Non-Current Assets: Property, Plant, and Equipment Overview

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5 Questions

Which method of depreciation involves applying a flat rate of depreciation to each year of an asset's useful life?

Straight-line depreciation

What is one of the details that companies are required to disclose about their property, plant, and equipment holdings in their financial statements?

Depreciation methods

If an asset's carrying value exceeds its recoverable amount, what is the next step that a company should take?

Record an impairment loss in the financial statements

Which depreciation method involves depreciating an asset at a higher rate in the early years and then at a lower rate in the later years?

Double-declining balance depreciation

What do improvements in an asset's value affect in terms of accounting treatment?

The asset's depreciation basis

Study Notes

Non-Current Assets: Property, Plant, and Equipment

Non-current assets, also known as long-term assets, are resources that a company owns and uses to generate future cash flows for more than one year. Within this category, we find property, plant, and equipment—assets that are particularly important for businesses involved in manufacturing, construction, and real estate.

Definition and Examples

Property, plant, and equipment (PP&E) are tangible, long-lived assets that are used in the production or supply of goods and services. They include:

  • Property: Land, buildings, and improvements made to the land or buildings, like parking lots, fences, and sidewalks.
  • Plant: Machinery, equipment, and tools used in the manufacturing or production process.
  • Equipment: Computer systems, vehicles, furniture, and other assets used in the day-to-day operations of the business.

Recognition and Accounting

PP&E are capitalized in the financial statements when they meet certain criteria, such as:

  • Cost is significant compared to the asset's estimated useful life and its residual value.
  • The asset is expected to last more than one year.
  • The asset is used or is to be used in the production or supply of goods or services.

Once capitalized, businesses must record PP&E at their historical cost, which includes its purchase price, plus any direct costs, like freight, installation, and taxes. The depreciation expense is then recognized over the asset's useful life, which can be determined using various accounting methods, such as straight-line, double-declining balance, or the sum-of-the-years' digits.

Disclosure Requirements

Companies are required to disclose details about their PP&E holdings in their financial statements. This includes:

  • Total PP&E amounts
  • Breakdown of property, plant, and equipment
  • Accumulated depreciation
  • Depreciation expense
  • Impairment losses
  • Retirement or disposal of PP&E

Depreciation Methods

There are several methods for depreciating PP&E, and accounting standards allow companies to choose the method that best aligns with their asset management strategy. Some popular depreciation methods include:

  • Straight-line depreciation: A flat rate of depreciation is applied to each year of the asset's useful life.
  • Double-declining balance depreciation: The asset is depreciated at a higher rate in the early years and then at a lower rate in the later years.
  • Sum-of-the-years' digits depreciation: Depreciation rates are calculated by dividing the asset's salvage value by the sum of the years in its useful life, with the years counted in reverse order

Impairment

If an asset's carrying value exceeds its recoverable amount, the asset is considered impaired. The impairment loss is then recorded in the financial statements. The recoverable amount is defined as the higher of an asset's fair value less costs to sell and its value in use. Improvements in an asset's value do not result in a gain, but they do affect an asset's depreciation basis

Conclusion

Property, plant, and equipment are vital long-term assets that contribute to a company's future cash flows. By understanding PP&E and their accounting treatment, businesses can gain insights into their financial health, making well-informed decisions about the future of their operations.

Learn about property, plant, and equipment (PP&E) as non-current assets used by businesses for long-term operations. Explore the recognition, accounting treatment, depreciation methods, and disclosure requirements associated with PP&E.

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