- This topic has 3 replies, 2 voices, and was last updated 7 years ago by
MikeLittle.
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Rosicky
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Hi Sir,
I can’t seem to understand why was the vessel that was overhauled after 8 years before its useful life period of 10 years is expensed. Shouldn’t any major repair/upgrade/overhaul be captialised ? Must it be routine or planned ?appreciate some enlightenment.
thanks.
MikeLittle
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“Kayte keeps some of its vessels for the whole 30 years ….”
In addition, if the overhaul was merely carried out to ensure it lasts 30 years and it doesn’t improve performance or generate additional revenue, then it needs to be expensed.
It’s a VERY tricky area – in practice as well as in exams
Ok?
Rosicky
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Hi Mike
Thank you for replying to my question.
In regards to the question, therefore it means restoring the 8 year old vessel’s engine doesn’t provide economic benefit even though it’s a major overhaul; useful life remains or capacity to generate additional revenue hasn’t increase.
Whereas those vessels on planned maintenance every 10 years, we capitalized as the engine is being componentize, major overhaul takes place(maintenance) & enhances the life of the vessel by another 10 years.
Therefore when it comes to capitalizing subsequent repair & maintenance can I safely say it must meet one of the following –
1. It enhances the economic benefits of the tangible fixed asset in excess of the previously assessed standard of performance; incremental benefits associated with cost.
2. Where a component of the tangible fixed asset that has been treated separately for depreciation purposes and depreciated over its individual useful economic life, is replaced or restored.
3. It relates to a major inspection / overhaul restoring economic benefits consumed and reflected in depreciationIn regards to the 3rd point, does restoring economic benefit mean back to its original level/capacity ? Shouldn’t that be expensed?
And enhancement of economic benefit doesn’t have to planned to qualify for capitalization ?
Honestly I am still a bit confused of the treatment application.
MikeLittle
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The last line in my previous post says it all! It’s a VERY tricky area!
I like your 1, 2 and 3
Restoring previously depreciated parts to restore their earning capacity is good.
I presume that the restoration does not have to bring the asset back to its original condition but rather bring it back to a condition where it is again able to contribute to the revenue earning / expense saving capacity of the asset
Rosicky
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