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Sir under the above mentioned standard, there is a clause which say that “assets that are in continued operation (eg an aircraft) may require regular major inspection to ascertain any faults and regardless of any faults, such cost should be capitalized as a replacement cost”. Why should the cost be capitalized and not taken through P&L as a revenue exp?
I will really appreciate if you can explain the rational behind this.Also, if the payment of an asset is deferred over for example, just say five years. Can you say how these payments must be capitalized. If its over the five years or should it be capitalized in full in year one.
For such assets (also ships), inspection costs must be estimated on INITIAL RECOGNITION of the asset. This cost will be depreciated over the period to the first inspection and the remainder of the original cost over the estimated life of the asset. For example, a shop costs $200m and must have a major overhaul (inspection) in a dry dock every 5 years. The estimate of the inspection is $50m. The inspection cost will be depreciated at $10m per annum and the remainder ($150m) at $7.5m per annum ($150m/20).
Although such costs may look like a repair (expense) they are a cost of getting the ship back into a seaworthy condition which, under IAS 16, must be capitalised.
After 5 years the carrying amount of the inspection cost will be $0 (as fully depreciated) and the actual cost, say $60m, of the overhaul must be capitalised (and depreciated over the next 5 years) … and so on. The cost of the overhauls does get expensed – but as depreciation (i.e. spread over 5-year period) – rather than in “hits” of the actual expense every 5 years.
If payment is deferred – the present value of the future payments will be capitalised on initial recognition of the asset (this will be the asset’s cost) and there will be a liability until the asset has been paid for.Sir, under the note of the financial statements for property, plant & equipment, it shows the following:
Cost
Accumulated Depreciation
Net Book ValueUnder the heading, ‘accumulated depreciation’, sometimes there is a part which says “write back on disposal”. Can you please explain what this means via an example.
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