Quick answer
Property, plant and equipment (PP&E) are long-lived tangible assets used in operations rather than held for immediate sale. Their recorded cost includes qualifying amounts needed to bring them to the location and condition required for use. Later accounting can include depreciation, impairment, subsequent expenditure, and disposal.
Buildings, delivery vehicles, production machines, and office equipment are physical resources that help a business operate across more than one reporting period. Recording one of those resources as PP&E begins with what the business controls, why it holds the item, and which costs are needed to prepare it for use.
Characteristics of property, plant and equipment
PP&E has physical substance, is used to produce goods or services, support administration, or otherwise operate the business, and is expected to provide benefit beyond the current period. Inventory is different because it is held for sale or consumed in producing goods for sale. A licence or separately identifiable software right has no physical substance and is instead assessed as an intangible asset.
Initial cost of PP&E
The purchase price is the starting point. Other expenditures may belong in the asset’s cost when they are directly connected to bringing the asset to the location and condition needed for its intended use. General operating costs, avoidable inefficiencies, or costs relating to a later period do not become part of the asset merely because they occur near the purchase date. When several assets are bought for one price, such as land with a building, the price is allocated by their relative fair values; the land portion is not depreciated.
Capitalizing means including qualifying spending in an asset’s recorded cost instead of treating it as an immediate expense. That cost may affect profit in later periods through depreciation, impairment, or derecognition.
Initial cost and expenditures incurred at acquisition
Harbour Graphics buys a production printer for $40,000 cash. It also pays $1,200 for delivery, $800 for installation and testing, and $600 to train employees.
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| Expenditure | Amount | Treatment in this example |
|---|---|---|
| Purchase price | 40,000 | Include in Equipment |
| Delivery | 1,200 | Include in Equipment |
| Installation and testing | 800 | Include in Equipment |
| Employee training | 600 | Recognize as an expense |
The printer’s initial recorded cost is $42,000: $40,000 + $1,200 + $800. Training prepares employees rather than the printer for use, so it is kept out of the asset’s cost under the stated assumptions.
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| Account | Debit | Credit |
|---|---|---|
| Equipment | 42,000 | |
| Training Expense | 600 | |
| Cash | 42,600 |
Equipment includes the purchase price, delivery, and installation and testing. The separate Training Expense keeps the employee cost out of the printer’s carrying amount.
The example assumes the printer meets the recognition requirements, all amounts are paid immediately, and taxes and other unstated costs do not apply.
Available-for-use date
The acquisition date and the date an asset is ready for its intended use are not always the same. Construction, installation, or testing may be needed first. The applicable framework and facts determine the precise start date, but the underlying question is whether the asset has reached the location and condition needed to perform as intended. See Depreciation for the separate cost-allocation treatment.
Subsequent accounting for PP&E
- Depreciation
- Allocates the depreciable amount of PP&E over the expected pattern of use. See Depreciation for useful life, residual value, method, accumulated depreciation, and the related journal entry.
- Impairment
- Considers whether the asset’s recorded amount should be reduced because the amount expected to be recovered has fallen below it. Impairment and Recoverability explains the framework-specific tests and reversals.
Subsequent expenditures: repairs, replacements, and betterments
Subsequent spending is not classified by size or by the word “repair.” Ask what the expenditure changes. Routine servicing that preserves the existing level of benefit is an expense. Under IFRS, a qualifying replacement, betterment, or major inspection can create or replace a future-benefit component and be capitalized when recognition requirements are met. The carrying amount of the old component is derecognized (removed from the records); leaving both old and new components in the asset would overstate PP&E.
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| Expenditure | Economic result | Typical IFRS treatment |
|---|---|---|
| Oil, cleaning, minor repairs | Maintains current operating condition | Expense as incurred |
| Replacement motor | Replaces an identifiable component | Capitalize the new component and derecognize the old carrying amount |
| Production upgrade | Increases capacity or improves output beyond the original assessment | Capitalize if recognition and measurement requirements are met |
| Required major inspection | Enables continued operation for another inspection cycle | Recognize a qualifying inspection component and remove the remaining prior inspection component |
Apply component accounting and distinguish repairs
Coastal Foods applies IFRS and bought a machine for $120,000, including a separately tracked motor component of $30,000. At the start of 20X4, accumulated depreciation is $48,000: $12,000 on the motor and $36,000 on the rest. Coastal pays $38,000 cash to replace the motor and receives no proceeds for the old motor. It also pays $2,000 for routine servicing. Ignore tax.
The old motor’s carrying amount is $30,000 − $12,000 = $18,000. It is removed even if scrap proceeds are nil.
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| Account | Debit | Credit |
|---|---|---|
| Machine — New Motor | 38,000 | |
| Accumulated Depreciation — Old Motor | 12,000 | |
| Loss on Derecognition | 18,000 | |
| Machine — Old Motor Cost | 30,000 | |
| Cash | 38,000 |
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| Account | Debit | Credit |
|---|---|---|
| Repairs and Maintenance Expense | 2,000 | |
| Cash | 2,000 |
After replacement, carrying amount is $72,000 opening net amount − $18,000 old motor + $38,000 new motor = $92,000. The replacement and servicing reduce cash by $40,000; the $18,000 derecognition loss and $2,000 servicing expense reduce profit by $20,000. Subsequent depreciation and any impairment are separate measurements.
Disposal and derecognition
Derecognition removes an asset from the records on disposal or when no future economic benefits are expected from its use or disposal. Before calculating a disposal gain or loss, update depreciation and any other required measurement to the disposal date.
A disposal removes both the asset’s recorded cost and its accumulated depreciation. Compare the proceeds with the carrying amount at the disposal date; the difference is a gain or loss, not revenue from selling an asset in the ordinary customer-sales sense.
Sell equipment above its carrying amount
Equipment cost $20,000, accumulated depreciation is $14,000, and it is sold for $7,500. Its carrying amount is $6,000, so the gain is $1,500.
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| Account | Debit | Credit |
|---|---|---|
| Cash | 7,500 | |
| Accumulated Depreciation | 14,000 | |
| Equipment | 20,000 | |
| Gain on Disposal of Equipment | 1,500 |
Advanced considerations
Under IFRS, an entity chooses the cost model or, when the conditions are met, a revaluation model for an entire class of PP&E. Revaluation means updating an asset’s carrying amount to its supported fair value at the revaluation date. The earlier printer and machine examples use the cost model. Under the IFRS revaluation model, an increase generally goes to OCI, except to the extent it reverses an earlier decrease in profit or loss. A decrease generally goes to profit or loss, except to the extent of an existing revaluation surplus for that asset.
ASPE Section 3061 uses cost, capitalizes a betterment that enhances service potential, expenses a repair that merely maintains it, and allocates cost to significant separable components when practicable and estimable.
An initial estimate of dismantling, removal, or site restoration can form part of asset cost when the related obligation is recognized. The liability is measured under the applicable requirements and can change later. Borrowing costs on a qualifying asset may also enter cost under the governing framework; routine financing cost is not capitalized merely because debt funded the purchase.
Common errors
- Expensing or capitalizing an amount solely because it is large.
- Treating depreciation as an estimate of current market value.
- Assuming every cost after acquisition increases the asset.
- Using tax capital cost allowance (CCA) rates as book depreciation.
- Applying one framework’s impairment treatment in another context.