What is property, plant and equipment (PP&E) in accounting? How are tangible fixed assets (PP&E) classified, recognised, measured, and presented on the financial statements, and what are the main accounting journals for purchase, depreciation and sale of property, plant, and equipment

What is property, plant and equipment (PP&E) in accounting? How are tangible fixed assets (PP&E) classified, recognised, measured, and presented on the financial statements, and what are the main accounting journals for purchase, depreciation and sale of property, plant, and equipment

What is property, plant, and equipment (PP&E) in accounting?

Tangible fixed assets as property, plant, and equipment (PP&E) are important assets in a company’s operations used to generate economic benefits over the long term. PP&E assets usually have a useful life of more than 1 year, but they typically will last for many more years than that.

Another characteristic of property, plant, and equipment (except land) is that these assets depreciate and are often difficult to convert into cash.

Classic examples of property, plant, and equipment (PP&E) include land, buildings, furniture and fittings, office equipment, plant and production equipment, motor vehicles, machinery, and information technology hardware.

What are tangible fixed assets held for sale?

When an asset or group of assets are classified as held for sale, will become subject to the provisions of IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations, rather than IAS 16

The below criteria are to be satisfied under IFRS 5 – Non-current Assets Held for Sale

• An asset is classified as held for sale if it is carrying amount will be recovered principally through a sale transaction rather than through continued use.
• The asset must be available for immediate sale in its present condition and its sale must be highly probable.

For a sale to be highly probable as per IFRS 5, it must meet the following criteria:

• The asset mut be available for immediate sale.
• The management must have a clear plan about the sell of the asset.
• The actions required to complete the plan indicate that it is unlikely that plan will be significantly changed or withdrawn in the following accounting period.
• An active programme and steps have been taken to locate a buyer.
• The asset has to be marketed at the point then is shown as held for sale, and the price should be reasonable in relation to its current fair value.
• The sale should be expected within the accounting period following the date of classification that is usually 12 months.

How are property, plant, and equipment (PP&E) presented in the Statement of Financial Position (Balance Sheet)?

The PP&E information appears in their Balance Sheet as either PP&E or property, plant, and equipment. These assets are normally reported on the Balance Sheet at net book value, which is their cost less accumulated depreciation.

How are property, plant, and equipment (PP&E) presented in Income Statement?

PP&E depreciation flows out of the Statement of Financial Position (Balance Sheet) from Property Plant and Equipment (PP&E) depreciation account onto the income statement as an expense.

How are property, plant, and equipment (PP&E) presented in Cash Flow?

The Cash Flow Statement tracks the inflows and outflows of cash from operating, investing, and financing activities over the financial period to determine the net change in cash flow and reconciling to the cash and cash equivalents as per the Statement of Financial Position (Balance Sheet) as summarized below:

Net change in cash = Cash from operations + Cash from investing + Cash from financing

Once the net change in cash is determinate, the amount will be added to the beginning of financial period cash balance to calculate the end of financial period cash balance as shown in the Balance Sheet under the cash and cash equivalents. The ending cash flow is calculated as per the formula below:

Ending Cash Balance = Beginning Cash Balance + Net Change in Cash

The Property, Plant, and Equipment (PP&E) are presented in Cash Flow under the investing activities within the proceeds from sale of PP&E, or payments for acquisitions of PP&E, and under the cash generated by operating activities under the movement in depreciation and amortisation.

Cash flow from investing activities shows how a company is allocating cash for the long term. Therefore, a negative cash flow from investing activities in the short term, it may help the company generate cash flow in the longer term as it shows that the company invest in PP&E to increase the productivity level that will generate benefits on the long run.

The cash flow statement is a great tool for analysts, and decision makers when assessing company performance, budgeting, or planning.

At the same time the movement on the cash floe statement will be an indicative for the investors to asset the company spendings on property plant an equipment and understand the company aims for the future.

What Is Cash Flow to Capital Expenditures (CAPEX) ratio?

Cash flow to capital expenditure (CAPEX) is a ratio that measures a company’s ability to acquire long term assets using free cash flow, and is calculated by dividing cash flow from operations by capital expenditure, as summarized below:

Cash Flow to Capital Expenditures = Cash Flow from Operations / Capital Expenditures

A higher ratio is and indicative that the company have sufficient cash to invest in new capital expenditures (CAPEX), as opposite to a lower ratio that shows the company capital is tight.

What is capital expenditure (CAPEX)?

Capital expenditure (CAPEX) is the funds an entity spends to purchase, maintain, or improve its fixed assets, such as land, buildings, equipment, and motor vehicles. CAPEX is an important concept, as this is the way for the business to support and expand its operating capacity by investing in property, plant, and equipment.

For an expense to be recognized as an asset and capitalized, there are specific requirements as per the IAS 16 Property, Plant and Equipment accounting standards.

• It is probable that future economic benefits associated with the item will flow to the entity; and
• The cost of the item can be measured reliably.

Initially, the assets are recognized at their cost, which is the purchase price and other expenses associated to purchasing costs, as duties, taxes, expenditures related directly to delivering the asset to the location where the company will use it and bringing it to the condition to operate as per company requirements.

Subsequently, the company can capitalise expenditure associated to the assets if they either broaden its useful life or improve the benefit for the business. Costs related to repairs of the item, or regular maintenance because of normal wear and tear, do not cover the requirements, and such costs are expensed directly in the Income Statement.

What is depreciation of property, plant, and equipment (PP&E)?

Depreciation refers to the systematic allocation of an asset’s costs over its useful life. An accounting method used to determine the gradual decline in value of an asset over time due to depletion, or obsolescence. This loss of value is recorded as an expense in the income statement, which reduces the company’s profit and therefore its tax liability.

The most used methods of depreciation for Property, Plant, and Equipment (PP&E) are.

• Straight-line Method: In the straight-line method, the cost of an asset is allocated to expense evenly over its useful life and is calculated as depreciable cost divided by the assets estimated useful life.

Depreciation expense = (Historical cost of the asset – Estimated residual asset value) ÷ Estimated useful life of the asset

• Accelerated Depreciation Declining Balance Method: In the accelerated method, the allocation of cost is greater in earlier years. By using Accelerated Depreciation Declining Balance Method, the amount of depreciation expense for a period is calculated as a percentage of the asset carrying value.

Depreciation expense = Percentage (%) x Carrying amount at the beginning of the period

• Units-of-production Method: In the unit of production method, the allocation of costs corresponds to the actual use of resources in each period. The amount of depreciation in each period is based on comparing the asset’s estimated return in that period with the asset’s estimated return potential over its useful life. Depreciation expense is calculated by multiplying production costs over time and dividing by the estimated production capacity over the life of the asset. It is also possible to estimate the depreciation cost per unit, that is, by dividing the depreciation cost by the estimated capacity.

Depreciation expense = (Depreciable asset cost * Production) ÷ Estimated total productive capacity

Depreciation is an important concept because it helps companies accurately reflect the true economic value of their assets over time. It also affects financial analysis, taxes, and decision-making because it affects a company’s profitability, asset values, and tax liabilities.

What is the definition for property, plant, and equipment (PP&E) in accounting?

Property, Plant & Equipment (PP&E) are tangible fixed assets held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and are expected to be utilised during more than one accounting period.

How to account for property, plant, and equipment (PP&E)?

Property Plant and Equipment (PP&E) accounting involves assessing the value of an organisation’s assets, such as buildings, machinery, land, or equipment generate economic benefits over the long term. Assessing the value of assets each financial period will be an aid to decision makers who can take informed decisions and plan accordingly.

To assess the value of Property Plant and Equipment (PP&E) assets, you can refer to old assets, which include the data about the historical costs, capital expenditure and depreciation.

As the assets are subjected to regular use over a long period, buildings and machinery often depreciate over time, reducing their productive value. Another way to record and account for depreciation is by tracking any decline in the asset productive efficiency.

The land will not depreciate but might be subject to land valuation that may vary in value depending on several external factors, such as local demand, location, infrastructure, or access to utilities.

How to calculate the net PP&E?

• Opening Balance PP&E: The gross PP&E is the total value of a company’s fixed assets at a point in time, usually at the end of financial period. This value changes as a company buys and sells assets, but gross PP&E only includes assets held by the company during the previous financial cycle and doesn’t include assets that were new purchased in the current financial year. Therefore, this closing previous period balance will the opening balance for calculation of the PP&E for the current financial period.
• Adding capital expenditures: Capital expenditures occur when a company is upgrading the company assets or is purchasing new equipment. At the same time, in the capital expenditure cost of purchase calculation are included customs duties, taxes, transportation costs and future removal costs, sales discounts, rebates and other costs directly attributable to the purchase of assets.
• Subtracting accumulated depreciation: Except for land that does not depreciate, PP&E assets depreciate until the end life term of each asset. Depreciation is shown on a separate line in the accounts and will be subtracted from the sum of gross PP&E and capital expenditures to arrive at the closing net PP&E assets value.

What is the PP&E Formula?

The net closing Property, Plant & Equipment (PP&E) amount that should show in the fixed assets register and accounts at the end of the accounting period is the opening gross PP&E as per the Statement of Financial Position (Balance Sheet) plus the capital expenditure less accumulated depreciation, as summarized below.

Closing Net PP&E = Opening Gross PP&E + Capital Expenditures – Accumulated Depreciation

How to account for purchase of property, plant, and equipment (PP&E) assets?

When the entity is purchasing an asset of property, plant, or equipment it should record a debit accounting entry to the asset section of the balance sheet and a credit accounting entry to the cash/bank and cash equivalents or payables (when it is used credit card or other deferred payment) section of the balance sheet as summarized below:

• Debit (DR): Balance Sheet (Property Plant and Equipment (PP&E) asset
• Credit (CR): Balance Sheet (cash/bank), or payables (when it is used credit card or other deferred payment)

How to account for depreciation of property, plant, and equipment (PP&E) assets?

The Property Plant and Equipment (PP&E) fixed assets depreciation is recorded as a credit on the Statement of Financial Position (Balance Sheet) to the asset accumulated depreciation accounts, and as a debit in the Income Statement (Profit & Loss) to the depreciation expense accounts, as summarized below:

• Credit (CR): Balance Sheet (accumulated depreciation accounts)
• Debit (DR): Profit & Loss (depreciation expense accounts)

During the life of the asset the accumulated depreciation accounts will track the reduction in the asset’s valuation and a journal for depreciation will be posted each period until the accumulated depreciation will match the asset purchase value, or until the asset is sold.

When an asset is sold there are many cases when the selling price is different than the book value of asset and the company must account for the difference in value either up that will be a gain for a company, or down that will be a loss for the company. The differences will be booked under the Gain/Loss on disposal accounts, as per the example below:

• Credit (CR): Balance Sheet (accumulated depreciation accounts)
• Debit (DR): Profit & Loss (depreciation expense accounts)
• Debit (DR)/Credit (CR): Profit & Loss (gain/loss on disposal of asset)

How to account for disposal of property, plant, and equipment (PP&E) assets?

When the entity is selling an asset of property, plant, or equipment it should record a credit accounting entry to the asset section of the Statement of Financial Position (Balance Sheet) and a debit accounting entry to the cash/bank and cash equivalents or receivable (when it is used other payment method) section of the Statement of Financial Position (Balance Sheet). In addition, the entity must account for depreciation and profit or loss on the disposal of asset as mentioned above.

• Credit (CR): Balance Sheet (Property Plant and Equipment (PP&E) asset.
• Debit (DR): Balance Sheet (cash/bank), or payables (when it is used credit card or other deferred payment)

What is PPE Turnover Ratio also called Fixed Asset Turnover Ratio?

PPE turnover ratio, or fixed asset turnover ratio, measures the efficiency at which a company can use its long-term fixed assets (PP&E) to generate revenue, by showing how much sale a company can achieve for the amount invested in PP&E, or in other words how a company is making use of the PP&E assets to generate revenue.

This is an important measure for analysing the company assets profitability for the use of decision makers within the company, lenders, or external investors to measure the return on their investment.

How to calculate the PP&E turnover ratio?

The PPE Turnover Ratio, or fixed asset turnover ratio is calculated by dividing the net sales of a company by the average (Ref.1) fixed assets belonging to the company, as summarized below:

PPE Turnover Ratio = Net sales ÷ Average Total Fixed Assets

• Net Sales are the gross sales of a company deducted by discounts, allowances, and returns.

Net Sales = Gross Sales– Discounts – Allowances– Returns

• Average Total Fixed Assets are the average between the beginning and end of period asset balances.

Average Total Assets = (Beginning Total Fixed Assets + Ending Total Fixed Assets) ÷ 2

How to analyse PP&E turnover ratio, or fixed asset turnover ratio?

A higher fixed asset turnover ratio suggests that the company is generating more income per monetary unit of asset owned. Therefore, this indicate that the company have spend efficiently on purchasing assets that convers at a high rate to revenue. On a contrary, money spent on assets with slow conversion to revenue should be analysed for future replacement or improvements as summarized below:

• High Asset Turnover Ratio: A high ratio suggests that the company allocation of capital derive more benefits from its assets. It could mean as well that the company has sold off its equipment and started to outsource its operations.
• Low Asset Turnover Ratio: A low ration suggests excess production capacity or inefficient capital allocation. This could happen due to producing items that no one wants to buy, therefore overestimating the demand for their product and overinvesting in the equipment to produce them or could happen due to manufacturing problems as bottlenecks in the manufacturing value chain.

How to increase property, plant & equipment (PP&E) turnover ratio.

Optimize and improve Efficiency: By constant analyse of how property, plant & equipment (PP&E) are being utilized you could find the best ways to improve the output you get from those assets. In addition, you can keep regular maintenance programs to keep the assets at the highest level of functionality and implement assets tracking systems that will monitor your results per each asset enabling better decisions when planning for disposals or replacements.

Advanced technologies:  One of the best ways to improve the property, plant & equipment (PP&E) turnover ratio is to implement automated inventory and order systems by computerizing your orders, inventory, and billing to ensure efficiency, and at the same have access to real time data to analyse how these sections of your company are doing.

Increase Revenue: Your pant and equipment may be producing more than you can sell; therefore, you need to find ways to sale those products at a faster rate by offering discounts on bulk purchases, or by improving your promotions and advertising campaigns.

Accelerate collections: If you analyse your efficiency based on collection basis then will be important to find ways to automatize and improve the receivables to enable your company collect at a faster rate.

Sell unused or underutilized assets: Companies often have unused or underutilized assets that may be best to sell as they produce low income, or do not produce income at all. Beside there are bearing other costs as storage or maintenance can be eliminated by selling these assets.

Lease assets: Another way to improve the fixed asset turnover ratio is by leasing the assets, that will give an instant improvement to the assets turnover ration. An additional benefits of leasing assets is that the company can renew the fixed assets more frequently without large movements of cash flows.

What is a fixed asset register?

Fixed asset register is a formal record of all the fixed assets owned by the entity. Here the company is keeping track of the assets value over time and other asset information’s as the description, asset identification number, serial number, contract, invoice or purchase order details, location of the asset, maintenance, insurance, warranty, and any other information the company might find useful to keep track and analyse of the assets within the entity.

At the same time the asset register can be used for pulling the data for asset financial analyses within the company or for external purposes as required by investors, lenders, or other company stakeholder.

Types of fixed asset register:

• Land and property fixed asset register.
• Furniture fixed asset register.
• Motor vehicles fixed asset register.
• Equipment fixed asset register.

How to maintain a fixed asset register?

The fixed aster registers can be maintained either in a physical or a digital format. Now days most of the company are opting for a digital format that will create huge benefits by endless possibilities of a digital asset register integration with the accounting software modules, as purchases and account payables, sales and accounts receivables, assets inventory systems, or other software the company might find useful to track and analyse data in relation to company fixed assets.

To maintain an accurate and relevant fixed asset register that can enhance the usefulness of the records for the company and stakeholders needs you should classify the fixed assets within the assets register by hierarchy that can be based on asset type, asset location or other priorities as per the company requirements. At the same will be highly imperative to maintain the assert register by updating the data on a timely manner.

What to record in a fixed asset register.

A fixed asset register is a database maintained in a physical or digital forma used to record meaningful data about each asset within the company as outlined below:

Asset description: The company will keep a main record of the asset by describing the asset based on the purchase documentation or based on the company requirements for the classification of fixed assets.

Acquisition cost: The asset register should have a detailed record of the acquisition or building costs for each asset, based on various documentation as purchase orders, invoices, contract, or costs allocated to purchase of assets.

Acquisition details: Here the company will record the date of purchase, invoice, or purchase order number or if the asset was constructed in house there will be a record of the date of its completion.

Owned or leased assets: Here to company is recording the details about the entity or individual that owns the asset, and in addition for leased assets the leasing entity details.

Asset identification: When tracing the inventory of the fixed assets the company must have unique asset identification data. This data can in a form of asset serial number, or a unique ID number allocated as per company assets classification.

Asset location: Fixed assets like machinery, equipment, office furniture the asset location will be usually the same as they tend to be kept in same physical locations. On the other hand, for mobile equipment like motor vehicles the company can use mobile tracking systems as GPS that can be allocated to the asset ID for easier tracking of these types of mobile assets in the fixed asset register.

Inspection and maintenance: Fixed assets require periodical inspection and maintenance to keep the assets at the highest level of operation.  The fixed asset register will be a great tool to track the status of how well the asset is maintained over the asset useful life.

Insurance and warranties: To keep the assets safe for technical errors, faults, or physical destruction the company is paying a premium for insurance or warranties of the fixed assets. You should keep a record of these details to assure all the insurance and warranties are not expired and renewed in time.

Disposal details: When an asset is disposed the asset should go of from the fixed asset register. Even there is not used of the asset as disposed the entities will to keep the historical data of the asset records for future analyses, or statutory requirements.

What are the benefits of keeping a fixed asset register?

The assets of a company can have a high value on the Statement of Financial Position (Balance Sheet) and the company need to keep accurate records or assets purchasing, maintenance, repairs insurance, security, compliance, or disposal. Therefore, the asset register will reflect all these costs associated to the assets and an accurate asset register will help the company analyse the assets efficiency and profitability over the time resulting in better and more informed analysis and decisions.

Some of the main benefits of keeping an accurate fixed asset register are listed below:

Improve Analyses: Keeping an accurate and detailed asset register will provide reliable data that should be easily to pick up by analyst to calculate the property, plant & equipment (PP&E) turnover ratio, assessing the assets usability, efficiency and so on.

Improve stakeholders’ relationship: Having an accurate asset register available when required by investors, lenders, or statutory requirements will improve the user confidence that will result to an enhanced relationship with the company stakeholders.

Financial accounting and cash flow: An accurate, and detailed fixed asset register will provide reliable and timely data for accounting, bookkeeping while maintaining a healthy cash flow for the company.

What are the accounting standards for property, plant, and equipment (PP&E)?

The international accounting standard on for property, plant, and equipment (PP&E) is IAS 16. Therefore, IAS 16 should be followed when accounting for tangible non-current assets unless another IAS or IFRS requires different treatment, as outlined below:

• IAS 16 standard does not apply to assets classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations that outlines how to account for non-current assets held for sale.
• Biological assets related to agricultural activity accounted under IAS 41 Agriculture
• Exploration and evaluation assets recognised in accordance with IFRS 6 Exploration for and Evaluation of Mineral Resources
• Mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.

According to IAS 16, land and buildings are separate assets and are accounted for separately even if they are held together. Land has an infinite lifespan and therefore does not deteriorate. Buildings have a limited useful life and are therefore subject to depreciation. The increase in the value of the land on which the building is located has no effect on determining the depreciable amount of the building.

IAS 16 was reissued in December 2003 and applies to annual periods beginning on or after 1 January 2005, and the purpose of IAS 16 is to provide guidance on the accounting for property, plant, and equipment. The main areas when accounting for property, plant, and equipment (PP&E) are listed below:

• Recognition
• Initial measurement
• Measurement after initial recognition
• Depreciation
• Derecognition

What is recognition of property, plant, and equipment (PP&E)?

IAS 16 defines tangible fixed assets, or property, plant, and equipment (PP&E) as:

• Assets that possess a physical substance, are held for use in the production of goods or delivery of services or for an administrative purpose, and it is probable that future economic benefits associated with the asset will flow to the entity.
• Assets that are expected to be used for more than one accounting period, and the cost of the assets can be measured reliably.

IAS 16 requires that property, plant, and equipment (PP&E) should initially be measured at cost and the cost of an asset should be recognised if:

• It is probable that future economic benefits associated with the item will flow to the entity; and
• The cost of the item can be measured reliably.

What is initial measurement of property, plant, and equipment (PP&E)?

A tangible fixed asset should be recorded at cost, with the cost of an asset including all spending necessary to bring the asset to working condition for its intended use. This would include not only its original purchase price but also costs of site preparation, delivery to site, installation, related professional fees for architects and engineers, duties, and taxes, and the estimated cost of dismantling and removing the asset and restoring the site as outlined below:

• The asset purchase price, including duties and taxes, after deducting trade discounts and rebates.
• All the costs directly attributable to bringing the asset to the location and optimal condition for operating in the manner intended by the entity management. Some examples of directly attributable costs are listed below:

• Initial delivery costs
• Site preparation costs
• Installation costs
• Testing costs

• The initial costs estimate for of dismantling and removing the item including restoring the site on which the asset was located. To note, that this is a cost component to the extent that it is recognised as a provision under IAS 37, Provisions, Contingent Liabilities and Contingent Assets.

If an asset is acquired in exchange for another asset the cost will be measured at the fair value, unless meeting one of the conditions below:

• The exchange transaction lacks commercial substance, or
• The fair value of neither the asset received, nor the asset given up is reliably measurable.

If the re is not used fair value measurement, its cost of the asset acquired is measured at the carrying amount of the asset given up.

What is subsequent measurement of property, plant, and equipment (PP&E)?

The measurement of a property asset after initial recognition can be either the cost model or the revaluation model. The entity should treat the model chosen as an accounting policy and shall apply that policy to an entire class of property, plant, and equipment.

• Cost model: The property, plant, and equipment (PP&E) assets shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses.
• Revaluation model: After recognition as an asset, an item of property, plant, and equipment whose fair value can be measured reliably will be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses.

The cost model reflects historical costs and is the traditional method of accounting for property, plant, and equipment while the revaluation model carries the asset at its fair value on the date of revaluation, minus subsequent accumulated depreciation and impairment losses, and provides a more up-to-date picture of the asset’s value on the Balance Sheet. In this article we will discuss in more detail about the revaluation model which is mostly used and involves more cost and complexity due to the need for valuations.

When the revaluation model is used and the revaluation fair value adjustment results in an increase in value, it should be recognized to other comprehensive income and accumulated in Balance Sheet under the revaluation surplus. There can be cases when the adjustment represents the reversal of a revaluation decrease of the same asset previously recognised as an expense, in which case it should be recognised in profit or loss.

On the other hand, when the revaluation model is used and a decrease is arising because of a revaluation, then it should be recognised as an expense to the extent that it exceeds any amount previously recognized to the revaluation surplus attributable to the same asset. When a revalued asset is disposed of, any excess revaluation surplus should be transferred directly to retained earnings, or it may be left in the Balance Sheet under the revaluation surplus.

In addition, revaluations shall be made regularly, and if an item of property, plant and equipment is revalued, the entire class of property, plant, and equipment to which that asset belongs shall be revalued. A class of property, plant and equipment is a grouping of assets of a similar nature and use in an entity’s operations. Some examples of asset classes are land, land and buildings, machinery, motor vehicles, furniture and fixtures, office equipment.

What is depreciation of property, plant, and equipment (PP&E)?

As per IAS 16 depreciation is a systematic allocation of the depreciable amounts of an asset over the asset useful life. Therefore, each asset should be depreciated, and generally as a separate item. When assets are grouped together and have the same useful lives and depreciation methods then the whole group should be depreciated similarly.

To note, land and buildings are separable assets and are accounted for separately, or airplanes engines would be depreciated separately from the main airframe when they have different useful lives.

Why are the assets depreciated?

By depreciating an asset, the company can evaluate the asset worth at a later point and the purchasing costs allocated and over the life of the asset. At the same time will be more realistic to write off only a portion of the cost each year over the life of the asset, rather than allocating all cost at once when the asset is purchased. In addition, allows businesses to analyse the profitability the asset over years and get more meaningful information for the decision makers of within the organisation.

What are the depreciation methods?

There are a few methods can be used to allocate depreciation to specific accounting periods, whereas the more common methods, specifically mentioned in IAS 16, are the straight-line method, and the reducing (or diminishing) balance method.

• Straight line: This is the simplest and most used depreciation method calculating a depreciation amount that is the same year after year for the life of the asset until the asset is depreciated down to its salvage value. Straight line depreciation method is most common used for smaller businesses that are looking for a simple way to calculate depreciation.

Straight line depreciation = (cost of the asset – estimated salvage amount) ÷ estimated useful life of an asset.

Where: Cost of the asset is the initial purchase or construction cost as well as any related capital expenditure incurred.

• Declining balance: The declining balance method provides larger deductions sooner and begins with the asset book value, rather than salvage value. Therefore, is considered a type of accelerated depreciation, and it is mainly used for companies with assets that lose a higher proportion of the value in the early years, while minimizing tax exposure.

Declining Balance Depreciation = Book Value x (1 ÷ Useful Life)

• Double Declining Balance: This is a type of faster accelerated depreciation, two times faster than the declining balance method.

Double Declining Balance Depreciation = Book Value x (2 ÷ Useful Life)

• Sum of the Years’ Digits: This is another type of accelerated depreciation that results in a higher depreciation in the first years of asset life, and is depreciated over the sum of asset life sum of digits i.e. if an asset has 5 years life span the sum of the years digits (SYD) will be 15 (1+2+3+4+5), and the depreciation is calculated as per the formula below:

(Remaining Lifespan / SYD) x (Original Cost of the Asset – Salvage Value

Where SYD = (n * (n+1) ÷ 2 (n* being the value of the asset)

• Units of Production: The units of production depreciation method will be a great choice for production intensive companies, as instead of using the value of the asset it is using the number of the units produced by the asset, as per the formula below:

Depreciation Per Unit = (Cost of Asset – Salvage Amount) ÷ Estimated Units Produced Over the Assets Lifetime

What is Salvage value?

Salvage value is the amount that an asset that is expected to be worth at the end of its useful life, after it has been fully depreciated.

The salvage value can be determined by calculation a percentage estimate of the value of the asset at the end of its useful life or engaging a professional valuer.

What is derecognition of property, plant, and equipment (PP&E)?

Property, plant, and equipment (PP&E) assets should be derecognised and removed from the Statement of Financial Position (Balance Sheet) either on disposal or when no future economic benefits are expected from its use or disposal. On the income statement will be recognized a gain or loss on disposal that is calculated as the difference between the disposal proceeds and the carrying amount of the asset at the date of disposal.

When the business is using the revaluation model the remaining balance in the revaluation surplus relating to the asset disposed is transferred directly to retained earnings and would be shown in the statement of changes in equity.

Disclosures requirement for IAS 16 property, plant, and equipment.

IAS 16 16 property, plant, and equipment encourages (but does not require) entities to disclose additional information.

The main disclosures for each class of property, plant, and equipment (PP&E) the entity could disclose are the measurement basis, useful lives or depreciation rates for each asset, depreciation methods used, carrying amount and accumulated depreciation at the beginning/end of the financial period.

In addition, the entity should maintain a reconciliation that include additions, disposals, revaluation increases/decreases, depreciation, impairments and any other movements over the period of the asset lifetime.

Which are the IFRS Standards for property, plant, and equipment (PP&E)?

Some of the IFRS standards that comes in addition to IAS 16 are, IFRS 5 – Disposal of assets, IFRS 13 – Fair Value Measurement, IFRS 15 – Revenue from Contracts with Customers, IFRS 16- Leases

IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations: IFRS 5 deals with the disposal of non-current assets and discontinued operations. If an asset or group of assets are classified as held for sale, will become subject to the provisions of IFRS 5. When an asset is classified as held for sale, IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations requires that the asset held for sale to be classified separately from all other assets on the Statement of Financial Position (Balance Sheet)

IFRS 13 – Fair Value Measurement: IFRS 13 provides a framework for measuring fair value and the disclosures requirement.

IFRS 15 Revenue from Contracts with Customers: IFRS 15 specifies how and when revenue from a contract with a customer will be recognised, and the relevant disclosures required from the entities to provide to the users of financial statements

IFRS 16 Leases: IFRS 16 is the framework for recognition, measurement, presentation and disclosure requirement for leases. The main objective of IFRS 16 is of ensuring that lessees and lessors provide reliable and relevant information for the users of financial statements.

What is the difference between US GAAP and IFRS in relation to the property, plant, and equipment (PP&E) accounting standards?

Under US GAAP all properties are included in the general category of Property, Plant and Equipment (PP&E), whereas under IFRS, when a property is held for rental income or capital appreciation will be recorded as an investment property.

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