What is a Plant Asset? Definition and Real-World Examples

Plant Assets Definition

Plant assets, also known as property, plant, and equipment (PP&E), are tangible assets with a useful life of more than one year.

 

These assets are held by businesses for use in the production or supply of goods and services, for rental to others, or for administrative purposes.

What is a Plant Asset

Characteristics of Plant Assets

There are several characteristics of a plant asset:

 

  • Tangible: Unlike intangible assets, such as patents or trademarks, plant assets are physical assets that can be touched and felt.

 

  • Longevity: Plant assets are expected to provide economic benefits over their useful life, which is typically one year.

 

  • Productive Use: Plant assets are used towards the production process, offering a service, or to generate revenue. For example, the machinery used by a manufacturing company is a plant asset as it directly contributes to the production of goods to be sold.

Examples of Plant Assets

Some examples of plant assets can include:

Buildings

  • Office Building: A building used for administrative and operational purposes, contributing to the business’s ability to carry out their day-to-day activities.

 

  • Manufacturing Facility: Necessary for the production of items to be sold.

 

  • Retail Store: A building where products are sold to customers to generate revenue for retail businesses.

 

  • Warehouse: Used for storing inventory and logistics and distribution operations.

Equipment

  • Fleet of Delivery Vehicles: A distribution company may own a fleet of delivery trucks used to transport products to customers.

 

  • Medical Equipment: Hospitals and healthcare facilities own various pieces of medical equipment, important to providing healthcare services.

 

  • Forklifts: Allows for easy handling of goods within warehouses and manufacturing facilities.

 

  • Restaurant Kitchen Appliances: Important for food preparation in the hospitality industry, which would directly contribute to generating revenue.

Improvements

  • Office Renovation: Upgrading the functionality and look of the office environment, which can contribute to an increased level of employee productivity and happiness.

 

  • Security System Installation: Adds value by reducing the risk of theft or damage.

 

  • Improved Manufacturing Layout: A more optimal layout of the manufacturing facility can potentially increase the production capacity and also speed up the process.

 

  • Added Parking Facilities: Enhances the property’s convenience for employees and visitors.

Land

  • Vacant Land for Future Development: A potential site for future expansion or development, holding long-term value for the business.

 

  • Land with Natural Resources: Valuable for businesses involved in extracting and utilizing natural resources, such as timber or minerals.

 

  • Commercial Real Estate: Holds value for potential commercial development or as an investment property.

 

  • Residential Property for Investment: A home building company could purchase land for investment purposes, then build residential homes to be sold in the future.

Accounting for Plant Assets

Here are the key steps involved in accounting for plant assets:

Initial Recognition

Plant assets are initially recorded at cost plus all expenditures necessary to buy and prepare the asset for its intended use.

 

This includes purchase price, shipping costs, installation charges and any other costs directly attributable to bringing the asset to its working condition.

 

For example, a company purchases a new manufacturing machine for £100,000.

 

The total cost, including shipping and installation, comes to £110,000.

 

Therefore, the company would record the machine at £110,000 as the initial cost.

Subsequent Costs

Any costs incurred after the initial purchase that enhance the asset’s future economic benefits are capitalised onto the balance sheet.

 

Routine maintenance costs are expensed to the income statement.

 

For example, a business spends £5,000 on upgrading the manufacturing machine to improve its efficiency.

 

This cost would be capitalised and added to the asset’s book value on the balance sheet.

Depreciation

Plant assets, except for land, are depreciated to spread their cost out over their useful life.

 

Depreciation methods can include straight line or declining balance.

 

For example, if the manufacturing machine has a useful life of 5 years, and the company chooses the straight line method, the annual depreciation expense would be £110,000 / 5 = £22,000.

Impairment

If there is an indication that the carrying amount (ie the historical cost) of a plant asset might have changed, an impairment test would be carried out.

 

If the asset’s value is found to be impaired, the carrying amount would be reduced.

 

For example, due to a decline in market demand, the business determines that the manufacturing machine’s recoverable amount is now £90,000 (down from £110,000).

 

The company would now adjust the carrying amount to £90,000, and depreciation would be calculated using the revalued amount.

Plant Assets in Financial Statements

Plant assets can affect the income statement, balance sheet and cash flow statement in the following ways:

Income Statement

Plant assets should be depreciated over their useful life, and reflected as an expense on the income statement.

 

This ensures that the value of the asset is accurately represented over its useful life.

Balance Sheet

Plant assets form an important part of a business’s balance sheet, and represent a tangible long-term investment that can contribute towards future revenue generation.

Cash Flow Statement

The purchase and sale of plant assets would affect a company’s cash flow.

 

Naturally, the initial purchase of the plant asset would be an outflow of cash, any subsequent sales would be a cash inflow.

 

If debt has been used to purchase the plant asset, then the cash flow statement would also show the regular payments towards that debt too.