What is Property, Plant, and Equipment (PP&E)

Property, plant, and equipment (PP&E) are long-term assets vital to business operations and not easily converted into cash. The total value of PP&E can range from very low to extremely high compared to total assets. International accounting standard (IAS) 16 prescribes the accounting treatment of PP&E.  Factors that cause PP&E to be listed separately on the balance sheet are how they are recognized as assets, how their carrying amounts are determined, and their associated depreciation charges.

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Property, Plant and Equipment (PP&E)

BREAKING DOWN Property, Plant, and Equipment (PP&E)

PP&E are physical, tangible assets expected to generate economic benefits for a company for a period of longer than one year. Examples of PP&E include land, buildings, and vehicles. Industries or businesses that require a large number of fixed assets are described as capital intensive.

Financial Statement Record

PP&E is recorded on a company's financial statements, specifically on the balance sheet. PP&E is initially measured according to its historical cost, which is the actual purchase cost and the costs associated with bringing assets to its intended use. For example, when purchasing a building for retail operations, the historical cost could include the purchase price, transaction fees, and any improvements made to the building to bring it to its destined use. The value of PP&E is adjusted routinely as fixed assets generally see a decline in value due to use and depreciation. Amortization is used to devalue these assets as they are used, but land is not amortized because of its potential to appreciate in value. Instead, it is represented at its current market value. The balance of the PP&E account is remeasured every reporting period, and, after accounting for historical cost and amortization, is called the book value. This figure is reported on the balance sheet. 

The PP&E formula is Net PP&E= Gross PP&E + Capital Expenditures-Accumulated depreciation.

Significance

While PP&E is generally meant to be held and used by the company in the course of its business, it is considered an asset because it can be liquidated.  For example, PP&E may be liquidated when they are no longer of use or when the company may experience financial difficulties. Of course, selling property, plant, and equipment necessary for business operations could be drastic and signal that a company is in financial trouble. It is important to note that whatever the reason a company has in selling some of its property, plant, or equipment, it is unlikely that a company will make a profit on the sale of the asset.