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Property Plant and Equipment

Property, Plant and Equipment (PP&E) are assets of a durable nature, often referred to as Pant Assets and Fixed Assets. PP&E have 3 important characteristics: (1) they are used in operations and not for sale, (2) they are long term in nature and usually depreciated, and (3) they possess physical substance. They include Land, Buildings and Equipment.

PP&E is usually valued at historical cost because of conservatism and reliability. Gains and losses are not recognized until the asset is disposed of. The cost should include not only the purchase price, but expenses incurred in getting the property ready for use.

Cost of Land

  • Purchase Price
  • Unavoidable Fees: Unavoidable Fees: Closing costs, attorney’s fees, title insurance, recording fees…
  • Preparation: grading, draining, clearing, filling, any improvement with an indefinite life
  • Assumed debts: Liens, mortgages, encumbrances, taxes

Cost of Building

  • Purchase Price
  • All physical costs: labor, materials, overhead
  • All administrative costs: permits, professional fees

Cost of Equipment

  • Purchase Price
  • Transportation: freight, handling, and insurance
  • Installation: assembly, structural modifications for accommodation.
  • Trial runs and tuning

Self-Constructed Assets

Self-Constructed Assets are machinery and equipment created to be used rather than purchased. An accounting decision needs to be made on the matter of costing overhead of the self-constructed assets; either assign none of the fixed overhead to the project or assign a portion of all overhead to the construction process. This second method is referred to as full-costing approach. It is important to remember that the recorded cost for a self-constructed asset can never be greater than the price if purchased.

Interest Costs

Items that quality for interest cost capitalization include assets under self-construction and discrete projects like: ships, bridges, buildings. The period during which interest must be capitalized begins when three conditions are present: (1) expenditures for the production have been made, (2) activities necessary to get the asset ready for its intended function are in progress, and (3) interest costs are being incurred. The capitalization period ends when the asset is substantially complete and ready to use.

The interest to be capitalized is limited to the lower of: actual interest cost incurred during the period, or the amount of interest cost incurred during the period that theoretically could have been avoided if the expenditures had not been made, avoidable interest.