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Introduction
1. External financial reporting decisions
2. Planning, budgeting, and forecasting
3. Performance management
4. Cost management
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1.2.4.2 Initial recognition of PPE
Achievable CMA Part 1
1. External financial reporting decisions
1.2. Financial transactions
1.2.4. Property, plant, and equipment
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Initial recognition of PPE

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The concept map below summarizes the information about PPE accounting relevant for the CMA examinations:

Covering PPE initial recognition, depreciation methods, and impairment rules for assets held for use or sale.
PPE Concept Map
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Definitions
Property, plant, and equipment (PPE)
These are non-current assets that are used to create and distribute the company’s products and services. The following types of assets are typically included in the caption:
  • Land and land improvements
  • Buildings
  • Machinery and equipment
  • Furniture and fixtures

The main feature of property, plant, and equipment is that they are not being sold in the ordinary course of business but they are used to create future value for the company by directly or indirectly creating and/or distributing goods or services.

Property, plant, and equipment are initially recorded at historical cost plus incidental costs necessary to bring the asset to its intended location and to make the asset ready for use. This may vary depending on the type of asset being accounted for.

Under U.S. GAAP, interest incurred during construction of a qualifying self-constructed asset must be capitalized as part of the asset’s cost. Detailed capitalized-interest calculations aren’t tested, but how U.S. GAAP and IFRS differ on capitalizing borrowing costs is covered in differences in long-lived assets.

Examples of capitalizable costs of different types of assets are shown below. Other types of costs may be incurred and should be analyzed individually.

Land

  • Purchase price of land
  • Legal fees
  • Broker’s commission
  • Obligations assumed by the buyer including delinquent taxes related to the land
  • Surveying fees
  • Demolition fees to remove an existing structure
  • Sale of scrap from the demolition (this is a reduction in cost)

Buildings

  • Purchase price
  • Cost of renovations
  • Architect fees
  • Obligations assumed by the buyer including delinquent taxes related to the building
  • If self-constructed, all materials, labor, and overhead connected to construction
  • Insurance during construction

Equipment

  • Purchase price, net of any purchase or cash discounts
  • Freight-in
  • Handling fees
  • Installation cost
  • Legal fees
  • Sales and excise taxes

Watch out: Capitalize only costs necessary to bring an asset to its intended use - items like employee training, abnormal repair costs, and general overhead not related to construction are expensed instead.

Example: capitalized cost of equipment

A company buys a machine for $50,000, takes a 2% cash discount, and pays $1,200 freight-in and $800 installation; it also spends $500 training employees afterward. Net cost: $50,000 − $1,000 (discount) + $1,200 + $800 = $51,000. The $500 training cost is expensed, not capitalized.

Answer: $51,000 capitalized; $500 training cost expensed.

Example: capitalized cost of land

A company buys land for $200,000, pays $5,000 in legal fees, and spends $10,000 to demolish an existing structure on the site. It sells scrap from the demolition for $1,500. Capitalized cost: $200,000 + $5,000 + $10,000 − $1,500 = $213,500. The scrap proceeds reduce the cost of the land rather than being recorded as income.

Answer: $213,500 capitalized as land.

PPE overview

  • Non-current assets used to produce/distribute goods or services, not held for sale
  • Includes land/land improvements, buildings, machinery/equipment, furniture/fixtures

Initial recognition & capitalizable costs

  • Recorded at historical cost plus incidental costs to bring asset to intended location/use
  • Land: purchase price, legal fees, broker’s commission, assumed obligations/delinquent taxes, surveying, demolition costs (less scrap sale proceeds)
  • Buildings: purchase price, renovation costs, architect fees, assumed obligations, self-construction costs (materials/labor/overhead), insurance during construction
  • Equipment: purchase price net of discounts, freight-in, handling, installation, legal fees, sales/excise taxes
  • Only costs necessary for intended use are capitalized — training, abnormal repairs, unrelated overhead are expensed

Capitalized interest (U.S. GAAP)

  • Interest during construction of qualifying self-constructed assets must be capitalized
  • Detailed calculations not tested on CMA; key is knowing U.S. GAAP vs IFRS treatment differs

Example calculations

  • Equipment: net purchase price (less cash discount) + freight-in + installation = capitalized cost; post-purchase costs like training expensed
  • Land: purchase price + legal fees + demolition costs − scrap sale proceeds = capitalized land cost (scrap reduces cost, not recorded as income)

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Initial recognition of PPE

The concept map below summarizes the information about PPE accounting relevant for the CMA examinations:

Definitions
Property, plant, and equipment (PPE)
These are non-current assets that are used to create and distribute the company’s products and services. The following types of assets are typically included in the caption:
  • Land and land improvements
  • Buildings
  • Machinery and equipment
  • Furniture and fixtures

The main feature of property, plant, and equipment is that they are not being sold in the ordinary course of business but they are used to create future value for the company by directly or indirectly creating and/or distributing goods or services.

Property, plant, and equipment are initially recorded at historical cost plus incidental costs necessary to bring the asset to its intended location and to make the asset ready for use. This may vary depending on the type of asset being accounted for.

Under U.S. GAAP, interest incurred during construction of a qualifying self-constructed asset must be capitalized as part of the asset’s cost. Detailed capitalized-interest calculations aren’t tested, but how U.S. GAAP and IFRS differ on capitalizing borrowing costs is covered in differences in long-lived assets.

Examples of capitalizable costs of different types of assets are shown below. Other types of costs may be incurred and should be analyzed individually.

Land

  • Purchase price of land
  • Legal fees
  • Broker’s commission
  • Obligations assumed by the buyer including delinquent taxes related to the land
  • Surveying fees
  • Demolition fees to remove an existing structure
  • Sale of scrap from the demolition (this is a reduction in cost)

Buildings

  • Purchase price
  • Cost of renovations
  • Architect fees
  • Obligations assumed by the buyer including delinquent taxes related to the building
  • If self-constructed, all materials, labor, and overhead connected to construction
  • Insurance during construction

Equipment

  • Purchase price, net of any purchase or cash discounts
  • Freight-in
  • Handling fees
  • Installation cost
  • Legal fees
  • Sales and excise taxes

Watch out: Capitalize only costs necessary to bring an asset to its intended use - items like employee training, abnormal repair costs, and general overhead not related to construction are expensed instead.

Example: capitalized cost of equipment

A company buys a machine for $50,000, takes a 2% cash discount, and pays $1,200 freight-in and $800 installation; it also spends $500 training employees afterward. Net cost: $50,000 − $1,000 (discount) + $1,200 + $800 = $51,000. The $500 training cost is expensed, not capitalized.

Answer: $51,000 capitalized; $500 training cost expensed.

Example: capitalized cost of land

A company buys land for $200,000, pays $5,000 in legal fees, and spends $10,000 to demolish an existing structure on the site. It sells scrap from the demolition for $1,500. Capitalized cost: $200,000 + $5,000 + $10,000 − $1,500 = $213,500. The scrap proceeds reduce the cost of the land rather than being recorded as income.

Answer: $213,500 capitalized as land.

Key points

PPE overview

  • Non-current assets used to produce/distribute goods or services, not held for sale
  • Includes land/land improvements, buildings, machinery/equipment, furniture/fixtures

Initial recognition & capitalizable costs

  • Recorded at historical cost plus incidental costs to bring asset to intended location/use
  • Land: purchase price, legal fees, broker’s commission, assumed obligations/delinquent taxes, surveying, demolition costs (less scrap sale proceeds)
  • Buildings: purchase price, renovation costs, architect fees, assumed obligations, self-construction costs (materials/labor/overhead), insurance during construction
  • Equipment: purchase price net of discounts, freight-in, handling, installation, legal fees, sales/excise taxes
  • Only costs necessary for intended use are capitalized — training, abnormal repairs, unrelated overhead are expensed

Capitalized interest (U.S. GAAP)

  • Interest during construction of qualifying self-constructed assets must be capitalized
  • Detailed calculations not tested on CMA; key is knowing U.S. GAAP vs IFRS treatment differs

Example calculations

  • Equipment: net purchase price (less cash discount) + freight-in + installation = capitalized cost; post-purchase costs like training expensed
  • Land: purchase price + legal fees + demolition costs − scrap sale proceeds = capitalized land cost (scrap reduces cost, not recorded as income)

More from Property, plant, and equipment

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