property, plant and equipment schedules

I’m so excited!  A client of mine is moving into new digs soon and it is a fantastic location, bright open layout concept and, on the surface, makes them look like an established software company.  Yeah!  During the move discussions the Controller pulled me aside and asked me:

how will this affect our property, plant and equipment (”PPE”) schedules?

Her question was directed towards the leasehold improvement portion of the company’s PPE depreciation schedule but it was a good reminder for me to review PPE in general.

Back in the day we called PPE “fixed assets” but then the accountants stepped in and we had a name change.  For technology companies, the fixed assets that are depreciated over time usually involve: software; hardware; furniture, fixtures and equipment; and leasehold improvements.  I’ve occasionally seen a phone system broken out but the categories usually remain the same.  Who knows? maybe you are lucky enough to own the building!  In general, fixed assets are tangible items that the company has bought and will use for an extended period of time (usually greater than a year).

The accounting presentation is very straight forward.  The cost to be recorded on the books is the purchase price, including import duties and taxes (excluding non-sales and use taxes like GST/HST/VAT, etc.), in addition to costs attributable to bringing and installing the assets in its needed location (e.g. shipping and handling costs; installation, retrofit or fit-up costs, etc.).  Using the “matching principle” in accounting, the cost is then depreciated over the life of the asset - this in essence represents the “wear and tear” on the assets value - as offset by the revenues associated with having the asset to operate the company.

So, back to the question.  Leasehold improvements are depreciated over the term of the lease - not a fixed time period like say hardware being depreciated over two years.

What happens when the lease is renewed?

Well, because you have depreciated your leasehold improvements over the term of the lease the net book value should be zero when the lease comes up for renewal.

What happens if we exit the lease early and move somewhere else?

Leaseholds imply improvements to the space that you are currently in.  If you move from that space then the benefit to you is now zero so your net book value needs to reflect that.

Thanks!  Do you have any products that help make PPE easier at month/year end?

Fortunately Business Ready has created two great offerings:

1. a template that will make your monthly depreciation journal entry easy as well as act as a supporting working paper for your audit, the PPE Depreciation Template;
2. and the associative Property, Plant and Equipment Policy that provides the accounting pronouncements, suggested guidance and responsibilities for fixed assets, and the accounting treatment and presentation.

Both of these can be customized to your particular operation.  Just a little something to get you started and point you in the right direction.  It is intelligence to run with.

Now, which desk is mine?