Category Archives: 1.05 Property, Plant and Equipment

Leasing or capitalizing?

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.
Continue reading →

But PPE increases my expenses significantly!

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 →

Replacing parts of a PPE item

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.
Continue reading →

PPE components – different useful lives

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?
Continue reading →

Assets with no carrying value – what to do with them?

Fixed Assets no value 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.
Continue reading →

Counting fixed assets

Fixed Assets count 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.
Continue reading →

Selling of assets

Normally, when disposing assets, the company’s management should have the aim to sell it. This way you simply don’t make a loss or get rid of an obsolete asset, but also earn something in the process. There is a really good chance that someone else may have use for it as it’s not that old for them, suits their business strategies more or they want the spare parts of it. Whatever the reason, but the party selling the asset, gets the proceeds which obviously is good in essence.

So, when the management has decided to sell the asset and in case there is a buyer, the asset is traded. It changes owners and as such the financial statements of the seller also change. It no longer possesses the asset and as such, it should also be derecognized from the financial statements.
Continue reading →