Chapter 11- PPE and Intangible Assets: Utilization and Impairment

BuildingProperty, plant and equipment, along with intangible assets are long-lived assets that a company uses in the production of goods and services.  If you recall, the matching principle requires that expenses associated with the earning of revenue be matched to that revenue.  Because of their nature,  it is not possible to directly relate revenue earned with property, plant, equipment or intangibles to their cost.  Therefore, some mechanism needs to be in place to allocate the cost of these long-lived assets to expense.

Depreciation and amortization accomplish this allocation requirement.  Before the depreciation or amortization can be determined, however, several things are necessary.  First, a method must be designated.  Second, an estimate of the assets useful life must be made.  Finally, an estimate of the value of the asset at the end of its useful life, i.e., residual value must be made.

For more information about this and other aspects of the utilization and impairment of property, plant and equipment, and intangibles, go here.