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Dudhley has acquired a machine which requires a major overhaul every 3 years. The cost of 1st overhaul is reliably estimated at 120k..
Is provision required or not ?can you please help me understand why provision is not required in this case?
Hi,
It is because you could easily sell the machine and not have to perform the major overhaul. What we do instead is split the 120k from the total cost of the asset and depreciate the 120k over the three years and then the rest of the asset’s cost is spread over the useful life of the asset.
Thanks
there is no where mentioned in the question that it is easily sold. because as per my understanding we makes a provision until and unless it is specifically mentioned that it can be sold easily.
Please help me understand it better, thanks!
It doesn’t need to mention it being sold. Where have you seen that we need it mentioned that it can be easily sold? The standard takes the view that we have the machinery but it is not a legal requirement for the overhaul and could also sell it prior to the overhaul being required, hence no provision.
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