Accounting and Audit News

published on 31 January 2024 I reading time approx. 2 minutes

Accounting for Property, Plant and Equipment (PP&E)

Property, plant and equipment (PP&E) are assets of the business meant for long term usage. They are physical things that can be touched and are not held for sale in the normal course of business. PP&E help the business make money by producing or supplying goods or services, renting them to others, or using them for administrative purposes.

Some examples of PP&E are:

Machines
Buildings
Vehicles
Computers and software
Land
Furniture

Types of PP&E

PP&E can be divided into two types: tangible and intangible. Tangible assets are physical things, like the ones listed above. Intangible assets are not physical things, like patents and copyrights.

Significance

PP&E are important for the financial situation of the business because they show how much the business has invested in its long-term assets and how well it is using them. PP&E also lose value over time, which affects the profit and loss of the business.

Accounting

As per Accounting Standard 10 issued by the ICAI (the Institute of Chartered Accountants of India)

Value: PP&E should be recorded at their cost, which includes the purchase price and the costs of bringing them to working condition, such as installation, transportation, taxes, and site preparation.

Depreciation: PP&E should be reduced by depreciation that is the amount of value that PP&E lose every year because of their use, age, or obsolescence. Depreciation is calculated based on the useful life and the salvage/residual value of PP&E. Useful life is the number of years that PP&E can be used by the business. Salvage/ residual value is the amount of money that PP&E can be sold for at the end of their useful life.

Impairment: PP&E should be checked for impairment, which is when PP&E are worth less than their recorded value on the balance sheet. This can happen if PP&E are damaged, outdated, or not used efficiently. Impairment means that the business must reduce the value of PP&E and record a loss in the profit and loss statement.

Retirement: PP&E should be removed from the balance sheet when they are sold, scrapped, or retired. The business must record the difference between the selling price and the recorded value of PP&E as a gain or loss in the profit and loss statement.

Revaluation: PP&E can be measured at their fair value, which is the market price of PP&E, instead of their cost. This is called the revaluation model. The revaluation model can be used only if the fair value of PP&E can be measured reliably and regularly. The revaluation model can increase or decrease the value of PP&E on the balance sheet and affect the profit and loss statement.

Bearer plants as PP&E: PP&E include bearer plants, which are living plants that are used to produce agricultural products, such as fruit trees, rubber trees, or tea bushes. Bearer plants are treated like PP&E because they have a long useful life and are not sold as agricultural products. Bearer plants do not include plants that are harvested as agricultural products, such as wheat, maize, or sugarcane.

Conclusion

Accounting for PP&E as per ICAI helps the users to understand the financial performance and position of the business and to make informed decisions.

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