Property, Plant, and Equipment (PP&E)

Property, plant, and equipment is the name used in financial statements for a company's tangible long-term assets that are held for use in producing goods and services, for rental to others or for administrative purposes, and that are expected to be used for more than one year. It covers land, buildings, machinery, equipment, vehicles, furniture, computer hardware, leasehold improvements and assets under construction. These assets are often the largest asset on the balance sheet of manufacturers, utilities, telecom firms, airlines and retailers that own their stores.

The same assets are commonly called fixed assets or plant assets. In US GAAP the main guidance is in ASC 360; under IFRS it is IAS 16. This entry focuses on how these assets are presented, measured after acquisition and analyzed.

• Land, which is not depreciated.
• Land improvements, such as paving, fencing and drainage.
• Buildings and building improvements.
• Machinery and equipment, including production lines and tools.
• Furniture, fixtures, vehicles and computer equipment.
• Construction work in progress, which is not depreciated until the asset is ready for use.

Since lease standards changed in 2019, right-of-use assets from leases may be shown within property, plant and equipment or as a separate line, with disclosure of which. Investment property held for rental income or capital growth is treated separately under IFRS (IAS 40).

The assets are first recorded at cost, including all costs of getting the asset ready for use. Afterwards, US GAAP requires the cost model: cost less accumulated depreciation and impairment. IFRS lets companies choose, for each class, between the cost model and the revaluation model, under which assets are carried at fair value at the revaluation date less later depreciation. Revaluation increases go to other comprehensive income as a revaluation surplus, and decreases go to profit or loss unless they reverse an earlier surplus. IAS 16 also requires component depreciation: significant parts of an asset with different useful lives, such as an aircraft's engines and airframe, are depreciated separately.

Both frameworks require impairment testing when indicators suggest the carrying amount may not be recoverable. US GAAP uses a two-step test for assets held and used, starting with undiscounted cash flows; IFRS compares carrying amount with recoverable amount, and allows impairment reversals.

Companies disclose a reconciliation of property, plant and equipment from the start to the end of the year. A manufacturer begins the year with gross property, plant and equipment of $820,000,000 and accumulated depreciation of $310,000,000, so net property, plant and equipment is $510,000,000. During the year it spends $95,000,000 on additions, sells equipment with a cost of $40,000,000 and accumulated depreciation of $32,000,000, and records depreciation of $68,000,000. Year-end net property, plant and equipment is:

Here $\text{Opening net}$ is cost less accumulated depreciation at the start of the year, $\text{Additions}$ is capital spending, $\text{Depreciation}$ is the year's charge, and $\text{Disposals at carrying amount}$ is the cost of assets sold less their accumulated depreciation. The result is $510,000,000 plus $95,000,000 minus $68,000,000 minus $8,000,000, or $529,000,000.

Analysts compare capital expenditure with depreciation to see whether a company is maintaining its asset base; capex well below depreciation for several years may signal under-investment. The fixed asset turnover ratio, revenue divided by average net property, plant and equipment, measures how productively the assets are used, and accumulated depreciation as a share of gross property, plant and equipment indicates the average age of the assets. Because the assets are carried mostly at historical cost, its book value can differ greatly from current market or replacement values, especially for land and older buildings, which is why lenders often obtain appraisals and investors look at the overall asset turnover ratio alongside these figures.