Property, plant and equipment are non-current assets that business owners would use in the operation of the business for a more extended period. They fall under the category of fixed assets, and they are tangible assets which are physical in nature. This type of assets cannot be liquidated easily, and the accountants from an accounting firm in Johor Bahru would always include them in the balance sheet when preparing the financial statements for the company.
We can say that property, plant and equipment is a type of long-term capital investment as the company’s management expects that these assets can help in generating economic benefits for the business. The procurement of these assets indicates that the management believes that they will be able to bring profits to the business in the long run. Some common examples of plant, property and equipment are land, buildings, vehicles, machinery, furniture and fixtures, equipment, and so on.
To calculate the net property, plant and equipment, you should sum up the gross plant, property and equipment and the capital expenditures, less their accumulated depreciation. As an instance, the plant, property and equipment owned by XYZ Corporation have a gross value of RM2,500,000. Due to the wear and tear of some of them, it bought a new machine that costs RM500,000. The accumulated depreciation that it has recorded for the old ones was RM750,000. So, the net plant, property and equipment is RM2,250,000 (RM2,500,000 + RM500,000 – RM750,000).
Business owners should only recognise the cost of plant, property and equipment as the company’s asset if they can determine the cost by using a reliable method or source and if there is a possibility where the future economic benefits will flow to the business. Hence, they should identify whether the item meets the requirements above. If it qualifies for the recognition, business owners should measure it at its cost.
After the recognition of property, plant and equipment, there are two different ways that the business owners can use for their measurement, which are the cost model and the revaluation model. If one chooses to measure the asset (Also see Understanding Asset Conversion Cycle) by using the cost model, he should measure it at its cost, less the amount of accumulated depreciation as well as any impairment loss. If he chooses to implement the revaluation model, he should record the asset according to its revalued amount, that is the asset’s fair value, less the amount of accumulated depreciation and any impairment losses.
As time passes, the plant, property and equipment will depreciate and may bring impairment losses to the company. This is when business owners may choose to dispose of them. As soon as they dispose of an asset, or when they no longer expect any future economic benefits from the use of that asset (Also see What You Need to Know About Deferred Asset), they should derecognise its carrying amount. After that, business owners should include the gains or loss that arise from the derecognition in the company’s income statement.