By Yuriy Smirnov Ph.D.
Property, plant, and equipment are tangible assets that are used for economic benefit during more than one period. Common examples include office buildings, land, machinery, office furniture, and computers.
Property, plant, and equipment are reported in the balance sheet by the carrying amount, which is the difference between its cost or fair value, and any accumulated depreciation and accumulated impairment losses.
Accounting for property, plant, and equipment mostly deals with initial recognition, depreciation, revaluation, impairments, and derecognition of an asset.
Under US GAAP and IFRS, property, plant, and equipment can be treated using either the cost model or revaluation model. Under the cost model, the carrying value of an asset is the initial cost less accumulated depreciation and impairments. Under the revaluation model, an asset is carried at its fair value at the revaluation date less accumulated depreciation and impairments.
The accounting standards (incl. US GAAP and IFRS) require that property, plant, and equipment be initially recognized by the cost.
Assume that DigitalFX LLC acquired a new 3D printer at a list price of $12,000. The delivery fee amounted to $2,400, import duty $2,000, and installation cost $1,600. The initial cost to bring the 3D printer into operation is $18,000.
Initial Cost = $12,000 + $2,400 + $2,000 + $1,600 = $18,000
If the 3D printer was acquired by cash, it should be recorded in the general journal by debiting the Property, Plant, and Equipment account and crediting the Cash Account for the amount of the initial cost.
If it was purchased on credit, Accounts Receivable should be debited instead of Cash.
Depreciation is a systematic allocation of the depreciable amount over the useful life of an asset. At the end of each accounting period, this cost should be capitalized. It is recorded in the general journal by debiting Depreciation Expense and crediting Accumulated Depreciation by the amount of the depreciation expense.
Assume that DigitalFX LLC estimated the useful life of the 3D printer as 3 years and its residual value as $3,000. If financial statements are prepared on an annual basis and the straight-line depreciation method is used, the residual value is $15,000 ($18,000 - $3,000), and the annual depreciation expense is $5,000 ($15,000 ÷ 3). The entry in the general journal to be made at the end of each year should be as follows:
The initial recognition under the revaluation model is also made at the initial cost of an asset. Thus, the journal entry to be made is the same as in the example above.
The revaluation model implies that an asset can be carried at its fair value at the date of revaluation. If the revaluated amount differs from the previous carrying amount, some entries should be adjusted in the general journal.
If the fair value of an asset at the revaluation date exceeds its current carrying value, it should be recognized in the general journal by debiting Property, Plant, and Equipment and crediting the Revaluation Reserve for the amount of surplus.
For example, if the current carrying value of the 3D printer is $12,000 and its fair value estimation is $13,500, the revaluation gain of $1,500 should be recorded as follows:
The entry to be made in case of revaluation loss depends on whether or not the amount of loss exceeds the accumulated revaluation reserve.
If the previously accumulated revaluation reserve for the specific asset is sufficient to cover its revaluation loss, only a single entry is required to be made in the general journal.
Assume the current carrying value of the 3D printer is $12,000 and estimation of its fair value is $9,500. If the accumulated revaluation reserve is $3,000 (greater than the revaluation loss of $2,500), the entry in the general journal should be as follows:
If revaluation loss exceeds the revaluation reserve, a double entry is required in the general journal. The Revaluation Reserve debits for accumulated revaluation reserve, Impairment Loss debits for the difference between revaluation loss and accumulated revaluation reserve, and Property, Plant, and Equipment credits for revaluation loss.
Let’s consider the previous example, assuming that the estimated fair value of the 3D printer is $7,500 instead of $9,500. The revaluation loss of $4,500 exceeds the previously accumulated revaluation reserve of $3,000 by $1,500. Thus, the amount of $1,500 should be recorded as impairment loss.
The depreciation of property, plant, and equipment should be continued after each revaluation, but the depreciable amount must be adjusted by the amount of revaluation gain or loss. For example, if the depreciable amount of the 3D printer before the revaluation date is $12,000 and the revaluation gain of $2,000 is recognized, the adjusted depreciable amount will be $14,000. In contrast, the revaluation loss of $3,000 will reduce the depreciable amount to $9,000.
Derecognition of property, plant, and equipment occurs when there is either no further economic benefit generated by an asset or management decides to dispose of an asset.
First, it is necessary to calculate the profit or loss on disposal. Profit on disposal occurs when disposal proceeds are greater than the carrying amount; otherwise, there is loss on disposal.
If gain on disposal of property, plant, and equipment is recognized, it should be recorded in the general journal as follows:
For example, management of DigitalFX LLC decided to sell the 3D printer at the end of its useful life. As its residual value is $3,000, the accumulated depreciation amounts to $15,000. Assume that the 3D printer was sold at $5,000. This should be recorded in the general journal as follows:
If disposal proceeds of property, plant, and equipment are less than its currying value, it should be recorded as follows:
Consider the example above, assuming that disposal proceeds amounted to $2,000.
