Property, Plant, and Equipment – Acquisition and Measurement

Property, Plant, and Equipment (PP&E) are tangible long-term assets held for use in operations and not intended for sale in the ordinary course of business. These assets provide economic benefits over multiple periods and are subject to specific rules for acquisition, measurement, and capitalization under U.S. GAAP (ASC 360) and IFRS (IAS 16).

This article covers the accounting treatment of PP&E from initial recognition to subsequent measurement, including capitalization thresholds, asset retirement obligations, and illustrative journal entries.

1. What Qualifies as PP&E?

PP&E includes:

✦ Land

✦ Buildings

✦ Machinery and equipment

✦ Leasehold improvements

✦ Furniture and fixtures

✦ Vehicles and tools

To be classified as PP&E, an asset must be:

✦ Tangible

✦ Used in production or supply of goods and services

✦ Expected to be used for more than one reporting period

2. Initial Recognition

PP&E is recognized when:

✦ It is probable that future economic benefits will flow to the entity, and

✦ The cost can be measured reliably

Assets acquired through purchase, construction, donation, or exchange transactions can all qualify, provided they meet these criteria.

To record a cash purchase: Dr. Equipment – $80,000 / Cr. Cash – $80,000.

To record an equipment purchase on credit: Dr. Equipment – $80,000 / Cr. Accounts Payable – $80,000.

3. Initial Measurement – Cost Components

The cost of PP&E includes all directly attributable costs to bring the asset to its intended use.

✦ Purchase price (including import duties and taxes)

✦ Freight, insurance, installation, testing

✦ Site preparation and professional fees

✦ Cost of dismantling or asset retirement obligations

Do not include:

✦ Admin costs

✦ General overhead

✦ Start-up losses

✦ Training costs

To capitalize freight and installation: Dr. Equipment – $2,000 / Cr. Cash – $2,000.

4. Self-Constructed Assets

For assets built internally, costs include:

✦ Direct labor and materials

✦ Applicable overhead

✦ Capitalized interest (if the asset takes substantial time to get ready)

Capitalized Interest – ASC 835 / IAS 23Interest is capitalized during the construction period on qualifying assets.

To capitalize interest: Dr. Construction in Progress – $5,000 / Cr. Interest Payable – $5,000.

5. Asset Retirement Obligations (ARO)

If an entity is legally required to dismantle or restore a site after asset use, an ARO must be recognized and capitalized into the cost of the asset.

Dr. Equipment – $10,000 / Cr. Asset Retirement Obligation – $10,000.

The ARO is measured at present value and accreted over time through interest expense.

6. Nonmonetary Asset Exchanges

When PP&E is acquired through nonmonetary exchanges:

✦ Use fair value of the asset given up, unless fair value is not reliably measurable

✦ If the exchange lacks commercial substance, use book value

To record exchange with gain: Dr. New Equipment – $90,000 / Cr. Old Equipment – $75,000 / Cr. Gain on Exchange – $15,000.

7. Group and Composite Purchases

When multiple assets are acquired for a lump sum, the total cost is allocated based on relative fair values.

If land and building are acquired for $500,000 and appraised at $200,000 (land) and $300,000 (building):

✦ Allocate $500,000 × 40% = $200,000 to land

✦ Allocate $500,000 × 60% = $300,000 to building

8. Disclosure Requirements

Disclosures under GAAP and IFRS include:

✦ Breakdown of major classes of PP&E

✦ Depreciation methods and useful lives

✦ Gross carrying amounts and accumulated depreciation

✦ Reconciliation of beginning and ending balances

✦ Capitalized borrowing costs and ARO, if applicable

Balance sheet presentation example:

✦ Land – $200,000

✦ Buildings – $1,500,000

✦ Equipment – $800,000

✦ Less: Accumulated Depreciation – ($450,000)

✦ Net PP&E – $2,050,000