the Cost of Property, Plant & Equipment (PPE)?
Don’t worry, it’s easier than it looks to calculate PPE, let’s break it down:
- IAS 16 makes it compulsory that PPE should initially measured at ‘cost’ of an item and should only be recognised if;
- It provides economic benefits in the future for business.
- Cost of the item can be measured reliably.
Now, regarding how to calculate the cost of PPE,
- Its purchase price + import duties + purchase taxes – trade discounts – rebates
- Also, you can add any other cost which is necessary to move those assets to the needed location or any cost that makes it capable to operate in the manner intended by management like:
- costs of employee benefits arising directly from the construction or acquisition of the item of PPE
- costs of site preparation
- initial delivery and handling costs
- installation and assembly costs
- the cost of testing whether the asset is functioning properly, and
- professional fees.
Net PP&E = Gross PP&E + Capital Expenditures – Accumulated Depreciation
For example, if you are planning to open a small cafe and you purchased a espresso machine, you may get these cost along with the price you paid for espresso machine:
| Items | Cost ($) |
|---|---|
| Purchase Price of Machine | 8,000 |
| Import Duties | 500 |
| Taxes (non-refundable) | 400 |
| Delivery and Handling Charges | 150 |
| Installation Cost | 200 |
| Training Cost for Staff to handle that machine | 250 |
| Trade Discount Received | -300 |
| Total | 9,200 |
So, you will be recording $9,200 on the balance sheet as the initial cost of the espresso machine (PPE) and you will be depreciating this over its useful life (more on this later), suppose 5 years.
Examples of Property, Plant and Equipment (PPE)
You may not have noticed but, if you run a business, you may be using them most of the time, let’s find the some common PPE examples:
- Land: If your company owns land. (like a land where your cafe building is sitting on)
- Buildings: Office your business has, factories, warehouses, retail stores (like a your store)
- Machinery: Equipment you use to produce or supply services (like, coffee machines on your cafe or that grinder to break your coffee beans)
- Vehicles: Delivery bike (like you use to deliver your coffee against online orders)
- Furniture and Fixtures: Desks, chairs, tables, display counters (like that desk where your coffee machine and grinder sit on)
- Office Equipment: Computers, Printers (like where you bills customers and print them)
- Leasehold Improvements: Upgrades to make your cafe better (like that beautiful lighting your customers are fan off and clicking pictures)
Accounting for Property, Plant and Equipment (PPE)
Initial Measurement
When you first buy a piece of PPE, you have to record it on your books at its cost, as we had discussed earlier.
Depreciation: Spreading the Cost
As discussed earlier, PPE are meant to last for a long time, but they don’t last forever (except land). Assets do wear out and become outdated after some years. That is where depreciation comes in and helps to spread the cost of that asset over its useful life.
Let’s imagine this, you bought a new espresso machine for your cafe, and your initial cost of purchasing that machine was $9200. Now, imagine you need to show that up on your Profit And Loss Account, it would take a large amount of your profit or even may show you are in loss. So, to stop massive hits on your profits of the year, Depreciation helps you to allocate that $9200, over the period of time up-to when that machine remains useful. Like, an Espresso machine costs you in total $9200 and it should last for 5 years, so now you will only book expenses of $1840 as an expense each year for 5 years.
As there are different ways to depreciate your PPE:
- Straight Line Method (you expense the same amount each year) formula to calculate straight-line method is [(cost – salvage value) / useful life]
- Declining Balance Method (you expense larger amount in early years and less amount later)
- Units of Production Method (you expense it based on its uses) formula to calculate this method is [(cost – salvage value) / estimated total production capacity * actual units produced]
Check out our guide on Methods of Depreciation
Expenditures for Fix-Ups and Upgrades
When you use any assets, it breaks up. Just like, your tire getting punctured so, what happens to that cost? well, here is a breakdown for that
- Repairs & Maintenance: Things like expenses of repairing a punctured tyre will be directly booked as expenses as they happen.
- Improvements & Betterments: Now, if you change the whole engine of a car, which can increase the efficiency and capacity of the car. Then these kinds of expenses can be added to the cost of assets on the balance sheet and usually depreciated over its remaining life.
Derecognition: Disposal or Selling of PPE
After some years of using your PPE, either you have to sell it in scrap or otherwise dispose of it. When that happens, you have to remove it from your accounting records which is called derecognition. So, to do derecognition, you have to calculate if there is any gain or loss by comparing the cash you received (if any) while disposing or selling it in scrap to the asset’s book value (it’s original cost – all the depreciation amount taken so far).
Derecognition = Cash Received – Asset’s Value
Cost Model vs. Revolution Model
It is all about how you value your PPE on the balance sheet after recording it for the first time.
- Cost Model: This is the simpler and more common method for small businesses. As you value the PPE at its original cost minus any depreciation and any impairment losses.
- Revolution Method: This is a more complex method as it has separate accounting rules, but it allows you to revalue your certain PPE (like buildings & land) to their fair market value periodically. Either value goes up or down you record it in the balance sheet as per the market.
Learn more about Cost Model vs. Revolution Model
Accounting of PPE in Special Cases: Leases and DIY Assets
Not all PPE assets are treated same in accounting, there are specific rules and standards, let’s find out
Leased Assets: Renting vs. Owning
Modern accounting rules (like IFRS 16 and ASC 842) have changed how we treat many long-term leases. If you own a lease which gives you control over an asset for most of its useful life (even if you technically don’t own it), you have to record it on your balance sheet as PPE (called a Right-of-Use Assets) along with corresponding lease liability. Why? Because economically, it’s very similar to buying the asset with a loan. If you are still confused, don’t worry we have covered this topic in Accounting for Leases.
Self-Constructed Assets
When you build your own building or machine instead of buying it, you will determine its cost differently. All the direct costs to build that building or machine (like materials, labor) are capitalized as PPE. So, it requires careful record-keeping to capture the cost of bringing that assets to a usable state. You can check our detailed guide on Accounting for Self-Constructed Assets.
Real-World Examples of Property, Plant and Equipment (PPE)
| Types of Businesses | Examples of Equipment / Assets |
|---|---|
| Restaurants | Ovens, Walk-in-Freezers, Kitchen Equipment, tables, chairs, POS Systems. |
| Construction Company | Bulldozers, cranes, excavators, trucks, scaffolding. |
| Tech Company | Servers, Laptops, Office Furniture. |
| Farm | Tractors, Barns, Irrigation Systems, Silos |