Difference between plant and Equipment

Property, plant and equipment (PP&E) is a company asset that is vital to business operations but cannot be easily liquidated, and depending on the nature of a company's business, the total value of PP&E can range from very low to extremely high compared to total assets. International accounting standard 16 deals with the accounting treatment of PP&E. It is listed separately in most financial statements because it is treated differently in accounting statements, and improvements, replacements and betterments can pose accounting issues depending on how the costs are recorded.

BREAKING DOWN 'Property, Plant And Equipment - PP&E'

PP&E is also called tangible fixed assets. These assets are physical, tangible assets and they are 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 amount of fixed assets are described as capital intensive.

Financial Statement Record

PP&E is recorded in a company's financial statements in the balance sheet. The cost of PP&E considers the actual cost of purchasing and bringing the asset to its intended use. This cost is called the historical cost. For example, when purchasing a building for a company to run its 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 it can increase in value. Instead, it is represented at 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.

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 a company could sell its property, plant or equipment, either because it is no longer of use or if the company runs into financial difficulties. Of course, selling property, plant and equipment that is necessary to a company's course of business could be drastic and could 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.