Property, plant and equipment or fixed assets are tangible non-current assets of an entity. Tangible means having physical existence, whereas non-current refers to the long-term nature of these assets. Furthermore, the basic definition of an asset must be kept in mind as well to understand the definition of property, plant and equipment (PPE) i.e. an asset is a resource controlled by an entity from which the entity expects to obtain economic benefits in future. Let’s sum up the definition of property, plant and equipment.
Property, plant and equipment are tangible non-current assets of an entity which are held by the entity for its own use and are expected to generate economic benefits for the entity in future, whether directly or indirectly, for at least more than one year.
Every business, whether large or small, usually requires PPE for its operations. Capital intensive industries such as mining companies, oil and gas extraction companies etc. require significant investment in PPE whereas labor intensive industries such as various service providers require relatively less investment in PPE. However, all businesses usually need PPE for their operations.
Some common examples of PPE are given below:
- Plant and machinery
- Office equipment
- Furniture and fixture
Accounting of property, plant and equipment
An item of property, plant and equipment is initially recognized at its cost.
What is the cost of an asset? It is the value of resources spent to acquire that asset. It includes all directly attributable expenditure incurred on acquisition of an asset and in making it ready for its intended purpose. For instance, cost of an item of PPE may include the following:
- Purchase price
- Transportation or freight charges
- Borrowing costs (as per the guidelines discussed in our chapter “capitalization of borrowing costs”
- Present value of dismantling cost
After initial recognition of PPE at its cost, one of the following two models for subsequent measurement is adopted.
These models are explained in our chapter “cost model and revaluation model for PPE”.