Quick answer
Property, plant and equipment (PP&E) are long-lived tangible assets used in operations rather than held for immediate sale. Intangible assets are non-physical resources subject to related but distinct recognition and measurement requirements. Subsequent accounting depends on the asset type and may include allocating cost over time, impairment, and disposal.
A building, delivery vehicle, or production machine is PP&E because the business uses the physical asset to operate over more than one period. A separately identifiable right without physical form, such as certain software or a licence, may instead be an intangible asset. This page begins with what enters the recorded cost and then follows the assets after acquisition.
First identify what kind of asset exists
Physical form is the first distinction, but not the last accounting decision. The business must determine whether it controls a separately identifiable resource, how that resource arose, and which requirements govern its initial and subsequent measurement.
PP&E
A physical resource used in operations, such as a building, vehicle, or machine. Qualifying cost is recorded as an asset; depreciation, impairment, later expenditure, and disposal address what happens after acquisition.
Identifiable intangible asset
A non-physical resource that can be distinguished from the business as a whole—for example, because it can be sold or licensed or arises from legal or contractual rights. Purchased software and licences can be examples.
Goodwill
An amount arising from a business combination for acquired benefits that cannot be identified and recorded as separate assets. An entity does not record internally developed reputation as goodwill merely because the business is successful.
What belongs in the initial recorded cost?
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.
Separate the asset’s cost from nearby spending
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.
| 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.
| 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.
Capitalization is not a way to avoid expense
Capitalizing a cost delays its effect on profit; the cost may later be recognized through depreciation, impairment, or disposal. The treatment must be supported by the recognition and measurement requirements, whether the amount could matter to users’ decisions, and the entity’s accounting policy.
What happens after acquisition?
- Depreciation or amortization
- Allocates the cost of a finite-life asset over the expected pattern of benefit. Tangible PP&E is depreciated; finite-life intangible assets are commonly described as amortized. See the Depreciation page for useful life, residual value, methods, accumulated depreciation, and the Maple Tech entry.
- Impairment
- Considers whether the asset’s recorded amount should be reduced because the amount expected to be recovered has fallen below it. The indicators, test, and measurement depend on the reporting framework and facts.
- Subsequent expenditure
- Requires a fresh analysis. Routine repairs and maintenance are generally expensed, while qualifying improvements may be added to the asset’s recorded amount.
- Disposal
- Removes the asset and related accumulated amounts, records any proceeds, and recognizes the resulting gain or loss under the applicable requirements.
Maple Tech’s equipment through March
| Statement | Account | Effect | Timing |
|---|---|---|---|
| Balance sheet | Equipment | March 3 acquisition records $12,000 cost | When acquired |
| Income statement | Depreciation Expense | March adjustment recognizes $200 | For March |
| Balance sheet | Accumulated Depreciation | Offsets $200 of cost; net equipment is $11,800 | At March 31 |
| Cash flow statement | Equipment purchase | Shows the $12,000 acquisition cash outflow | On March 3 |
Follow an intangible asset from acquisition onward
For an identifiable intangible asset, the first question is whether the business acquired the resource separately or generated it internally. A separately purchased right has an observable acquisition cost. Costs incurred internally require a more careful analysis because research, development, advertising, training, and ordinary operating activity do not automatically create a recognizable asset. The applicable framework and facts determine which expenditures, if any, qualify.
- Finite useful life
- The expected benefit has a limited period or output. The recorded amount is allocated over that useful life using an amortization method that reflects the expected pattern of benefit.
- Indefinite useful life
- No foreseeable limit is identified under the applicable facts and requirements. “Indefinite” does not mean permanent or immune from impairment and reassessment.
- Amortization
- The systematic allocation term commonly used for a finite-life intangible asset. It serves the same broad expense-recognition purpose as depreciation but applies to a non-physical asset.
- Impairment
- A separate assessment of whether the recorded amount remains recoverable. Its indicators, test, measurement, and any reversal depend on the governing requirements.
Purchase and amortize a three-year software licence
Harbour Graphics pays $18,000 for a separately acquired software licence that is available for use immediately. Under the stated facts, the licence meets the recognition requirements, has a three-year finite useful life, no residual value, and an even pattern of benefit.
$18,000 ÷ 3 years = $6,000 amortization per year
| Account | Debit | Credit |
|---|---|---|
| Software Licence | 18,000 | |
| Cash | 18,000 |
| Account | Debit | Credit |
|---|---|---|
| Amortization Expense | 6,000 | |
| Accumulated Amortization — Software | 6,000 |
Software licence after one year
| Statement | Account | Effect | Timing |
|---|---|---|---|
| Income statement | Amortization Expense | Expense increases by $6,000 | For the first year |
| Balance sheet | Software Licence, net | Cost of $18,000 less $6,000 accumulated amortization gives a $12,000 carrying amount | At year end |
| Cash flow statement | Amortization | The amortization entry has no current cash effect; the separate licence purchase used cash | Purchase date versus later allocation |
The example teaches the cost-allocation mechanics only. Internally generated software, renewals, impairment, taxes, and framework-specific measurement questions require their own facts and current requirements.
Revaluation, component accounting, impairment reversals, development costs, and goodwill can be treated differently under IFRS and ASPE and may also change with effective dates. Check the requirements that apply to the entity and reporting period.
Common mistakes
- 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.
- Applying tax CCA as though it were automatically book depreciation.
- Applying one framework’s impairment or goodwill treatment in another context.