This module delves into Property, Plant, and Equipment (PPE), a crucial component of a company's assets. Understanding PPE is vital for financial analysis, particularly in the context of competitive exams like the CFA. We will cover its recognition, measurement, subsequent expenditures, impairment, and disposal.

An item of PPE should be recognized if, and only if:

1. It is probable that future economic benefits associated with the item will flow to the entity.
2. The cost of the item can be measured reliably.

After initial recognition, PPE can be measured using either the cost model or the revaluation model.

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount is the cost of an asset, or other amount substituted for cost in the financial statements, less its residual value. Key components of depreciation include:

• Depreciable amount: Cost less residual value.
• Useful life: The period over which an asset is expected to be available for use by an entity; or the number of production or similar units expected to be obtained from the use of the asset by the entity.
• Residual value: The estimated amount that an entity would currently obtain from disposal of the asset at the end of its useful life.

Subsequent expenditures on PPE can be capitalized or expensed.

• Capitalized: If the expenditure increases future economic benefits beyond the originally assessed standard of performance (e.g., significant upgrades, capacity enhancements).
• Expensed: If the expenditure merely maintains the asset's operating condition or restores it to its previous level of performance (e.g., routine repairs and maintenance).

An asset is impaired when its carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and its value in use.

• Fair value less costs to sell: The amount obtainable from the sale of an asset in an arm's length transaction between knowledgeable, willing buyers, less the costs of disposal.
• Value in use: The present value of the future cash flows expected to be derived from an asset.

An impairment loss is recognized immediately in profit or loss.

An item of Property, Plant, and Equipment should be derecognized (removed from the statement of financial position) on disposal or when no future economic benefits are expected from its use or disposal. Gains or losses arising from derecognition are recognized in profit or loss. The gain or loss is the difference between the net disposal proceeds and the carrying amount of the asset.

For the CFA exam, focus on:

• The components of initial cost.
• The differences and implications of the cost model vs. revaluation model.
• The calculation and impact of different depreciation methods.
• Identifying when expenditures should be capitalized versus expensed.
• The process of impairment testing and loss recognition.
• The calculation of gains/losses on disposal.