What is property, plant and equipment (PP&E)?

Property, plant and equipment (PP&E) comprises such noncurrent assets as land, buildings, machinery and equipment, furniture and fixtures, and leasehold improvements that are acquired by a business for long-term, continued use in the production of income rather than for resale.  PP&E are primarily operational in character and held by an entity for use in the production or supply of goods or services, for rental to others or for administrative purposes and are expected to be used during more than one period.

On any balance sheet date, PP&E is shown “net” accumulated depreciation and includes PP&E acquired under finance leases.  The difference between the assets’ cost and their accumulated depreciation since asset recognition.  With the exception of land, which has an unlimited life, tangible assets are depreciable.

A finance lease is a long-term financing arrangement that transfers the risk and rewards of ownership to the lessee, it being capitalized on the balance sheet of the lessee because its economic substance is considered the same as an outright purchase of a capital asset.  In accounting for finance leases, the lessee records a noncurrent asset and a long-term liability at the present value of the discounted future minimum lease payments (MLPs) plus any bargain purchase option or bargain renewal option.

While a finance lease is amortized by the lessor as a financial asset, it is depreciated by the lessee as a fixed asset.  Finance leases are recorded by the lessees at the present value of the discounted future lease payments (including any bargain purchase or renewal option) and depreciated over the asset’s economic life or lease term.