Every business concern or organization needs resources to operate the business functions. The resources are sometimes owned by the company and sometimes borrowed by external parties. The resources owned by the company are called its assets. On the other hand, the borrowed money is the liability or obligation for the business entity.
The assets include everything that the company owns. The assets can be further categorized as tangible, intangible, current, and non-current assets. Current assets are liquid assets that quickly change into cash. It includes cash/bank, short-term securities, inventories, account receivables, etc.
The second type of asset is non-current assets. The non-current assets are the company’s long-term assets that last for many years and deliver economic benefit. There is a further classification of tangible and intangible non-current assets.
The tangible assets are physical assets of the company that can be seen, touched, and consumed. However, non-tangible assets do not have physical existence. The non-tangible assets include patents, trademarks, copyrights, etc.
In this article, we will talk about non-current tangible assets and, specifically the plant assets. The article will be all about plant assets, their recognition, depreciation, and differentiation from other asset classes.
What is a Plant Asset?
A plant asset is a non-current or fixed asset that lasts for a long period. We can formally define the plant assets as,
Plant assets represent the asset class that belongs to the non-current, tangible assets. The plant assets’ economic benefits last for more than one year. These assets are used for operating the business functions and generating revenues in the financial periods. The plant assets are often synonymously termed fixed assets.
The IAS 16 of the IFRS governs the rules regarding recognizing and recording the plant assets in the company’s financial statements. These fixed assets are not charged to expenses at once. Instead, a part of the cost is periodically charged to the expense account to depreciation the plant assets.
Characteristics Of Plant Assets
The characteristics of the plant assets can be summarized as,
- The plant assets are fixed assets that are used for running business operations and revenue generation.
- The plant assets are tangible assets that imply the physical presence of the assets.
- The useful life of these assets is more than one year. It means the plant assets continue to provide economic benefits for the entire useful life.
- The plant assets are not charged to the expense account at once. Instead, a periodic amount is charged to expenses as depreciation. However, the land is an exceptional case as its value does not depreciate.
What Is Included in the Plant Assets?
The most common examples of the plant assets in any business entity are as follow:
Building: Buildings are the most common example of the plant assets because it increases the utility of a piece of land. Buildings can be offices, warehouses, manufacturing factories, etc.
Machinery: Plant or machinery is explained as different machines used in revenue generation or business operations. Examples of machinery can be beveling machines, band saws, etc.
Equipment: Equipment is more like machinery that includes heavy machinery like production machines. The equipment is different from the machinery as equipment represents the necessary tools or setup required for a purpose.
Land: Any piece of land owned by an entity for business purposes is also part of plant assets.
Vehicle: If a business entity owns vehicles for delivery, commuting, or handling the products, they are also part of plant assets.
Furniture and Fixtures: The office setup, workstations, lighting fixtures come under this head.
Any land maintenance, improvement, renovations, or construction to increase building operations or revenue generation capacity are also recorded as part of the plant assets.
Recognition and Recording
According to IFRS’s IAS 16, a business entity can record an asset as a plant asset if the following conditions are met:
- There is a strong probability that the future economic benefits associated with the asset will inflow to the entity
- The cost of the asset can be measured reliably.
Besides, when the business entity acquires the asset, it is recorded at the cost value. The cost of an asset includes:
- The purchase price of the asset plus duties and non-refundable taxes
- The direct cost of bringing the asset to business facility and installation to make it operational
- The costs of dismantling, removing, or disposing of the asset.
Recording of Plant Assets In Financial Statements
When a plant asset is acquired by a company that is expected to last longer than one year, it is recorded in the balance sheet at the end of the financial year. Besides, a part of the asset’s cost is charged to expenses account as a non-cash expense, depreciation.
In the balance sheet of the business entity, these assets are recorded under the head of non-current assets as Plant, property, and equipment.
Monte Garments is a factory that manufactures different types of readymade garments. The company also has a printing press for printing customized merchandise with brand designs. A new press technology has just launched in the market, and the company owner decided to acquire the machine. The cost of the machine is USD100,000, and it is expected to stay useful for five years with a residual value of USD10,000.
When the asset is brought in, the accounting books will show a debit of cash and credit of asset. The following entry will be passed in accounting books:
|Plant Assets Account||100,000|
Later on, the company will charge the depreciation according to the method of depreciation it usually follows. Let’s say the company follows the straight-line method. 18,000 USD must be charged to the plant asset account for every financial year as a depreciation expense.
At the end of the financial period, the following entry will be passed in accounting books:
|Plant Asse Account||10,000|
The same process will be repeated every year at the end of the financial year.
Depreciation On Plant Assets
Let’s skim through the concept of depreciation for the plant assets. Depreciation is the periodic allocation of an asset’s value(cost) over its useful life. The basic principle working behind the depreciation of assets is the matching principle. The matching principle states that expenses should be recorded in the same financial year when the revenue was generated against them. As the fixed assets last longer, the expenses are divided over the item until they’re useful.
There are different methods of depreciation that a business entity can use. Many business entities use different depreciation methods for financial reporting and tax purposes. Let’s have an overview of each method.
Straight Line Method
The straight-line method is the most commonly used method in most business entities. It is also called a fixed-installment method, as equal amounts of depreciation are charged every year over the useful life of an asset.
The depreciation expense in this method is calculated by subtracting the residual value of an asset from the cost and dividing the remainder by a number of years(useful life). The straight-line method’s illustration has been given in the above example.
Declining Balance Method
The second method of deprecation is the declining balance method or written down value method. The percentage for charging depreciation is pre-decided and fixed. Every year, the percentage is applied to the remaining value of the asset to find depreciation expense. In the initial years of the asset, the amount of depreciation expense is higher and decreases as time passes. Therefore, this method is called as declining balance method.
Sum of Years Digit Method
The third type of method is the sum of years digit method. This method implies charging the depreciation expense of an asset to a fraction in different accounting periods. This method explains that the utility and level of economic benefit decrease as the age of asset increases.
Therefore, the first few years of the assets are charged to higher depreciation expenses. The later years are charged a lower sum of depreciation based on the assumption that lower revenue is generated.
Other methods: Double declining balance method is an extension of the declining balance method. There are more methods of depreciation such as unit production method, insurance policy method, etc. The company’s management decides which method has to be applied after assessing the accounting policy, asset usage, and other factors.
Plant assets are different from other non-current assets due to tangibility and prolonged economic benefits. They are recorded as fixed assets in the balance sheet.
These assets are significant for any business entity because they’re necessary for running operations. Besides, there is a heavy investment involved to acquire the plant assets for any business entity. The company’s top management regularly monitors the plant assets to assess any deviations, discrepancies, or control requirements to avoid misuse of the plant assets and increase the utility.
In this article, we’ve explained the concept of plant assets in very detail. We hope you’ll know the difference between plant assets and other non-current assets and the accounting treatment.