Property Plant and Equipment (PPE)

 Also known as fixed assets; are physical assets that have lives that extend beyond one
year.
 These assets are non-current in nature and are presented on the balance sheet.
 Tangible assets that are used in business for production or supply of goods or services, for
rental, or for administrative purposes.
 Some examples of assets that fit into this category are land, land improvements, buildings,
and machinery.

TYPES OF INDUSTRIES:
 Asset Intensive Industry – an industry that requires above-average levels of capital in order to
operate. These are the Automobile manufacturing, energy, transportation and semiconductors.
These industry typically own a lot of their fixed assets outright which are utilized to generate
income for the company.
 Asset-light industries – an industry that own fewer capital assets. These industries are
manufacturing, customer service, IT, real estate, industrial machinery and service providers.

ACQUISITION:
 The costs incurred to acquire property, plant, and equipment are capitalized.
 The acquisition cost to be capitalized includes not only the purchase price of the asset but
also the cost incurred to put the asset into place and make the asset ready for use.

RECOGNITION:
1. It is probable that future economic benefits associated with the asset will flow to the entity
over a period of more than one year
2. The cost of the asset can be measured or estimated reliably.

INITIAL MEASUREMENT:
Initially measured at cost:
a. Purchase price, including import duties, nonrefundable purchase taxes, less trade discounts
and rebates (initial delivery and handling cost)
b. Direct costs of bringing the asset to the location and condition necessary for it to be used
(installation and assembly costs)
c. Initial estimate of dismantlement, removal and site restoration costs
d. Costs of employee benefits arising directly from the construction or acquisition of PPE
e. Cost of site preparation
f. Professional fees
g. Testing costs, net disposal proceeds of samples generally during testing

Examples of cost that are expensed outright:

a. Cost of opening a new facility
b. Cost of introducing a new product or service (including costs of advertising and promotional
activities)
c. Cost of conducting business in a new location or with a class of customers (including costs of
staff training)
d. Administration and other general overhead costs

SUBSECQUENT MEASUREMENT:
An entity chooses either cost model or the revaluation model as its accounting policy and applies that
policy to the entire class of PPE.

AEC 64: AUDITING AND ASSURANCE | Property, Plant and Equipment

  Cost model – PPE is carried at its cost less any accumulated depreciation and any accumulated
impairment losses
 Revaluation model – PPE is subsequently measured at a revalued amount, being its fair value at
the date of the revaluation less any subsequent accumulated depreciation and accumulated
impairment losses.

ADJUSTMENTS:
 Increase, when expenditures are made that provide economic benefit beyond a one year
period; these are typically larger in nature in comparison to routine maintenance and repair
costs.
o Purchase price, including import duties, nonrefundable purchase taxes, less trade
discounts and rebates (initial delivery and handling cost)
o Direct costs of bringing the asset to the location and condition necessary for it to be
used (installation and assembly costs)
o Initial estimate of dismantlement, removal and site restoration costs
o Costs of employee benefits arising directly from the construction or acquisition of
PPE
 Decreases, when it depreciates -- fixed assets declines over time. This decline in values is
calculates using various methods:
a. Straight-line method – depreciation is recognized evenly over the useful life of the
asset.

𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒

𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 = 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑐𝑜𝑠𝑡 − 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒

a. Double declining method – computed by applying a fixed rate on the asset’s carrying
amount, rather than depreciable amount. This method initially ignored the residual
value. The residual value is considered only at the latter part of the asset’s useful life
by adjusting the depreciation charges so that the carrying amount does not fall below
the residual value.

2
𝐷𝑜𝑢𝑏𝑙𝑒 𝑑𝑒𝑐𝑙𝑖𝑛𝑖𝑛𝑔 𝑟𝑎𝑡𝑒 =
𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒

1.5
150% 𝑑𝑒𝑐𝑙𝑖𝑛𝑖𝑛𝑔 𝑟𝑎𝑡𝑒 =
𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒

b. Sum-of-the-Year Digits – computed by applying a series of fractions to the

depreciable amount of the asset. A fraction is derived by dividing the useful life by the
sum of the digits in the life of the asset.

𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 + 1
𝑆𝑌𝐷 𝑑𝑒𝑛𝑜𝑚𝑖𝑛𝑎𝑡𝑜𝑟 = 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 𝑥
2

FIXED ASSET RATIO:

 This ratio measures the operating performance of a company which is the ability to generate sales
from its fixed-asset investments.

AEC 64: AUDITING AND ASSURANCE | Property, Plant and Equipment

 High ratio indicates that a company has effectively used investments in fixed assets to generate sales.
However, there is no exact number or range that dictates whether a company has been efficient at
generating revenue from such investments.
 Low ratio indicates that a company is underperforming in sales and has a relatively high amount of
investments in fixed assets.

𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡

𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠 = 𝐺𝑟𝑜𝑠𝑠 𝑠𝑎𝑙𝑒𝑠 − 𝑟𝑒𝑡𝑢𝑟𝑛𝑠 𝑎𝑛𝑑 𝑎𝑙𝑙𝑜𝑤𝑎𝑛𝑐𝑒𝑠

𝑁𝑒𝑡 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒 − 𝐸𝑛𝑑𝑖𝑛𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐹𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡 =
2

𝑁𝑒𝑡 𝐹𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡𝑠 = 𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑎𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛

AEC 64: AUDITING AND ASSURANCE | Property, Plant and Equipment