Recognition
The cost of property,
plant and equipment will be recorded as an asset if:
(1) it is probable future benefits will be
generated; and
(2) the cost of the item can be measured
reliably.
Spare parts and
servicing equipment
These are usually
carried as inventory, and recorded in the income statement as consumed.
However, major spare
parts and stand-by equipment qualify as property, plant and equipment, if they
will be used during more than one period.
Also, if the parts
and servicing equipment can be used only in connection with an item of
property, plant and equipment, they are accounted for as property, plant and
equipment.
IAS 16 does not
specify what constitutes an item of
property, plant and equipment.
It may be appropriate
to aggregate individually-insignificant items, such as computer spare parts as
one asset.
Safety and
environmental costs
Items may be acquired
for safety or environmental reasons. The benefit is the undertaking’s continuance
in business, as a result of their use.
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EXAMPLE Can
equipment with no immediate value to an undertaking’s operation be
capitalised as an asset?
Issue
Expenditure
for property, plant and equipment is recorded as an asset when:
i)
it is probable that future economic benefits will flow to the undertaking;
and
ii)
cost can be reliably measured.
Property,
plant and equipment may be acquired for safety or environmental reasons. Such property, plant and equipment may not
increase the future economic benefits of existing items of property, plant
and equipment.
However,
it may be necessary for an undertaking to obtain the future economic benefits
from its other assets. This type of
property, plant and equipment can be recognised as an asset because the undertaking
can derive economic benefits from related assets.
Can
management capitalise expenditure in respect of an asset that has no
immediate value to an undertaking’s operations?
Background
A
bank runs a network of branches. New health and safety legislation is
introduced which requires all branch owners throughout the country to install
a sprinkler system. The addition of
the new system will not increase the banks’ business.
The
branches have not suffered any fires, and management considers that there is
only a remote chance of a fire occurring in the future. The installation of the sprinkler is
therefore not expected to reduce the operating costs of the branches.
Solution
Yes.
Management should recognise the sprinkler system as an asset, to the extent
that the resulting carrying amount of each branch (assuming that each branch
is a separate cash-generating unit) does not exceed its recoverable amount
(see impairment section below).
The
acquisition of safety equipment, which does not increase any future economic
benefits, qualifies for recognition as an asset if it enables future economic
benefits to be obtained from related assets.
Management
can only earn future economic benefits from the branches by installing the
sprinkler system, because the authorities are likely to close branches
without such systems.
However,
the cost of the sprinkler system should not be recognised until it has been
installed.No provision should be made for the future installation of health
and safety equipment.
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Repairs and
maintenance costs
The costs of the
day-to-day servicing (‘repairs and maintenance’) are recorded in the income
statement as incurred. These costs exclude items that significantly add value.
Material parts of
some items may require replacement at regular intervals. For example, motors of
air conditioning systems may require replacement several times during the life
of the system.
Items may also be
acquired to make a less-frequently recurring replacement, such as replacing the
interior walls of a building, or to make a non-recurring replacement.
The cost of the
replacement is added to the cost of the asset and the cost of the old part is
subtracted.
New carrying cost =
old carrying cost + new part cost - old part cost
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EXAMPLE replacing parts
Your building has a
carrying amount of $1 mln. New interior walls cost $0,2 mln.
The original walls
have a carrying amount of $0,1mln.
Add the cost of the
new walls, and remove the carrying amount of the old walls:
$1 + $0,2 - $0,1= $1,1mln. is the new carrying amount. |
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I/B
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DR
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CR
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Property, plant & equipment
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B
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$0,2 mln
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Cash
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B
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$0,2 mln
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Depreciation
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I
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$0,1 mln
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Property, plant & equipment
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B
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$0,1 mln
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This records the purchase of the new walls and disposal
of the old walls
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