Let us say you’ve determined a useful life for an asset and as it happens, you want to change it.

Generally saying the reasons for changing the useful life is pretty straightforward – an event has triggered the asset to be used for a shorter or a longer period. This event can be a few things:  Continue reading →

An asset’s useful life is the period it’s planned to be used – normally longer than 12 months for it to be part of property, plant and equipment.

When you purchase an asset and you’ve initially accounted for it (the asset and the respective liability), there are numerous things you ought to determine for the asset to account for it subsequently.  Continue reading →

As you know, property, plant and equipment (PPE) items are depreciated into expense over their useful life. In reality though the determined useful life is hardly exactly the time the asset is really going to be used. It’s rarely longer, but usually far more often shorter than the actual usage.

First and foremost, ensuring that the useful lives in fact represent the real usage as fairly as possible is something that should be done at all times. In practice, a company’s management should at least once a year review the useful lives to make sure the expense is spread out to the period the asset is being used.

Besides that however, what to do when the carrying value of an asset is already at zero? One suggestion we have, is just before year end make a list of all assets already at zero and about to get close to zero in next few months and review their useful lives – are they perhaps going to be kept longer than that? If they are, simply change the useful lives as if they had been changed from the beginning of the financial year. You can decrease the expense for the year and ensure the assets are depreciated over their actual usage once more.
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Just as you count your inventory on a regular basis, counting your property, plant and equipment (PPE) items should be on the agenda as well at least once a year. The asset list may be long; they may be physically spread out on a big area, between different departments etc., so how do you know they all exist?

As you might expect, making sure that all those assets do exist is something that has to be done. Ensuring that all your assets on the balance sheet exist in reality is something that’s obvious, but for some reason fixed assets are those which we considered as “once bought, I know it exists”.

Well, the reality and practices has shown something different. It’s especially so with smaller equipment, which gets lost, broken easily, switched etc.
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Every now and then it may happen that you need to buy something additional to an existing asset. It may either need an upgrade or addition to it, doesn’t really matter, however there are a few things that need to be kept in mind when treating these additions.

One obvious question is if it even meets the PPE definition criteria? Are you using it for more than 12 months? For an example paper to the printer is not a PPE item although it is needed for a printer to actually do what it’s meant to do. So prior to making the recognition, do think if the addition in essence is a PPE item? Is it going to be used to create revenue or decrease expenses? Will any future profits or benefits run into the company from using it?
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Excel Balance Sheet Template includes a group of assets labeled as “Property, plant and equipment”. When we have covered the meaning of those assets in our separate blog about property, plant and equipment, in general we want to share with you some issues regarding capitalizing expenses under the abovementioned line.

What often is ignored and neglected are the conditions when expenses are capitalized as assets and when not. It happens more than often that auditors find expenses that should have been capitalized. This is strange when you stop to think about it however. One should be more interested in keeping the costs as low as possible. But to put that aside, we are concentrating more on the possible treatments that should be considered.
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