Accounting for Property, Plant and Equipment Assets
January 26, 2021

Businesses and nonprofit entities capitalize machines, furniture, buildings, and other property, plant and equipment (PPE) assets on their balance sheets. Here’s a refresher on some common questions about how to properly report these long-lived assets under U.S. Generally Accepted Accounting Principles (GAAP).

What’s Included in Book Value?

PPE is reported on the balance sheet at historical cost. This includes the amount of cash or cash equivalents paid for an asset. Historical cost also may include costs to relocate the asset and bring it to working condition. Examples of capitalized costs include the initial purchase price, sales tax, shipping and installation costs.

Costs incurred during an asset’s construction or acquisition that can be directly traced to preparing the asset for service also should be capitalized. In addition, costs incurred to replace PPE or enhance its productivity must be capitalized. However, repairs and maintenance costs may be expensed as incurred.

GAAP doesn’t prescribe a dollar threshold for when to capitalize an asset. But, for simplicity, management may set a capitalization threshold as long as it doesn’t materially affect the financial statements. PPE below that threshold may be written off as incurred.

How Long Is the Useful Life?

Useful life is the period over which the asset is expected to contribute directly or indirectly to future cash flow. When estimating the useful life of an asset, management should consider all relevant facts and circumstances, such as:

  • The asset’s expected use,
  • Any legal or contractual time constraints,
  • The entity’s historical experience with similar assets, and
  • Obsolescence or other economic factors.

What’s the Right Depreciation Method?

Depreciation is meant to allocate the cost of an asset (less any salvage value) over the period it’s in use. GAAP provides the following four depreciation methods:

  1. Straight-line,
  2. Sum-of-the-years-digits,
  3. Units-of-production, and
  4. Declining-balance.

For simplicity, many small businesses deviate from GAAP by using the same depreciation method for tax and financial statement purposes. The IRS prescribes specific recovery periods for different categories of PPE and provides accelerated depreciation methods.

Under current tax law, instead of using the standard Modified Accelerated Cost Recovery System (MACRS) depreciation method, certain entities currently may choose to immediately deduct a qualified PPE purchase under Section 179 or the bonus depreciation program, thus minimizing taxable income in the years the asset is placed in service. The use of these accelerated depreciation methods may create a large spread between the value of PPE on the balance sheets and the assets’ fair market values.

For More Information

Reporting PPE is a gray area in financial reporting that relies on subjective estimates and judgment calls by management. We can help you report these assets in a reliable, cost-effective manner.

© 2021

You might also like

FAQs about QuickBooks

FAQs about QuickBooks

Almost 40 years after its launch, QuickBooks® remains the leading accounting software program for small and medium-sized businesses. If you decide to use QuickBooks for your bookkeeping needs, you may have questions about implementation and using it to run your...

read more
Pick the Right Accounting Method for Your Business

Pick the Right Accounting Method for Your Business

Timely, accurate financial information is essential to running a successful business. There are a number of accounting methods you can use to record and track your business’s financial performance. Here’s an overview of cash, tax and accrual basis accounting to help...

read more
How to Report Software Costs

How to Report Software Costs

What do electric cars, smart TVs and equipment used for making french fries have in common? The answer is embedded software, according to recent comments by Financial Accounting Standards Board (FASB) Vice Chair James Kroeker. He also told the Private Company Council...

read more