Property, Plant and Equipment
Property, Plant and Equipment
I- Nature of Accounting Issues
Businesses purchase and use a variety of fixed assets, such as equipment, furniture, tools, machinery, buildings, and land. These fixed assets are long-term or relatively permanent assets. Also, they are tangible assets because they exist physically. They are owned and used by the business and are not offered for sale as part of normal operations. Perhaps the most descriptive titles these assets are known under are plant assets or property, plant and equipment. Depending on the industry, the plant assets of a business can be a significant part of its total assets. That is why the accounting for these long-term assets has important implications for a company’s reported results. In this paper, we discuss the proper accounting for the acquisition, use, and disposition of property, plant, and equipment. Before going over a brief overview of the nature of accounting issues, we ought to take a deeper look at what plant assets really are. The major characteristics of property, plant, and equipment are as follows: * They are acquired for use in operations and not for resale. Only assets used in normal business operations are classified as property, plant, and equipment. For example, an idle building is more appropriately classified separately as an investment. Also, land developers or sub dividers classify land as inventory.
* They are long-term in nature and usually depreciated. Property, plant, and equipment yield services over a number of years. Companies allocate the cost of the investment in these assets to future periods through periodic depreciation charges. The exception is land, which is depreciated only if a material decrease in value occurs, such as a loss in fertility of agricultural land because of poor crop rotation, drought, or soil erosion.
* They possess physical substance. Property, plant, and equipment are tangible assets characterized by physical existence or substance. This differentiates them from intangible assets, such as patents or goodwill. Unlike raw material, however, property, plant, and equipment do not physically become part of a product held for resale. The content of this paper will be centered on the four main accounting issues we face when dealing with property, plant, and equipment. The first one is computing the costs of these plant or fixed assets; the following one is how to allocate the costs of those fixed assets–depreciation- (less any salvage amounts) against revenues for the corresponding periods; the third one is how to account for expenditures such as repairs, additions and improvements to these plant assets; and finally how to record their disposal. The following table provides a summary of these accounting issues: II- Historical Background of the Accounting Rules in the U.S and Internationally * IFRS Standards Background Information
An important and considering factor for understanding the International Financial Reporting Standards is having a little history about it how it came to be. Before we go any further about property, plant, and equipment, we must first discuss the history and background of how the standards under IFRS originated and the importance of defining why it originated. In order to understand IFRS, we need to examine what the International Financial Reporting Standards are. With that in mind, we want to reference the authors of Understanding IFRS Fundamentals: International Financial Reporting Standards, “IFRS are a set of standards promulgated by the International Accounting Standards Board (IASB), an international standard-setting body based in London” (Ankarath 2). This quote tells us who makes IFRS and where IFRS originated from. The International Accounting Standards Board made it clear that when developing the standards, they wanted to make them clearly stated and based on principles instead of rules-based like...
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