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 permits two accounting models:
    Cost model. The asset is carried at cost less accumulated depreciation and impairment. [IAS 16.30]
     
    Revaluation model. The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation and impairment, provided that fair value can be measured reliably. [IAS 16.31]
    The revaluation model
    Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date. [IAS 16.31]
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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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