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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Major overhaul – IAS 16
Dear sir, i have 2 questions:
1. Can i make a provision for regular overhauls ( say, major overhaul every 5 years)
2. there are 2 ways of recording the major overhaul as follow
Assume total initial cost of PPE = $1000, useful life = 20 years, residual value=nil ,using straight line method
after 5 years, the business have to perform major overhauling with assumed cost of $100
So the 1st double entry is
DR PPE $1000
CR Cash/supplier $1000
2a. The business depreciates the PPE in 2 seperate components
+ $100 for major overhaul, annual depreciation charged to SoPL = $100/5=$20
+ the remaining amount of $900 is depreciated over 20 years so annual depreciation expense = $900/20=$45
-> Total depreciation charged to SoPL = $65
At the end of year 5, they paid for the overhaul accounted it as follow:
DR PPE $100
CR Cash $100
2b. In the first 5 years, annual depreciation = $1000/20=$50
After 5 years, they perform major overhauling and $100 is capitalised
DR PPE $100
CR Cash/supplier $100
In the next 5 years, there’s an extra depreciation item for Major overhaul and double entry as follow
DR Depreciation expense $50+$20=$70
Cr Accumulated Depreciation $70
=> Are those ways of recording major overhaul appropriate in accordance with IAS 16???
Hi,
No, you do not make a provision for the regular overhaul as there is no obligation for the overhaul.
The correct treatment is your 2a. scenario where the cost of the overhaul is depreciated separately from the remainder of the asset’s cost.
Thanks
Thanks
Hi,
No, you do not make a provision for the regular overhaul as there is no obligation for the overhaul.
The correct treatment is your 2a. scenario where the cost of the overhaul is depreciated separately from the remainder of the asset’s cost.
Thanks
Thanks