Property, plant, and equipment (PP&E) are long-term assets that are used in the production or supply of goods and services. They include a wide range of assets, such as land and buildings, machinery and equipment, and vehicles and other vehicles. FRS 102, the financial reporting standard that applies in the United Kingdom, includes detailed guidance on the accounting treatment of PP&E.
According to FRS 102, PP&E are initially recognized in the financial statements at their historical cost, which is the amount paid to acquire the assets, plus any directly attributable costs of bringing the assets to their present location and condition. Historical cost is generally determined using the cost model, which values assets at their original purchase price, less any accumulated depreciation and impairment losses.
The cost of an asset may include various components, such as the purchase price, any import duties or taxes, and any directly attributable costs of installation or modification. FRS 102 requires entities to recognize any directly attributable costs as part of the initial cost of the assets. For example, if a company purchases a new machine and incurs costs to install it, these costs would be recognized as part of the initial cost of the machine.
Once assets are recognized, FRS 102 requires entities to apply the depreciation method to allocate their cost over their useful lives. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The useful life of an asset is the period over which it is expected to generate economic benefits for the entity. The depreciable amount of an asset is its initial cost, less its residual value.
The residual value of an asset is the estimated amount that the entity expects to receive from the sale or disposal of the asset at the end of its useful life. FRS 102 requires entities to review the assumptions used to determine the useful lives and residual values of their PP&E on an annual basis, and to make any necessary adjustments. For example, if an entity expects a machine to have a useful life of 10 years, but it becomes obsolete after 8 years, the entity would need to adjust the useful life and residual value of the asset.
FRS 102 also includes guidance on the disclosure of PP&E in the financial statements. Entities are required to disclose the carrying amount of their PP&E, as well as the methods and assumptions used in determining their useful lives and residual values. They are also required to disclose any impairments of their PP&E, and any changes in the methods or assumptions used to determine their useful lives and residual values.
Overall, the guidance on PP&E in FRS 102 provides a comprehensive and transparent framework for the recognition, measurement, and disclosure of these assets in the financial statements. It helps to ensure that the financial statements of entities accurately reflect the value of their PP&E, and provide useful information to users of the financial statements.