Volume 10, No. 13

 

Accounting 101 For Property, Plant & Equipment:  Though it may seem elementary, there has never been any comprehensive guidance published by an accounting standard-setter regarding the kinds of costs that should be classified as property, plant and equipment. That may change in the months ahead. The Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants has put forth a proposal that finally codifies proper practice. AcSEC's proposed accounting would make the policies for classifying certain costs less variable across companies and could also reduce any corporate propensity to capitalize fluffier kinds of costs, of which there have been numerous past examples. One particular aspect of the proposal has been controversial: the requirement to break down large assets into smaller components so that depreciation expense can be more accurately applied. Most preparers of financial statements denounce the proposal for the additional costs it might incur and deride it as an attempt to get depreciation expense "just right." That might not be such a bad thing: given the frequency with which firms write down assets, there may be something very wrong with depreciation expense as presented. Those writedowns sap the confidence of financial statement users - making the status quo a rather expensive proposition as well.

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