- This topic has 11 replies, 3 voices, and was last updated 9 years ago by
.
- Posts
According to IAS 16 inspection and overhaul cost should be capitalized as incurred and depreciated over its useful life. Can you explain me the rationale and scope of this provision in the IAS ? As what are the economic benefits that are going to flow to entity as a result of inspection and why not expense as incurred. Also, the inspection might be imposed by law or regulation or on own discretion will it effect this provision ?
Hmmm! Not sure about the inspection side of this myself! Overhaul I can understand. When PPE is overhauled, the word itself suggests that this is more than simple maintenance – it’s an all-over major adjustment / amendment / service which is doing more than simply maintaining useful economic life – it’s improving the earning capacity of the asset. And thus, it should be capitalised and depreciated
With reference to the inspection costs, does the IAS not say that they MAY be capitalised if they fulfill the criteria of improving earning capacity? You mention “provision” – I assume that you’re not talking about a provision in the technical sense of IAS 37. If you were, and you’re referring to the possibility of legally required inspections and therefore the appropriateness of providing for them, then “No” they would not be providable simply because the company could walk away from the asset – abandon it – and thus avoid the expense of inspection.
Yes with provision i didnot refer to IAS 37 anyways it was helpful in the context. In the same context why decommissioning cost is capitalized and provision realized and later increasing the provision with time.
Well, referring to the Dec 09 paper Q1 where a warehouse is required to undergo major health and safety inspection because of a new regulation. It was quite confusing as how can inspection result in economic benefit to a company or improve the economic benefit from an asset to be capitalized.
Thanks Mike 🙂
Ah – in the context of the warehouse inspection – yes, I can see that it should be capitalised. If it didn’t undergo the inspection, presumably it would be closed down. Thus the inspection costs can clearly be seen to be necessary in order that the building could continue to be used and thus help to contribute to ongoing inflows of economic benefit
Decommissioning costs – they satisfy the definition! They are a present obligation (legal or constructive) arising from some past event the settlement of which will probably involve the outflow of economic resource capable of reliable measurement.
So …… capitalise
Mike, isn’t it when you initially recognize an asset to calculate the cost of an asset. And it can be argued as same can be deemed necessary for maintenance and repairs. Is it with the necessity or a requirement ? there is a difference between continuing to provide economic benefit and improving the benefits from that asset.
And lets say for example we have a oil rig from which we have realized decommission cost and we intend to sell that asset. How will we account for such a provision ?
Thanks Mike.
Yes, but if we are no longer to be allowed to use the asset unless we have it inspected (and we didn’t know this when we bought it) then the inspection is going to allow the future generation of earnings from the use of that asset where, if we don’t have it inspected, it will cease to generate earnings.
When we use an oil rig, we typically will be obliged to de-commission it so we know from the start that it’s an obligation and should be capitalized.
How to account for the provision on disposal? I can only imagine that we reduce the asset down to a net asset (net of the provision)
Is that ok?
Compont approach
-alpha ltd acquires an aircraft at a cost of $2000 000.it is estimated that 45% of the cost is attributable to frame of the aircraft,which has an expected useful life of 20years .the remainder of the cost is attributable to the eengines.if the engines are replaced at the end of 4years at a cost of $1300 000.Can you show me the journal?
And also the journal if engine were never identified as separate component. But the incurred cost to replace the engines at the end of 4years qualifies for recognition as an assets
Dr Aircraft $2,000,000
Cr Cash $2,000,000If you wished to be more detailed in your entry (and it would help with later depreciation calculations!),
Dr aircraft frame $900,000
Dr aircraft engines $1,100,000
Cr Cash $2,000,000Depreciate the frame over 20 years at the rate of $18,000 each year
Depreciate the engines over 4 years at the rate of $2,750,000 each yearIsn’t this from F3? Or, at least, from F7!
Really appreciate it Mike for your assistance to ACCA students through all these years.
Really i am short of words to express my gratitude.
Just wanna thank you for your efforts for us. Its people like you who will be remembered forever for what you do for others.
Gladly and proudly your former student and admirer. 🙂
I thought I recognised the name “rimx”! and was surprised to see a post from you!
Glad to hear that you were successful and that you are now starting off on a long and rewarding career.
You can help us though!
Whenever it is appropriate and you are speaking with someone embarking on a career in accountancy and they are wondering about the examination journey, you could spread the word about opentuition.
That would be very kind of you
Good luck to you in the future, whichever way it takes you
🙂
- You must be logged in to reply to this topic.