PROJECT OF

ACCOUNTANCY & FINANCIAL

MANAGEMENT I

Topic: - Property, Plant & Equipment

Name: - Anand Sandesh Gawand
Class: - FYBCOM
Division: - B
Roll number: - HFBC239
Number of words: - 2050

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 ACKNOWLEDGEMENT

I would like to express my special thanks of gratitude to

my Professor, who gave me the golden opportunity to do

this wonderful project of ACCOUNTANCY & FINANCIAL

MANAGEMENT I on " Property, Plant & Equipment", Who

also helped me in completing my project. I came to know

about so many new things I am really thankful to them.

Secondly I would also like to thank my parents and

friends who helped me a lot in finalizing this project

within the limited time frame.

CONTENT

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1. Cover Page
2. Acknowledgment
3. Content
4. Understanding PP&E
5. PP&E and non-current assets
6. Calculating PP&E
7. Significance of PP&E
8. Accounting for PP&E
9. Limitations of PP&E
10. Recognition and Measurement of PP&E
11. Depreciation of PP&E
12. Some Illustrations
13. Conclusion
14. Bibliography

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 Property, Plant & Equipment
Understanding Property, Plant, and Equipment (PP&E)
Property, plant, and equipment are also called fixed assets, meaning they are physical assets that
a company cannot easily liquidate or sell. PP&E assets fall under the category of noncurrent
assets, which are the long-term investments or assets of a company. Noncurrent assets like
PP&E have a useful life of more than one year, but usually, they last for many years.1

Examples of property, plant, and equipment include the following:

 Machinery
 Computers
 Vehicles
 Furniture
 Buildings
 Land

Noncurrent assets like PP&E are the opposite of current assets. Current assets are short-term,
meaning they are items that are likely to be converted into cash within one year, such as
inventory.

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PP&E and Non-current Assets

Although PP&E are noncurrent assets or long-term assets, not all noncurrent assets are property,
plant, and equipment. Intangible assets are nonphysical assets, such as patents and copyrights.
They are noncurrent assets because they provide value to a company but cannot be readily
converted to cash within a year. Long-term investments, such as bonds and notes, are also
considered noncurrent assets because a company usually holds these assets on its balance
sheet for more than one fiscal year. PP&E refers to specific fixed, tangible assets, whereas
noncurrent assets are all of the long-term assets of a company.

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Calculating PP&E

To calculate PP&E, add the amount of gross property, plant, and equipment, listed on the
balance sheet, to capital expenditures. Next, subtract accumulated depreciation from the result.
In most cases, companies will list their net PP&E on their balance sheet when reporting
financial results, so the calculation has already been done.

As a formula, it would be:

Significance of PP&E
Investment analysts and accountants use the PP&E of a company to determine if it is on a sound
financial footing and utilizing funds in the most efficient and effective manner.

A company investing in PP&E is a good sign for investors. A fixed asset is a sizable investment
in a company's future. Purchases of PP&E are a signal that management has faith in the long-
term outlook and profitability of its company. PP&E are a company's physical assets that are
expected to generate economic benefits and contribute to revenue for many years. Investment in
PP&E is also called a capital investment. Industries or businesses that require a large number of
fixed assets like PP&E are described as capital intensive.

PP&E may be liquidated when they are no longer of use or when a company is experiencing
financial difficulties. Of course, selling property, plant, and equipment to fund business
operations is a signal that a company might be in financial trouble. It is important to note that
regardless of the reason why a company has sold some of its property, plant, or equipment, it's
likely the company didn't realize a profit from the sale. Companies can also borrow off their
PP&E, (floating lien), meaning the equipment can be used as collateral for a loan.

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Accounting for PP&E
PP&E is recorded on a company's financial statements, specifically on the balance sheet. PP&E
is initially measured according to its historical cost, which is the actual purchase cost and the
costs associated with bringing assets to its intended use. For example, when purchasing a
building for retail operations, the historical cost could include the purchase price, transaction
fees, and any improvements made to the building to bring it to its destined use.

The value of PP&E is adjusted routinely as fixed assets generally see a decline in value due to
use and depreciation. Depreciation is the process of allocating the cost of a tangible asset over
its useful life and is used to account for declines in value. The total amount of a company's cost
allocated to depreciation expense over time is called accumulated depreciation.

However, land is not depreciated because of its potential to appreciate in value. Instead, it is
represented at its current market value. The balance of the PP&E account is remeasured every
reporting period, and, after accounting for historical cost and depreciation, is called the book
value. This figure is reported on the balance sheet.

Limitations of PP&E

PP&E are vital to the long-term success of many companies, but they are capital intensive.
Companies sometimes sell a portion of their assets to raise cash and boost their profit or net
income. As a result, it's important to monitor a company's investments in PP&E and any sale of
its fixed assets.

Since PP&E are tangible assets, PP&E analysis doesn't include intangible assets such as a
company's trademark. For example, Coca-Cola's (KO) trademark and brand name represent
sizable intangible assets. If investors were to only look at Coca-Cola's PP&E, they wouldn't see
the true value of the company's assets. PP&E only represents one portion of a company's assets.
Also, for companies with few fixed assets, PP&E has little value as a metric.

Recognition and Measurement of PP&E

PP&E should be recognized by a company only if:

1. It is probable that future economic benefits associated with the asset will flow to the
entity over a period of more than one year; and
2. The cost of the asset can be calculated or estimated reliably.

The initial costs of a PP&E item may include:

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 1. Its purchase price, any import duties, non-refundable taxes, sales discounts, and rebates.
2. Any costs directly attributable to bringing the asset to the location and condition
necessary for it to be operational (such as installation expenses).
3. An estimated value of the costs of dismantling and removing the asset and restoring the
site on which it is located. This is commonly referred to as an asset retirement obligation
(ARO).

Repairs and Replacement of PP&E

The nature of PP&E assets is that some of these assets need to be regularly fixed or replaced to
prevent equipment failures or to adopt a more sophisticated technology. For example, it is
normal for companies to repair or replace old factories or automobiles with new assets when
necessary.

The general rule in accounting for repairs and replacements is that repairs and maintenance work
are expensed while replacements of assets are capitalized. Repairs are easy to record; it is simply
a debit to repair or maintenance expense and a credit to cash. Replacements, however, are a bit
more complicated. For replacements, the old cost of the asset is written off from the company’s
books and the cost of the new replacement is recorded/recognized.

Depreciation of PP&E
The other major component of the PP&E formula is depreciation. Depreciation reduces the
value of property, plant, and equipment on the balance sheet as the value of assets is lowered
over time due to wear and tear and the reduction of their useful life. The depreciation expense is
used to reduce the value of the net balance and it flows to the income statement as an expense.

ILLUSTRATION 1

ABC Specialty Gases plc set up a boiler unit near its manufacturing shed. The price paid
for the equipment is ` 220000 inclusive of GST of ` 20000. The entity gets a credit of
GST while calculating the tax payable on the finished goods sold.

Additional costs are freight ` 5000, customs duty ` 10000, installation expenses ` 4000.
The estimate of dismantling and removing the item would be ` 5000. After the equipment
was put to use ` 2500 was spent for maintenance. Calculate the cost of the asset in
accordance with Ind AS 16

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Solution

Statement of calculation of cost of asset

Item

Purchase price (net of GST of

` 20000) 200000

Freight 5000

Customs duty 10000

Installation expenses 4000

Initial estimate of dismantling and 5000

removing the item

Total cost as per Ind AS 16 224000

Maintenance charges of ` 2500 was incurred post installation of the equipment and does
not have any revenue generating capacity hence to be charged to Statement of Profit &
Loss.

ILLUSTRATION 2

Hibiscus plc is in the process of negotiating the acquisition of specialized machinery for
the perfumery process. The following activities are accordingly carried out.

(1) A special site has to be prepared for the machinery installation. Hence the old site
was dismantled at the cost of ` 10,000. Scrap recovered from this process was sold for `
800. Cost of construction of the special site is ` 60,000.

(2) Negotiations were successful and it was decided that the old machinery which had
carrying cost of ` 50,000 but was now valued at ` 40,000 will be exchanged for new
specialized machinery valued at ` 200,000. The difference itself will be settled in cash.

(3) It spent ` 4,000 on freight and ` 3,000 on installation.

(4) It spent materials worth ` 3,000 and wages of ` 1,200 on the trial run.

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(5) Machinery was finally installed but owing to low capacity utilization, it incurred loss
of ` 10,000

(6) Hibiscus incurred costs of ` 5,000 for launching the product.

Required: Give your opinion on how to account for above mentioned transactions as per
Ind AS 16 and the final cost of the new asset

Solution:

Cost to be capitalized of new specialized machinery

Cost of construction of
60,000
new site

Cost of new machinery 200,000

Cost of installation 3,000

Freight 4,000

Trial run cost 4,200

Total cost of Machinery 271,200

Note:

(i) The cost of special site (` 10,000) would have been added for capitalisation of the old
machine. Hence, not added.

(ii) The New Machinery is valued at the fair value given. Accordingly entry of
acquisition of new machinery will be:

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 Dr New Machinery ` 200,000

Dr Loss on old Machinery ` 10,000

(` 50,000 – ` 40,000)

Cr Old Machinery ` 50,000

Cr Cash ` 160,000

(It is a combined entry and the valuation of new machinery is already given in the
question i.e. ` 200,000, which will be settled by exchange of old machinery for ` 40,000
and balance in cash ` 160,000)

(iii) Cost of launching and the initial loss are not to be recognized as cost of the
machinery

(iv) Trial run costs are included in the cost of the machinery as it is incurred to ensure
that the machine is in working condition.

Elements of costs not to be included as per Ind AS 16 (examples)

(a) Cost of opening a new facility

(b) Administration and general overhead

(c) Cost of launching a new product or service (including costs of advertising and
promotional activities);

(d) Expenses on opening a new business facility or expenses related to an inaugural

function

(e) Cost of relocating – shifting factory consequent to statutory order

(f) Initial losses when the asset operates at lower capacity

(g) Costs of incidental operations not necessary to bring the asset to its required
condition and location.

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 Conclusion

Property, plant, and equipment (PP&E) are the long-term, tangible assets that a company owns.
They are most often fixed assets. PP&E, which includes trucks, machinery, factories, and land,
allows a company to conduct and grow its business.

PP&E is depreciated over time and can be sold for its salvage value. When a company
purchases PP&E, it is known as a capital expenditure. Proper management of capital
expenditures is crucial to the growth and profitability of a company, so much so that investors
analyze how a company manages its PP&E to determine if its capital expenditures will aid its
success or be a drain on its funds.

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 Bibliography
 https://www.taxmann.com/
 https://www.investopedia.com/
 https://en.wikipedia.org/wiki/Fixed_asset
 https://www.educba.com/

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