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Provision for Major refurbishment of NCA

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Provision for Major refurbishment of NCA

  • This topic has 1 reply, 2 voices, and was last updated 2 months ago by P2-D2.
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  • April 2, 2025 at 8:16 pm #716449
    JJavierC
    Participant
    • Topics: 1
    • Replies: 0
    • ☆

    Good evening,

    I was studying the chapter of IAS 37 Provision, Contingent liabilities and contingent assets from the BPP course book. In the book there is a section which explained Capitalised provision costs

    it explains “Costs which are capitalised will be depreciated over the useful life of the machine (or if it relates to a specific overhaul or major refurbishment, the useful life prior to that date). So, if a machine requires a major refurbishment every five years in order to remain functional, then the capitalised provision will be depreciated over the five year.

    This is demonstrating the accruals concept of accounting as the costs relating to the asset (both its used and the refurbishment) are spread over the period when the revenue is generated”

    The book gives the double entry as Dr NCA and credit Provision.

    However, in the ACCA study hub the study resources about this standards says “In addition to routine maintenance, some assets require substantial expenditure every few years for major “refits” or refurbishment and the replacement of major components. These costs should not be provided for; instead, IAS 16 applies” and in the examples given the material explains that the provision is not recognized since the company can avoid the expenditure by selling the machine.

    Could you please explain if what the book is saying is correct or both are correct and I am just confusing two different things?

    thank you in advance

    April 8, 2025 at 5:58 pm #716516
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7163
    • ☆☆☆☆☆

    From what I see then the ACCA Study Hub is correct. We do not provide for the costs, as we could simple decide to sell the asset before the date the refurbishment is required, hence no obligation. What is done is that we split the cost of the NCA, so that part of it relates to the refurbishment cost and the rest related to the rest of the NCA. Each part is then depreciated separately, with the refurbishment cost over the period until refurbishment and the rest of the cost over the useful life.

    Thanks

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