Property, plant, and equipment (PPE) assets represent a significant investment for businesses and nonprofit organizations. Accurate PPE accounting is essential for maintaining reliable financial statements and ensuring compliance with U.S. Generally Accepted Accounting Principles (GAAP). Below, we outline key considerations for accounting for PPE, including valuation, depreciation, and capitalization thresholds.
How Is PPE Valued on the Balance Sheet?
PPE is initially recorded at historical cost, which includes the purchase price plus all expenditures directly related to bringing the asset to the location and condition necessary for its intended use. Common capitalizable costs include:
- Sales taxes and import duties
- Transportation and delivery fees
- Installation and setup costs
- Costs to modify or relocate the asset
For self-constructed assets, additional guidance applies. Entities should capitalize direct materials and labor, a reasonable share of overhead, and other costs directly tied to the construction. Interest costs incurred during the construction period that are directly attributable to the asset should also be capitalized. Capitalization of interest ends when the asset is substantially complete and ready for its intended use. General administrative or unrelated costs should not be capitalized.
Organizations must distinguish between capital expenditures and maintenance expenses. Costs incurred for replacements or improvements that extend an asset’s useful life or enhance its functionality can typically be capitalized. In contract, routine maintenance and repairs should be expensed as incurred. Establishing an appropriate capitalization threshold helps ensure only meaningful expenditures are recorded as assets.
Determining Useful Life and Depreciation Methods
Over time, PPE assets decline in value due to use, obsolescence, or market conditions. Depreciation is the systematic allocation of an asset’s cost over its useful life. When determining useful life, organizations should consider:
- Expected usage based on historical trends
- Legal or contractual limits on use
- Risk of technological obsolescence
- Industry-specific guidelines
GAAP allows several depreciation methods, including:
- Straight-line depreciation – Equal expense amounts each year over the asset’s life
- Declining balance – Accelerated expense in the early years
- Units-of-production – Based on actual output or usage
- Sum-of-the-years-digits – Accelerated depreciation using a declining fraction formula
Some small businesses apply tax depreciation methods for financial reporting purposes to simplify recordkeeping. However, accelerated tax methods—such as Section 179 expensing or bonus depreciation—are not acceptable under GAAP. This creates temporary differences between book and tax depreciation, which appear as deferred tax assets or liabilities in the financial statements.
Current tax laws allow businesses to accelerate the depreciation deductions for qualifying PPE under Section 179 or bonus depreciation. While this provides tax relief, it can result in differences between an asset’s book value and its tax basis. Financial statement users should understand these differences when analyzing an entity’s balance sheet.
Ensuring Compliance and Accuracy in PPE Accounting
Proper PPE accounting requires judgment in areas such as setting capitalization thresholds, selecting depreciation methods, and estimating useful lives. These decisions can affect both financial reporting under GAAP and tax positions.
At Maxwell Locke & Ritter, our experienced team helps organizations navigate PPE accounting, offering practical, GAAP- and tax-compliant solutions that support strategic financial planning. Whether you’re managing a growing asset base or evaluating your capitalization policy, we’re here to help. Contact us today to ensure your PPE assets are accurately accounted for and aligned with your financial goals.
