Question about subsequence cost of IAS 16

"ABC company believes that in four years time, the production line will require a major overhaul to ensure it generates economic benefits for the next six years. The estimated overhaul cost at 31 December2016 was $6,000,000." Should this overhaul be capitalized?

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  • IAS 16 states that the cost of an item of property, plant and equipment shall be recognized as an asset if, and only if: it is probable that future economic benefits associated with the item will flow to the entity; and the cost of the item can be measured reliably. This recognition principle shall be applied to all costs at the time they are incurred, both incurred initially to acquire or construct an item of property, plant and equipment and incurred subsequently after recognition to add to, replace part of or service it. Hence, overhauling expenses should be capitalized if company is certain about future inflow of benefits and amount of expenditure.
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  • IAS 16 states that the cost of an item of property, plant and equipment shall be recognized as an asset if, and only if: it is probable that future economic benefits associated with the item will flow to the entity; and the cost of the item can be measured reliably. This recognition principle shall be applied to all costs at the time they are incurred, both incurred initially to acquire or construct an item of property, plant and equipment and incurred subsequently after recognition to add to, replace part of or service it. Hence, overhauling expenses should be capitalized if company is certain about future inflow of benefits and amount of expenditure.
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