Plant Assets

Plant assets are tangible, long-lived assets that a business uses to produce goods, deliver services or run its operations, and that it does not intend to sell in the ordinary course of business. Examples include land, buildings, machinery, equipment, vehicles, furniture and computers. The term is used widely in US textbooks as another name for fixed assets or property, plant and equipment.

Plant assets are reported in the noncurrent section of the balance sheet at cost less accumulated depreciation. Their cost is spread over their useful lives through depreciation, except for land, which is assumed to have an unlimited life. Natural resources such as mineral deposits are sometimes grouped with plant assets but are expensed through depletion instead.

Under the historical cost principle, a plant asset is recorded at all the costs needed to acquire it and get it ready for its intended use:

• Machinery and equipment: purchase price, sales tax, shipping, insurance in transit, installation and testing.
• Buildings: purchase price or construction costs, architects' fees, permits and, during construction, capitalized interest.
• Land: purchase price, closing costs, title fees, surveying, clearing and grading, and the cost of demolishing old buildings, less salvage proceeds.
• Land improvements: parking lots, fences and lighting, which are depreciated separately because they wear out.

Costs such as repairs after installation, training staff to use a new machine or fines for late delivery are expensed. When several assets are bought together for a single price, the cost is split among them in proportion to their fair values. For example, if land and a building are bought for $900,000 and appraised at $300,000 and $700,000, the land is recorded at 30 percent, or $270,000, and the building at 70 percent, or $630,000.

Depreciation allocates the depreciable cost of a plant asset over its useful life. The straight-line method is the most common:

Here $\text{Cost}$ is the capitalized cost, $\text{Residual value}$ is the expected amount recoverable at the end of the asset's life, and $\text{Useful life in years}$ is the period over which the business expects to use it. The $630,000 building above, with a $30,000 residual value and a 40-year life, is depreciated by $15,000 a year. Accelerated methods, such as the declining balance method, charge more in early years, and the units-of-production method links depreciation to usage.

Ordinary repairs and maintenance are expensed. Costs that extend an asset's life, add capacity or improve efficiency are capitalized as additions or improvements. If events suggest an asset's carrying amount may not be recoverable, it is tested for impairment and written down where necessary.

When a plant asset is sold, scrapped or traded in, depreciation is first updated to the disposal date. The asset's cost and accumulated depreciation are removed, and any difference between the proceeds and the carrying amount is recorded as a gain or loss. These steps are explained further in the entry on disposal of fixed assets.

Purchases of plant assets appear as capital expenditure in the investing section of the cash flow statement. The fixed asset turnover ratio, sales divided by average net plant assets, measures how efficiently a company uses its productive capacity, and comparing accumulated depreciation with gross cost gives a rough idea of the age of a company's plant. Capital-intensive businesses such as manufacturers, railways and utilities carry large plant asset balances, which also serve as collateral for secured borrowing.