• Property, Plant, & Equipment (PPE) includes buildings, equipment, trucks, etc.
  • PPE is recorded at cost (the purchase price) and is not marked-to-market
    • Exception: Firms that use international accounting rules (IFRS) can use the cost method or a different method (the “revaluation” method) that accounts for changes in fair value
  • Costs incurred subsequent to acquiring PPE may be capitalized to the existing asset if they extend the asset’s useful life or increase its production capacity. Routine maintenance costs, however, are immediately expensed
  • Most PPE is depreciated over time (land is not depreciated)
    • Depreciation is not intended to reflect reductions in fair value
    • There are many depreciation methods: straight-line, double-declining balance, sum of the years’ digits, units of production
  • PPE can also be impaired
    • An impairment is required if the undiscounted future cash flows of the asset are lower than the asset’s carrying value (if that is true, then the amount of the impairment is determined as the difference between the asset’s carrying value and its fair value)
  • If the PPE is self-constructed (e.g., your firm paid to have a building constructed, instead of buying an existing building) then interest associated with the construction can be capitalized (the interest becomes part of the PPE asset)
  • When one firm exchanges PPE with another firm, we call this a nonmonetary exchange. Whether a gain or loss can be generated from such a transaction depends on whether the exchange has “commercial substance” (i.e., it affects the economic position of your firm).
  • Disposing of PPE (e.g., selling a machine you used in production) may generate a gain or a loss. If the selling price exceeds the book value, you have a gain.  If the selling price is less than the book value, you have a loss.  The “book value” is the asset’s original cost minus any accumulated depreciation (or impairments) associated with the asset
  • All of the information above applies to GAAP reporting. Tax reporting for depreciation is different.  It uses an accelerated depreciation method called MACRS that has different schedules based on the type of asset.
    • MACRS uses a “half-year convention.” This means that if you purchase an asset in December, you get 6 month’s depreciations that first year instead of just 1 month’s depreciation.  To prevent companies from abusing this, there is a rule:  if the aggregate basis of all property placed in service during the last 3 months of the year exceeds 40% of the cost of all property placed in service during the year, then you must use a “mid-quarter” convention.  Thus, timing matters
    • There are other special tax rules (e.g., bonus depreciation from the American Taxpayer Relief Act, Section 179 expensing, etc.)


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