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Businesses and not-for-profit entities capitalize machines, furniture, buildings, and other property, plant and equipment (PPE) assets on their balance sheets. Here\u2019s a refresher on some common questions about how to properly report these long-lived assets under U.S. Generally Accepted Accounting Principles (GAAP).<\/p>\n
What\u2019s included in book value?<\/strong><\/p>\n PPE is reported on the balance sheet at historical cost. This includes the amount of cash or cash equivalents paid for an asset. Historical cost also may include costs to relocate the asset and bring it to working condition. Examples of capitalized costs include the initial purchase price, sales tax, shipping and installation costs.<\/p>\n Costs incurred during an asset\u2019s construction or acquisition that can be directly traced to preparing the asset for service also should be capitalized. In addition, costs incurred to replace PPE or enhance its productivity must be capitalized. However, repairs and maintenance costs may be expensed as incurred.<\/p>\n GAAP doesn\u2019t prescribe a dollar threshold for when to capitalize an asset. But, for simplicity, management may set a capitalization threshold as long as it doesn\u2019t materially affect the financial statements. PPE below that threshold may be written off as incurred.<\/p>\n How long is the useful life?<\/strong><\/p>\n Useful life is the period over which the asset is expected to contribute directly or indirectly to future cash flow. When estimating the useful life of an asset, management should consider all relevant facts and circumstances, such as:<\/p>\n What\u2019s the right depreciation method?<\/strong><\/p>\n Depreciation is meant to allocate the cost of an asset (less any salvage value) over the period it\u2019s in use. GAAP provides the following four depreciation methods:<\/p>\n For simplicity, many small businesses deviate from GAAP by using the same depreciation method for tax and financial statement purposes. The IRS prescribes specific recovery periods for different categories of PPE and provides accelerated depreciation methods.<\/p>\n Under current tax law, instead of using the standard Modified Accelerated Cost Recovery System (MACRS) depreciation method, certain entities currently may choose to immediately deduct a qualified PPE purchase under Section\u00a0179 or the bonus depreciation program, thus minimizing taxable income in the years the asset is placed in service. The use of these accelerated depreciation methods may create a large spread between the value of PPE on the balance sheets and the assets\u2019 fair market values.<\/p>\n For more information<\/strong><\/p>\n Reporting PPE is a gray area in financial reporting that relies on subjective estimates and judgment calls by management. We can help you report these assets in a reliable, cost-effective manner.<\/p>\n \u00a9 2021<\/em><\/p>\n <\/body> Businesses and not-for-profit entities capitalize machines, furniture, buildings, and other property, plant and equipment (PPE) assets on their balance sheets. Here\u2019s a refresher on some common questions about how to properly report these long-lived assets under U.S. Generally Accepted Accounting Principles (GAAP). What\u2019s included in book value? PPE is reported on the balance sheet at […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[13,7,10],"tags":[8,11,12],"class_list":["post-15255","post","type-post","status-publish","format-standard","hentry","category-aa","category-articles","category-news","tag-articles","tag-news","tag-updates"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/15255","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=15255"}],"version-history":[{"count":0,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/15255\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=15255"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=15255"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=15255"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n
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