Replacement of an asset component
Under IAS 16, recognise the replacement cost in the asset’s carrying amount when the recognition criteria are met, and derecognise the carrying amount of the part replaced. If the old part was not separately identified initially, an estimate may be needed. Day-to-day servicing costs are expensed as incurred. The accounting depends on the nature of the expenditure, not simply whether it occurs after acquisition.
Worked example
A machine’s old motor has a carrying amount of $5,000. A new motor costing $30,000 meets the recognition criteria. Add $30,000 to the machine’s carrying amount and derecognise the old $5,000 motor.
Common mistake
Expensing every replacement automatically because it is subsequent expenditure, or capitalising the new part while retaining the old part’s carrying amount.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | FR | Direct | September 2026–June 2027 |
| ACCA | SBR | Direct | September 2026–June 2027 |