Property, Plant, and Equipment

RECENT NEWS
The Economic Times  Nov 29  Comment 
Such corporates witnessed a decline in the proportion of their fixed assets to total assets to 52% in the financial year 2015-16 from 71% in fiscal 2010-11.
The Hindu Business Line  Sep 20  Comment 
Most of them made use of RBI’s dispensation to revalue their assets substantially
Motley Fool  Sep 2  Comment 
When do share repurchases actually benefit shareholders? And what about using debt to buy back shares?
Motley Fool  May 15  Comment 
A depreciable asset is a fixed asset, but a fixed asset may not be a depreciable asset. Let us explain.
The Economic Times  May 3  Comment 
Department-Related Parliamentary Standing Committee on Industry, said it has always taken a firm stand that the fixed assets, particularly land.
The Economic Times  Mar 29  Comment 
It will submit report on the double entry accounting system for the division. The study will cover areas like traffic revenue, fixed assets, and balance-sheet accrual system.
Motley Fool  Feb 29  Comment 
Learn how to deal with abrupt and non-recoverable asset-value declines on the balance sheet.
Financial Times  Jan 17  Comment 
Chinese data includes activity indicators for industrial production, retail sales, and fixed assets
Motley Fool  Dec 19  Comment 
How should a company account for its complex fixed assets?




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Property, Plant, and Equipment is the total value of a business' most essential assets, which cannot easily be liquidated

Property, plant & equipment (PP&E) are those assets essential to the company's business including (as the name suggests) the property on which the company does business and the equipment essential for the business' continued operations. Often, PP&E assets are tailored to be production specific and as such have little resale value. Over time, the value of these assets are generally depreciated to more accurately reflect their current worth to the company. The term "fixed assets" is often used in place of "property, plant and equipment" and the two terms are functionally equivalent.

It should be noted that while most PP&E assets (such as motor vehicles or computers) depreciate over time, land and buildings can often increase in value depending on local real-estate conditions.

Property, Plant, and Equipment are listed along with Long-Term Investments and intangible assets as non-current assets on a company's balance sheet.

Because PP&E assets are highly illiquid, investors often use the metric as a gauge of how quickly a company can adapt to dramatic shifts in the industry. In theory, companies with high PP&E relative to their total book value are less capable of adapting quickly to new and emerging trends, as they are incapable of converting assets acquired or developed for very specific purposes into cash or other, newly necessary assets.

Example

  • Oil and Gas Co (XYZ) decides to build oil rigs on the site of an oil-well. This costs a total of $3 million, which is added to PP&E on the balance sheet. XYZ's Petroleum Engineers determine that the useful life of the rigs is five years (about how long they think the well will continue to produce oil). Using straight-line depreciation, XYZ lists $600,000 in depreciation costs (3 million / 5) on their balance sheet each year for five years - at which point the rigs are fundamentally worthless to XYZ. It should be noted that even though the rigs represent real value to XYZ over the five years of their usefulness, because they were built for a specific purpose in a specific location and cannot easily be moved or deconstructed and rebuilt, their value is not in any way transferable or liquid. Worst case scenario, they can be sold as scrap metal, but it is highly unlikely XYZ can resell these rigs for anything close to their initial costs.
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