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Good Morning Sir,
I’m stuck with a question which appeared in the 2016 February Case Study, First Choice Bakery, variant 2, Q2.
They have an ageing vehicle fleet which doesn’t comply with emission legislation. They are planning “on updating the vehicles existing engines and exhaust systems to comply”. They are spending £125,000 and the question is whether capitalise or expense.
My answer is to capitalise because the update will extend the useful life of the vehicle.
The model answer is exactly the opposite – cannot be capitalised because update doesn’t extend useful life simply allows vehicle to comply with legislation.
I am really confused because I would have thought updating an ageing engine would definitely extend useful life, surely a compliant engine would be better and make the vehicle live longer.
I don’t know vehicles and engines and I don’t know how I am supposed to know whether expenditure incurred in renewing a component of a existing non-current asset extends the life or not. Would I get 0 marks on the case study question just because I make a bad judgement? Surely in real life I would ask a engine expert / mechanic to assess whether the useful life’s been extended or not.
I hope you can add some insight.
Hi,
Subsequent expenditure can be capitalised if it enhances the economic benefit and yes if that life of the asset is being extended then it usually indicates that the benefit is being enhanced.
However, the key here that the updates to the engines do not increase the life, I don’t think it mentions this is in the question either, you’ve just assumed that it does. The update is just getting the engines up to the operating capacity that they were previously operating at and so there is no enhancement. As there is no enhancement then the expenditure is expensed.
If you answer something incorrectly then you would not score any credit.
Hope this helps.
Thanks
Good Morning Sir,
Thank you for your quick answer. I think I do get your point and under exam condition when IAS5 comes around I won’t assume an extended useful life unless the question explicitly says so.
However I have to add that even though the case study question didn’t say the useful life was extended, it didn’t say that it wasn’t either. So I had to make an assumption one way or other.
Obviously at work it wouldn’t be down to Accounts to decide whether the life of an asset has been extended or not. It would be based on discussion with the car experts.
Hi,
If the life of the asset was to be extended then it would be specifically stated in the question. It is like dealing with error type questions, in that if you’re not told something is wrong then it must be correct, we don’t assume that it is incorrect.
Keep up the hard work. When are you looking to take the exam?
Thanks
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