Property, Plant and Equipment
Property, Plant and Equipment
PPE accounting separates:
- the cost of obtaining and preparing a productive resource;
- the pattern in which its depreciable amount is consumed;
- later impairment, replacement and disposal.
Initial cost
Northstar buys a laser-cutting machine:
| Item | Treatment | Amount |
|---|---|---|
| Supplier price net of discount | Capitalise | £108,000 |
| Delivery and installation | Capitalise | £7,000 |
| Testing net cost | Capitalise | £3,000 |
| Staff training | Expense | £4,000 |
| Opening campaign | Expense | £5,000 |
| Initial PPE cost | £118,000 |
Capitalised costs are directly attributable to bringing the asset to the location and condition necessary for operation. Training prepares employees, not the machine.
Component depreciation
Suppose a £120,000 production system contains:
| Component | Cost | Residual value | Useful life | Annual straight-line depreciation |
|---|---|---|---|---|
| Frame and mechanics | £90,000 | £10,000 | 10 years | £8,000 |
| Control unit | £30,000 | £0 | 3 years | £10,000 |
| Total | £120,000 | £18,000 |
One blended ten-year life would understate early consumption of the control unit. IAS 16 requires significant components to be depreciated separately.
Dr Depreciation expense £18,000
Cr Accumulated depreciation £18,000
The formula and the estimate
Straight-line:
Diminishing balance:
Do not subtract accumulated depreciation twice. Method, useful life and residual value are estimates reviewed at least at each year-end under IAS 16; changes are generally prospective estimate changes.
Subsequent spending
| Spending | Likely treatment | Reason |
|---|---|---|
| Routine servicing | Expense | Maintains existing service potential |
| Replacement of a significant control unit | Capitalise replacement; derecognise old component | A new component resource is obtained |
| Major inspection required to continue use | Capitalise if criteria met; derecognise prior inspection component | Inspection benefit spans periods |
| Repair after accidental damage | Usually expense, then test impairment | Restores rather than creates additional resource |
Disposal
If equipment has cost £120,000, accumulated depreciation £78,000 and is sold for £46,000:
Remove both cost and accumulated depreciation; compare proceeds with carrying amount, not original cost.
Framework boundary
- IFRS permits a cost model or a consistently applied revaluation model for a class of PPE.
- US GAAP generally retains historical cost for ordinary PPE.
- Impairment tests and reversal rules differ. Do not carry an IFRS reversal conclusion into US GAAP.
Quick check
At the start of year 4, Northstar revises the frame’s remaining useful life from seven years to five; carrying amount is £66,000 and residual value remains £10,000. What is new annual depreciation?