Why It Matters: Property, Plant, and Equipment

Why learn how to account for property, plant, and equipment?

Most companies present their balance sheet according to three generally recognized classifications:

  1. current assets,
  2. property and equipment
  3. other noncurrent assets

Property and equipment are often called property, plant, and equipment (PP&E) because in the broadest sense, property and equipment would include the physical plant, which would be the manufacturing buildings and equipment.

Noncurrent assets consist of tangible assets and intangible assets, which have distinguishing characteristics as follows:

  • Tangible assets have physical characteristics we can see and touch. In addition to plant assets such as buildings and furniture, they include natural resources such as gas, oil, and investments.
  • Intangible assets have no physical characteristics we can see and touch, but represent exclusive privileges and rights to their owners. Common intangible assets include patents and goodwill.

Notice that Facebook, Inc. doesn’t subtotal property and equipment separately from the other noncurrent assets, but Facebook’s balance sheet is in that order, which mirrors the theoretical order of liquidity.

FACEBOOK INC.
CONSOLIDATED BALANCE SHEET
(in millions, except for number of shares and par value)
Description December 31,
Description 2019 2018
Category, Assets
Subcategory, Current Assets:
     Cash and cash equivalents $     19,079 $     10,019
     Marketable securities 35,776 31,095
     Accounts receivable, net of allowances of $206 and $229 as of December 31, 2019 and December 31, 2018, respectively 9,518 7,587
          Total current assets Single line
66,225
Single line
50,480
Property and equipment, net 35,323 24,683
Operating lease right-of-use assets, net 9,460
Intangible assets, net 894 1,294
Goodwill 18,715 18,301
Other Assets 2,759 2,576
Total assets Single line
$     133,376
Double line
Single line
$     97,334
Double line

In addition, even though Facebook isn’t thought of as a “bricks and mortar” kind of establishment, like The Home Depot, which is largely reliant on physical stores, Facebook still has a significant investment in property and equipment ($35 billion).

Property, plant, and equipment (PP&E) are long-lived (noncurrent) assets because they are expected to contribute to revenue for more than one year. To be classified as a plant asset, an asset must:

  1. be tangible, that is, capable of being seen and touched
  2. have a useful service life of more than one year
  3. be used in business operations rather than held for resale.

Common plant assets are buildings, machines, tools, and office equipment. Here is more detail on the $35 billion in property and equipment that Facebook reported on its 2019 financial statements.

Note 6.       Property and Equipment
      Property and equipment, net consists of the following (in millions):
Description Column added for spacing Column added for spacing December 31,
Description Column added for spacing Column added for spacing 2019 2018
Land $     1,097 $     899
Buildings 11,226 7,401
Leasehold improvements 3,112 1,841
Network equipment 17,004 13,017
Computer software, office equipment and other 1,813 1,187
Finance lease right-of-use assets 1,635
Construction in progress 10,099 7,228
      Total Single line
45,986
Single line
31,573
Less: Accumulated depreciation (10,663) (6,890)
Property and equipment, net Single line
$     35,323
Double line
Single line
$     24,683
Double line

In this section, we will look at the accounting treatment for plant assets. Natural resources, intangible assets, and investments will be covered in the next modules.

By the end of this section, you will be able to: (a) differentiate between current expenses and capital expenditures; (b) describe and compute depreciation expense and know how it relates to accumulated depreciation; (c) record purchases and sales of fixed assets; and (d) understand the disclosures in the financial statements related to property, plant, and equipment (PP&E).