Definition of Property, Plant and Equipment
Property, Plant, and Equipment can be defined as physical (or tangible) assets that are possessed by the company in the longer run. They typically have a life of more than 1 year. They are also referred to as Fixed or Non-Current Assets.
Property, Plant, and Equipment are mostly the heaviest chunk in the Financial Statements, primarily because of the fact that they are considered the most capital-intensive chunk of the business. Normally, Property, Plant, and Equipment are mentioned as the first line item on the Balance Sheet.
Property, Plant, and Equipment majorly shape up the asset structure of the company. Therefore, from an investor’s perspective, it is an important indicator of the financial well-being of the company. Since these assets are sourced using considerable finance spread, it is indicative of the amount that is owned by the company.
In the case of liquidation, Property, Plants, and Equipment generate the most amount of finance. Therefore, it adds a layer of financial security from the investors’ perspective, because they will have a certain surety that their investment can be recovered in extreme cases.
Example of Property, Plant and Equipment
Property, Plant, and Equipment comprise several different components that are clubbed together. However, these separate heads are quite broad in their own dimensions. Explanation and subsequent examples of property, plant, and equipment are as follows:
– Definition of Property: Property can be defined as an immovable piece of land on which the company operates, and is formed. Alternatively, it can also be a piece of land that the company owns, for purposes of leasing out, or as an investment.
Examples of Property: Property includes land and other pieces of immovable property that a company owns and possesses. A company might procure land for any given purpose. This is supposed to be included in the Balance Sheet as an amalgamated figure.
Definition of Plant: The plant includes the machinery, including heavy equipment that is used in order to ensure that production and machine-related maintenance is properly accounted for. The plant might include a single set of machinery, or several types of machinery clubbed together as one.
Example of Plant: The definition of the plant is subject to change depending on the industry involved. For example, for a textile-based company, the knitting and stitching unit would be classified as a plant. In the Balance Sheet, they are going to be recorded as a single figure under ‘Plant’.
However, in the notes to the financial statements, the historical cost, as well as accumulated depreciation of all plants are going to be recorded for the perusal of shareholders and other users of the financial statements.
Definition of Equipment: Equipment is defined as the fixed assets that act as an aid towards the production process. They may, or may not be directly involved in the production process, but they are considered to be ancillary parts of the production process.
Example of Equipment: Similar to plants, the equipment can also vary depending on organization to organization. It can be seen that equipment from a textile company’s perspective might be the loading carts, or cars that are used for the production process.
Characteristics of Property, Plant and Equipment
Property, Plant, and Equipment are classified as such once they fulfill the asset recognition criteria laid out by the accounting bodies. In this aspect, it is important for accountants to understand that in addition to the asset recognition principle, there are certain salient features that are relevant specifically to Property, Plant, and Equipment.
The salient characteristics of Property, Plant and Equipment are given below:
- Useful Life: There is a useful life associated with all long-term assets. It is important to reliably estimate the life of a certain asset, in order to determine the timeline across which the asset is likely to generate positive economic value for the company.
- Salvage Value: In addition to the concept of useful life, Property, Plant and Equipment has a salvage value associated too. Salvage Value is the amount that can expected to be recovered, once the asset has reached its full economic life. It is also referred to as scrap value.
- Depreciation: All fixed assets (including Property, Plant and Equipment) are subject to depreciation. Depreciation refers to the wear and tear that the assets go through as a result of operations. Depreciation (or amortization) is a very major aspect of Property, Plant and Equipment, and should be mentioned on the financial statements.
Classification of Property, Plant and Equipment
Property, Plant, and Equipment are categorized as Non-Current Asset that is meant to generate economic utility to the company for a longer time frame.
It is important to categorize them as a net amount after depreciation has been accounted for. In other words, all assets are supposed to be declared at the Net Book Value, which is the amount net of the historical cost of the asset, minus accumulated depreciation.
For all the subcategories within Property, Plant, and Equipment, it is important to mention both, the historical cost, as well as the Accumulated Depreciation that has been charged on the given asset. This gives an insight to the investors regarding the asset outlay, and the actual value of the asset in terms of the useful life, as well as accumulated depreciation.
Calculating Property, Plant and Equipment
In accordance with the presentation standards laid out by IFRS (International Financial Reporting Standards), it is important for organizations to follow this step, in order to comply with the industry standards.
In accordance with the presentation standards, Property, Plant, and Equipment are mentioned as a single line item. The three different components, Property, Plant as well as Equipment, are mentioned under one subheading.
Subsequent calculations in the financial statements are mentioned in the Notes to the Financial Statements. However, separately, all three components, including Property, Plant, and Equipment are mentioned on the financial statement notes.
It must also be noted that property, plant, and equipment are recorded at their NetBook Values, which is the net of the cost of the historical cost, as well as accumulated depreciation.
Journal Entries to record Property, Plant and Equipment
Since Property, Plant and Equipment are Non-Current Assets, they are treated in a manner similar to other assets. Therefore, when either Property, Plant, or Equipment is purchased, the following journal entries are required:
|Property, Plant, and Equipment||xxx|
|Bank (or Debtor)||xxx|
Depreciation account is also maintained alongside asset accounts. Since this is a non-cash expense, the treatment for depreciation expense is slightly different. In order to calculate depreciation, the following journal entries are done:
In the same manner, when the asset is sold, it is recorded using the following journal entries:
|Gain (or Loss) on disposal||xxx|
|Property, Plant, and Equipment||xxx|
The journal entry above shows the treatment that is required once an asset is disposed of (i.e. sold on the market). It is important to consider that the organization can either make a loss on the sale or disposal or a profit. In the case of either, it is recorded in the Income Statement.
If the company makes a profit on disposal, it is recorded as Other Income in the financial statements. Subsequently, a loss is charged in the Income Statement as an Operating Expense.