A property, plant and equipment (from hereon “PPE”) item, a tangible asset can consist of components rather than being one unit. Sometimes it can be apparent, however often enough it’s just forgotten.
When it comes to PPE items and their components – think useful lives and replacement. If something of something that’s exceeding the threshold for being recognized as an asset on its own will be replaced sooner than the something itself, than this something of something should be accounted as a component of this something. Continue reading
There are some people and companies that prefer leasing over owning assets. For the purpose of the argument, we do mean operational lease and not finance lease in here. It’s ownership versus renting.
I guess it comes down to priorities. Whether it’s important for you to own the asset and not worry about cash or simply rent it and pay for it as a regular service you’d buy. One option gives you the ownership but also all the accompanying risks, but doesn’t result in a regular cash outflows. The other option means you’ve got minimal risks and none relating to ownership, but you do have to pay a sum of money each period.
Pro capitalizing people would say that owning an asset gives you the freedom to use it whenever however and modify it as you see fit. They’d also say that not having to worry about regular cash outflows is a huge bonus.
Does it really? Fact of the matter is that buying a PPE item as I was once announced by one of my surprised friends requires one-off investment in terms of cash whereas renting it means you’re tied to cash outflows for a longer period. This friend of mine in fact thought that buying the asset would result in a one-off expense on the accounts as well. Little did he know that the asset is an investment and depreciated into expenses over a period in time which he got to determine.
Yes, indeed, PPE items do generate expense into the accounts, but the significance of those is entirely up to you really. For how long you think you’ll use the asset? Continue reading
Be it components with different useful lives that are to be replaced or some parts of the main item – the treatment is the same.
Your first course of action is to take off the fully depreciated or broken component from the balance sheet. With components that are capitalized separately it’s easier in a way that they already have their cost price and depreciation whilst just broken components which are capitalized as a part of the item there’s one more thing that needs to be done – setting their cost price and accumulated depreciation. How it’s done is relatively easy really.
Property, plant and equipment items are always capitalized with setting a few specific considerations to them alongside with the accounting entry itself. Amongst other things the information set includes also something called a useful life. When we’ve already talked about the meaning behind the useful lives and how they’re used, there’s a little bit more to it that we’d like to share with you.
Namely when you think about bigger machinery and something that does indeed include replaceable components which on their own are also significant of value and do last longer than 12 months, but just not as long as the whole item would. How would you treat those components?