Additions to Property, Plant, and Equipment

Definition

The financial accounting term additions to property, plant, and equipment refers to one type of cost subsequent to acquisition.  Additions are defined as an increase or expansion of these assets and the cost is typically capitalized.

Explanation

Subsequent to assets being placed into service, they oftentimes require additional investments to either improve or maintain their productivity.  Additions are one of four categories of these investments; the others include improvements, reinstallations and rearrangements, and repairs.

To capitalize costs associated with existing property, plant, and equipment, one of the following three conditions must be met:

  • The quality of output is enhanced in some manner.  The units produced contain functionality that was not present prior to the investment.
  • The useful life of the asset is extended.   For example, the expected service life of the asset is longer after the investment.
  • The capacity or productivity of the equipment increases.  The units of output are higher.

By their very nature, additions to assets involve the creation or expansion of the capacity or output of an existing asset.  For this reason, nearly all additions qualify for capitalization, and need not be expensed.

Oftentimes an addition can include a change to an existing structure.  For example, an exterior wall of a building may be torn down to accommodate a new wing.  If the company did not anticipate the destruction of this part of the asset, the loss in value should be reported (expensed) in the current period.   If the original plans included the eventual expansion of a facility, the cost of this removal can be included in the capitalized cost of the addition.

In practice, companies do not eliminate the cost of the removed property from the original asset account and continue to depreciate the entire historical value.

Related Terms

property, plant, and equipment, costs subsequent to acquisitionimprovements and replacements, reinstallations and rearrangements, repairs, disposition of property, plant, and equipment, sale of property, plant, and equipment, involuntary conversions,  service life, acquisition cost