Property Plant and Equipment (PP&E): Definition

KEY TAKEAWAYS

• Property, plant, and equipment (PP&E) are the actual, tangible, long-term assets of a corporation that normally have a lifespan of more than a year.
• Real estate, equipment, land, furnishings, and cars are a few examples of PP&E.
• Companies’ financial accounts include their net PP&E.
• To ascertain the kind of capital expenditures a firm is making and how it generates funds for its projects, potential investors and analysts examine a company’s PP&E.

What Is Property, Plant, And Equipment (PP&E)?

Property, plant, and equipment (PP&E) are tangible or physical assets. They are classed as long-term assets that have a typical lifespan of over a year. 

Also known as fixed assets, PP&E are essentially long-term physical assets. In industries that tend to be considered capital intensive, there is a significant amount of these fixed assets. Examples include auto manufacturers, oil companies, and steel companies. 

It is vital that a company accurately records its PP&E on its balance sheet. Analysts or potential investors will often look at a business’s PP&E to see how and where the company is spending its money in relation to its fixed assets. This is in ways that could potentially help increase the company’s profitability. 

It’s also useful for the business itself to keep track of its PP&E. This is if there comes a time when they need to liquidate their assets in order to raise capital. Most fixed assets will naturally depreciate over a period of time. They are also not easily converted into cash. While some assets such as real estate can actually increase in value over a certain period of time, which companies can use to raise further capital from their initial investment. 

There are a number of criteria that need to be met for a company to recognize its PP&E. They are as follows:

1. It is likely that future economic benefits that are associated with the asset will flow to the entity over a period of time spanning more than a single year
2. The asset’s cost can be estimated or calculated reliably

The initial cost of any form of PP&E can include:

1. It’s purchase price, any import duties, or rebates. It also includes any non-refundable taxes and sales discounts. 
2. Any attributable costs that are incurred bringing the asset to the location. As well as getting it in the right condition for it to be operational. This includes things such as installation expenses. 
3. An estimated value of the costs of removing and dismantling the asset and restoring the site on which the asset was located. This is known as an asset retirement obligation (ARO).

Characteristics Of Property, Plant, And Equipment

Any fixed asset will have a useful life assigned to it. This basically means that they have a fixed number of years where they will hold economic value to the company. PP&E assets also have what is known as a salvage value. This is the value that is remaining once the asset’s useful life comes to an end. Salvage value is also known as scrap value. 

Fixed assets undergo depreciation. This divides the cost of fixed assets and expenses over their useful life. Depreciation does not affect the cash flow. It is likely that the revenue from the use of the PP&E will be spread over its useful life. By spreading out the expenses of the purchase over its useful life,  the actual profit and loss of the company are reflected more reasonably.  

It’s important to note that a tangible asset is depreciated for accounting purposes. On the other hand, intangible assets are amortized.

PP&E Formula

In order to figure out a company’s net PP&E, you can use the following formula:

Calculation Of Property, Plant, And Equipment

Let’s say that Company X owned PP&E with a gross value of $500,000. The accumulated depreciation for its machinery amounted to $210,000. Due to the general wear and tear of the machinery, Company X makes the decision to purchase more equipment. The value of this purchase comes to an extra $100,000. 

For this period of time, the depreciation expense for all of Company X’s new and old equipment is $15,000. 

By using the information given above, we can use the PP&E formula to calculate the net PP&E of Company X:

NP = 500,000 + 100,000 – 210,000 – 15,000

This means that the net PP&E would amount to $375,000.

Examples Of PP&E

There are a number of examples of PP&E, it includes things such as:

• Office furniture
• Machinery
• Vehicles
• Buildings
• Undeveloped land

A company that is planning to expand may decide to purchase a number of fixed assets. This would be a way of investing in the long-term future of their business. These purchases are known as capital expenditures. They significantly impact the financial position of a company. 

The method in which the asset has been financed has an impact on the financial viability of the company. Whether this has been done through available cash, or the asset is financed through debt or equity.

Summary

PP&E are long-term, tangible assets that the corporation owns, and they are typically fixed assets. PP&E contains assets like equipment, land, and real estate that enable the corporation to increase its enterprise value over time.

It’s important for business owners to understand and keep track of their PP&E. This is useful because it allows them to have an up-to-date view of the value of their business, but it also allows them to properly calculate the tax liability for their business assets.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.