## Putting It Together: Property, Plant, and Equipment

Let’s take a final look at the assets section of the balance sheet for Facebook, Inc., focusing on PP&E. Notice the title of that line specifically states, “Property and equipment, net,” which means that the $35.323 billion dollars in PP&E is stated net of accumulated depreciation, meaning it is the book value of those assets. FACEBOOK INC. CONSOLIDATED BALANCE SHEET (in millions, except for number of shares and par value) Description December 31, Description 2019 2018 Category, Assets Subcategory, Current Assets: Cash and cash equivalents$     19,079 $10,019 Marketable securities 35,776 31,095 Accounts receivable, net of allowances of$206 and $229 as of December 31, 2019 and December 31, 2018, respectively 9,518 7,587 Prepaid expenses and other current assets 1,852 1,779 Total current assets Single line 66,225 Single line 50,480 Property and equipment, net 35,323 24,683 Operating lease right-of-use assets, net 9,460 Intangible assets, net 894 1,294 Goodwill 18,715 18,301 Other Assets 2,759 2,576 Total assets Single line$     133,376
Double line
Single line
$97,334 Double line Let’s also look at Note 6 again. In 2019, accumulated depreciation is almost$11 billion, up from $7 billion in 2018. Note 6. Property and Equipment Property and equipment, net consists of the following (in millions): Description Column added for spacing Column added for spacing December 31, Description Column added for spacing Column added for spacing 2019 2018 Land$     1,097 $899 Buildings 11,226 7,401 Leasehold improvements 3,112 1,841 Network equipment 17,004 13,017 Computer software, office equipment and other 1,813 1,187 Finance lease right-of-use assets 1,635 Construction in progress 10,099 7,228 Total Single line 45,986 Single line 31,573 Less: Accumulated depreciation (10,663) (6,890) Property and equipment, net Single line$     35,323
Double line
Single line
$24,683 Double line The rest of the text of Note 6 states: Depreciation expense on property and equipment were$5.18 billion, $3.68 billion, and$2.33 billion for the years ended December 31 of 2019, 2018, and 2017, respectively. The majority of the PP&E depreciation expense was from network equipment depreciation of $3.83 billion,$2.94 billion, and \$1.84 billion for the years ended December 31 of 2019, 2018, and 2017, respectively. Construction in progress includes costs mostly related to construction of data centers, network equipment infrastructure (to support our data centers around the world), and office buildings. No interest was capitalized for any period presented.

In addition, on pages 82–83 in Note 1, entitled Summary of Significant Accounting Policies, that starts on page 79, the company discloses its general policies around reporting fixed assets and calculating depreciation. Most of these general policies you should recognize by now:

PP&E, which includes amounts recorded under finance leases, are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or the remaining lease term, whichever is shorter.

The estimated useful lives of property and equipment are described below:

Property and Equipment Useful Life
Network equipment 3– 20 years
Buildings 3–30 years
Computer software, office equipment and other 2–5 years
Finance lease right-of-use assets 3–20 years
Leasehold improvements Lesser of estimated useful life or remaining lease term

The useful lives of our property and equipment are determined by management when those assets are initially recognized and are routinely reviewed for the remaining estimated useful lives. Our current estimate of useful lives represents the best estimate of the useful lives based on current facts and circumstances but may differ from the actual useful lives due to changes in future circumstances, such as changes to our business operations, changes in the planned use of assets, and technological advancements. When we change the estimated useful life assumption for any asset, the remaining carrying amount of the asset is accounted for prospectively and depreciated or amortized over the revised estimated useful life. Historically, changes in useful lives have not resulted in material changes to our depreciation and amortization expense.

Land and assets held within construction in progress are not depreciated. Construction in progress is related to the construction or development of PP&E that have not yet been placed in service for their intended use.

The cost of maintenance and repairs is expensed as incurred. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from their respective accounts, and any gain or loss on such sale or disposal is reflected in income from operations.

You may be surprised now by how much of these financial statement disclosures you understand. You know property and equipment net means book value. You recognize the different subcategories of PP&E listed in Note 6, and you know accumulated depreciation is all the prior depreciation expense taken minus any accumulated depreciation that was attached to assets sold. You know how straight-line depreciation expense is calculated (Facebook, Inc. likely uses accelerated depreciation for tax purposes, which is allowed under both tax law and GAAP). You understand the concept of useful life and of capitalization.

You may have caught the line where the company says, “Construction in progress includes costs mostly related to construction of data centers, network equipment infrastructure to support our data centers around the world, and office buildings. No interest was capitalized for any period presented.” That statement probably means the company did not borrow any money for the construction in progress. If it had, it would be capitalizing interest as part of construction. In the second to the last paragraph of the accounting policies statement, you may have noticed the company addressing both concepts of estimates and materiality, and in the last paragraph you saw the company address both repairs and maintenance (expensed as period expenses) and  gains and losses on retirement of assets.

Now, with your new knowledge about the ways PP&E is addressed and assessed, you will be able to read a company’s financial statements with a greater depth of understanding.