Property Plant and Equipment Excel Workout
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Property, Plant and Equipment (PP&E) Net
June 5, 2025
What is Property, Plant, and Equipment?
Property, plant, and equipment are the tangible assets within a company, often abbreviated to PP&E. They are expected to be used by the company for longer than one year and, consequently, categorized as non-current assets. PP&E typically includes buildings, land, machinery, and any equipment used within a business.
How Property, Plant, and Equipment (PP&E) Works
Assets that are classed as PP&E are initially included at cost on the financial statements, which is the purchase price plus any incidentals associated with the acquisition. (This can be summarized by all costs that bring the asset to its working condition for its intended use) Delivery, inspection, handling, and installation costs will all be included in the item’s initial value.
PP&E is recorded on the balance sheet and is usually the largest component of total assets (for sectors which are asset-heavy, such as manufacturing, utilities, etc). PP&E are fixed long-term assets and are typically illiquid assets, so they are classed as non-current assets.
Key Learning Points
- Property, plant, and equipment (or PP&E) is represented as one line on the balance sheet, but is often comprised of many non-current assets
- It is typically reported at the net book amount, which accounts for depreciation and capex
- Depreciation only represents the accounting cost of using long-term assets over their useful life and does not represent a decline in market value
- Capex represents the investment the company makes (over the period) in terms of maintenance and ongoing asset improvements
- PP&E can suffer impairment expenses, which represent an extraordinary loss of value, and the asset must be written down to its fair value
- Impairments are unpredictable and never included in financial forecasts, and are treated as non-recurring items
Examples of PP&E
PP&E is presented as one line item, but can be made up of the following components:
- Land and buildings
- Plant and machinery
- Fixtures, fittings, and vehicles
- Assets in the course of construction
Some parts of PP&E can be multi-purpose, such as office spaces or more generic machinery, which are used by the company but can be sold off if necessary. Other components of PP&E might be specifically constructed for the company or production line, so less easy to sell in the event of a liquidity crisis (as well as being integral to the ongoing production). They may also be less easy to sell at the end of their useful life.
How to Record a PP&E Purchase
PP&E is part of the cost of doing business and produces economic benefits over several periods. Therefore, its cost is allocated on the income statement over time using a process called depreciation. Depreciation represents the consumption of benefits over time, and using the matching principle in accounting it is then apportioned to a specific period where the equipment is used to generate revenues. Depreciation is a cost allocation system and does not represent a decline in the market value of assets.
Companies will select which depreciation policy to use for their various assets. This may be straight-line, declining balance or based on a metric such as units of production. Some assets will have a residual value at the end of their useful life (and then can be sold or replaced). Other assets can be valued at zero at the end of its useful life. This will be determined by the company and its accounting policies, so it is important to check the notes accompanying the financial statements.
How do Companies Report PP&E?
Where is Property, Plant, and Equipment Recorded?
PP&E is presented on the balance sheet at the net book amount (net of accumulated depreciation). The footnotes break this down into component parts.
This is shown in the example from General Motors below:
General Motors Co. – Extract from notes to accounts 2018
Here we can see how the PP&E is broken down into sub-categories such as land, buildings, and machinery. It also shows construction in progress (i.e., fixed assets or projects being built), which may be part of larger capex programs. General Motors has also provided details of the estimated useful lives, which can then be used for forecasting future PP&E.
Depreciation and Capex
There are many methods of calculating depreciation. The two main systems are straight line and reducing balance. A straight line is the most common method and is quick and easy to calculate.
Formula for Straight-line Depreciation
The formula for straight-line depreciation is the following:
The expense incurred is the same for each period of the asset’s life and is often shown in the income statement or notes to the financial statements. However this is not part of cash flow – the cash flow is the initial purchase, usually called capital expenditure (capex).
Capital expenditure or capex increases the PP&E balance and represents the investing activities of the business. Over the financial year, a business may want to purchase more assets or maintain current ones to increase its economic benefit (and therefore revenues for the company).
Formula for Calculating PP&E
If PP&E is constructed rather than purchased, all costs of construction, including interest, are added to arrive at the PP&E work-in-progress amount.
For analysts, PP&E is usually stated as a line in the financial statements, with further details about the assets (such as property locations, etc) disclosed in the footnotes. If it isn’t disclosed, Net PP&E can be calculated using the formula below:
Access a free Financial Edge PP&E template, which will go through the steps of using this formula to calculate Net PP&E.
Access a free Financial Edge PP&E template, which will go through the steps of using this formula to calculate Net PP&E.
Forecasting PP&E
The best way to forecast PP&E is to use BASE analysis, which will factor in the capex and depreciation assumptions into the model.
When building a company’s financial model, analysts will typically forecast capital expenditures and depreciation based on the guidance of the company. This can then be incorporated into the PP&E forecasts by adding the capex (spending on fixed asset maintenance and improvement) and subtracting the depreciation for the period.
When looking at PP&E, investors will want to see a company that has a well-managed and up-to-date set of assets. PP&E will be pivotal to support the expansion of the company so investment in long-term assets will be a sign of good health at the company. Without investment in PP&E, the company may begin to lag in terms of production and also face increased costs in the future to replace equipment which has not been well-maintained.
What Else Affects the Reported PP&E Balance?
If an item of PP&E is not being consumed over time or if its useful life is very long, then it is not depreciated. Land is the most common example of this but if the land is “wasting”, such as a quarry or mine, then it is depreciated like any PP&E asset.
Asset Impairments and Write-Downs
When the business believes that the carrying amount of PP&E is overstated, it should impair or write down the book value of the asset to fair value. This may be due to an unexpected change in market conditions or other circumstances. Fair value is the anticipated recoverable amount.
This process is called an impairment and is fundamentally like unscheduled depreciation. The carrying amount of the assets is reduced and the income statement is expensed accordingly. These charges or expenses can be significant, are hard to forecast, and are normally considered to be non-recurring when calculating normalized profits. Restructuring and reorganization costs frequently include some elements of impairment.
A typical type of impairment might occur when market conditions have changed, and part of the business is no longer performing in line with company expectations. If this is likely to be ongoing then the company may do a write-down or asset impairment for the cost of the equipment, which will no longer be useful to the company.
Conclusion
Property, Plant, and Equipment (PP&E) are essential assets for businesses, representing significant investment by the company to secure long-term economic benefits. These tangible assets are initially recorded at cost, including all expenses necessary to bring them to working condition. Over time, PP&E undergoes depreciation, which allocates the cost of the assets over their useful life, matching expenses with revenues. However, depreciation does not reflect market value changes. Impairments may occur, requiring assets to be written down to fair value, and these are treated as non-recurring items in financial forecasts.
Understanding the intricacies of PP&E, including its components, valuation, and reporting, is crucial for accurate financial analysis and decision-making.