Category Archives: 1.05 Property, Plant and Equipment

Disposing of assets

As part of everyday operations some assets become obsolete, outdated, break or simply don’t respond to company’s needs or strategic development plans anymore. What happens then is that the asset is either sold, destroyed, given away or taken apart for any possible spare parts. Either way it will not exist in its original state and nature in the company.

In accounting certain entries should obviously done as a result also. In reality the asset is more or less non-existing so in accounting it should also be written off from the balance sheet. The balances usually in financial statements relating to assets are: property, plant and equipment class in cost, accumulated depreciation and depreciation of the period (in the income statement). Now that the asset is decided by the management to be disposed, the asset is disposed from the balance sheet from this point onwards.
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Subsequent additions to an asset – how to treat them?

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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Initial recognition of property, plant and equipment (PPE)

Be the reasons what they may, the management has decided to purchase an asset. It has agreed on a budget and also made certain person responsible for acquiring it. The very moment your company possesses the rights and obligations to the asset, is the moment you recognize the asset on your balance sheet.

Not taking into account any future or subsequent measurement considerations you simply recognize the asset in its cost value. Provided you have not yet paid to the supplier, the entry is as follows:
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Non-current assets held for sale

A company may for whatever reason at any given point in time decide to give up on some of its assets. This may be due to discontinuing operations, replacement or something else, however, there are specific treatments for such assets on the balance sheet.

The first and foremost condition is that the asset must be available for immediate sale in its current condition. If it’s continued to be in use, it is questionable if the asset is in fact subject to be sold immediately.

Second condition that must be met is the fact that the sale must be highly probable. This is defined by having a selected buyers who have shown interest, existing market for the asset, reasonable price etc. For any transaction to be probable, obviously an imminent intent and an action plan must be enforced. If any approvals are required, those should also be obtained to ensure the highest probability.
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Understanding the residual value

When first recognizing an asset on the balance sheet as a part of property, plant and equipment or part of intangibles, you should come across with the term ‘residual value’. I say that you ‘should’ because most accounting standards (at least the ones based on IFRS) are referring to the need to determine one.

The general rule is that the difference between cost and residual value is charged as depreciation over the useful life on an asset. When cost value is something that is easier to grasp as a definition, the term ‘residual value’ is too many times misinterpreted.
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Capitalizing expenses as property, plant and equipment – Excel Balance Sheet Template

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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Understanding when impairment needs to be charged – Property, plant and equipment schedules template

Property, plant and equipment schedules template includes a line labeled as “Revaluation surplus”. It may however not always be surplus and may be a negative in the form of a charge. In the accounting and IFRS it’s called an impairment charge. To start off with impairment one needs to understand when impairment is initially charged and why is it?
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