Understanding Property, Plant and Equipment (PPE): A Guide for Businesses

In most businesses, Property, Plant and Equipment (PPE) represent a significant investment. These are not just numbers on the balance sheet but they are physical assets that form the operational backbone of the enterprise.

 

Whether it’s factory buildings, machinery, furniture, or vehicles, PPE needs careful financial treatment, both for internal decision-making and external compliance.

 

This article aims to simplify the key accounting and legal requirements relating to PPE, their treatment under accounting standards, physical verification requirements, and what business owners must watch out for.

 

1. What is PPE and Why is it Important?

 

1. Property, Plant and Equipment includes tangible assets that:

• Are held for use in production or supply of goods/services,
• Are expected to be used for more than one accounting period, and
• Are not meant for sale in the normal course of business.

 

2. Why does PPE matter?

• High-value assets: Normally, these are the most expensive assets owned by the company which are critical for the functioning of the company.
• Impacts financial metrics: PPE affects depreciation, return on assets, net worth, and profitability ratios.
• Crucial for audits, valuations & funding: Investors and lenders closely examine how PPE is recorded and maintained. PPE are normally mortgaged to lenders to secure the loan taken by the company. For Investors, PPE contribute significantly to the valuation of the company.

 

2. Framework governing PPE

The accounting of PPE in India is governed by the following:

Particulars	Applicable Standard
For Ind AS compliant entities	Ind AS 16 – Property, Plant and Equipment
For others	AS 10 (Revised) – Property, Plant and Equipment
For impairment	Ind AS 36 or AS 28
Companies Act, 2013	Schedule II – for depreciation and asset life
Auditor's reporting	CARO 2020 – for asset verification, record-keeping, etc.

 

1. Requirements Under the Standards

Area	Ind AS 16 / AS 10 (Revised) Requirements
Initial recognition	At cost, including purchase price including import duties & non refundable purchase tax, cost directly attributable to bringing the asset to its present location & condition and expenses on trial run.
Subsequent measurement	Either cost model or revaluation model (Ind AS only)
Depreciation	On a systematic basis over useful life, component-based depreciation is mandatory
Revaluation	Allowed under Ind AS & AS
Disposal	Gain/loss on disposal is recognised in profit or loss

 

2. Companies Act, 2013 – What You Must Comply With

1. Schedule II – Depreciation

• Specifies useful lives for various asset classes.
• Allows deviation but must be disclosed with justification.

 

2. Books of Account Rules

As per the Companies (Accounts) Rules:

• Maintain fixed asset records showing full particulars, including quantitative details and location.
• From 1 April 2023, mandatory audit trail (edit log) in ERP/accounting software for all accounting entries, including fixed assets.

 

3. What CARO 2020 Requires Auditors to Report

The Companies (Auditor’s Report) Order – CARO 2020 mandates auditors to comment on:

1. Proper records of PPE including quantitative details and situation.
2. Physical verification of PPE by management at reasonable intervals.
3. Discrepancies, if any, and whether they were material and properly dealt with in books.
4. Ownership of immovable property – whether title deeds are in the company’s name.
5. Revaluation done during the year and amount of change if change is in excess of 10% of the aggregate net carrying value
6. Benami property cases, if any.

 

3. Physical Verification of PPE – Statutory Requirements and Disclosures

 

1. Is Physical Verification Mandatory?

Yes, though no specific frequency is mandated under the Companies Act, the responsibility lies with management to:

• Conduct physical verification of PPE at reasonable intervals, and
• Maintain proper documentation of verification and reconciliation.

 

Auditors must report this in the CARO clause and may qualify the report if it is not conducted.

 

2. Accounting for Discrepancies

If differences are found between the Fixed Asset Register and physical count:

• Surplus assets (unrecorded): If ownership is established, capitalise appropriately with full disclosure.
• Shortages / missing assets: If confirmed lost, discard from books; charge to P&L as loss or impairment.
• If not immediately reconcilable, show as a reconciling item pending management decision.

 

3. Disclosure Requirements

Disclose the following in the financial statements (notes to accounts):

• Brief of the verification process and date.
• Nature and extent of discrepancies.
• Impact of adjustments made, if material.
• Basis for any write-off or revaluation.

 

4. Fixed Asset Register – Contents

A well-maintained Fixed Asset Register (FAR) should contain:

• Asset category and description
• Unique identification / tag numbers
• Location and custodian of the asset
• Acquisition date and vendor details
• Cost breakup (base cost + incidental expenses)
• Depreciation schedule and WDV
• Movement, revaluation, or disposal history
• Physical verification record and remarks

 

5. Impairment of PPE – When and How?

Impairment means a decline in the asset’s recoverable value below its carrying value.

 

1. When Does It Arise?

• Damage or obsolescence of asset
• Significant market decline
• Reduced usage or shutdown of business line
• Adverse legal or regulatory developments

 

2. How is it Accounted For?

• Determine recoverable amount: Higher of (i) Value in use and (ii) Fair value less costs of disposal.
• If carrying value > recoverable amount, the impairment loss is charged to the P&L.
• Impairment reversal is permitted if impairment loss recognised in prior accounting periods may no longer exist or may have decreased.

 

6. Final Thoughts

Handling PPE is not just a statutory obligation, but a strategic financial responsibility. It impacts everything, from your tax liability to your borrowings, from investor confidence to regulatory compliance.

Businesses must ensure:

• Accurate and timely capitalisation of costs
• Consistent depreciation policies
• Up-to-date asset registers
• Impairment testing regularly
• Complete disclosures in financial statements

An efficient system for managing PPE also reflects the strength of your internal controls and the seriousness with which management protects shareholders' assets.

 

Contact us, if your business needs assistance in PPE accounting, verification planning, record automation, or audit readiness.

 

Frequently Asked Questions (FAQs)

 

Q1. What qualifies as PPE?

A: Tangible assets used in production or operations, having useful life of more than 12 months and not intended for sale, e.g., machinery, buildings, vehicles, Compurer.

 

Q2. Can we capitalize repairs and maintenance?

A: Routine repairs are charged to P&L. Capitalisation is allowed only if the expense enhances useful life or efficiency of the asset.

 

Q3. What happens if I use different useful lives than Schedule II?

A: Allowed with technical justification and proper disclosure in the notes to accounts.

 

Q4. What is component-based depreciation?

A: Depreciating individual components of an asset separately if they have material value and different useful lives.

 

Q5. Is physical verification of PPE mandatory?

A: Yes, though the frequency is not fixed. It must be done at reasonable intervals and disclosed. Auditors report this under CARO.

 

Q6. How should discrepancies during verification be accounted for?

A:

• Surplus: Add to FAR with proper supporting and approvals.
• Shortages: Write-off after management approval and record as loss or impairment in P&L.

 

Q7. What are title deed verifications and why are they critical?

A: Auditors must confirm whether immovable properties are in company’s name. If not, reasons must be disclosed. Important for ownership validation.

 

Q8. What causes impairment of assets?

A: Damage, obsolescence, reduced capacity usage, legal restrictions, or market changes.