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| Home > Accounting Standards > Interpretations of Financial Reporting Standards 2003 > INT FRS 23 |
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Interpretation of Financial Reporting Standard
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Property, Plant and Equipment - Major Inspection or Overhaul Costs |
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Paragraph 11 of FRS 1, Presentation of Financial Statements, requires that financial statements should not be described as complying with Financial Reporting Standards unless they comply with all the requirements of each applicable Standard and each applicable Interpretation of the Financial Reporting Standard. INT FRSs are not intended to apply to immaterial items. |
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Reference: FRS 16, Property, Plant and Equipment |
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ISSUE |
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- FRS 16.23 requires the capitalisation of subsequent expenditure on an item of plant, property or equipment that improves the condition of the asset beyond its originally assessed standard of performance. All other subsequent expenditure, such as repairs or maintenance expenditure that restores or maintains the future economic benefits that an enterprise can expect from the originally assessed standard of performance of the asset, should be recognised as an expense in the period in which it is incurred.
- FRS 16.27 indicates that major components of some items of property, plant and equipment may require replacement at regular intervals. The components are accounted for as separate assets because they have useful lives different from those of the items of property, plant and equipment to which they relate.
- An enterprise purchases a property, plant and equipment asset and incurs all costs necessary to bring it into condition for its intended use. The enterprise will in the future need to perform a major inspection or overhaul of the asset at regular intervals over its useful life to allow the continued use of the asset by the enterprise. An example of this is the purchase of an aircraft which requires an overhaul once every three years.
- The issue is when the enterprise incurs the cost of the major inspections or overhauls of the item of property, plant or equipment, occurring at regular intervals over the useful life of the asset and made to allow the continued use of the asset by the enterprise, should those costs be capitalised as a component of the asset or expensed.
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CONSENSUS |
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| 5. |
The cost of a major inspection or overhaul of an item of property, plant and equipment occurring at regular intervals over the useful life of an asset and made to allow the continued use of the asset should be recognised as an expense in the period in which it is incurred except when:
- consistent with FRS 16.12, the enterprise has identified as a separate component of the asset an amount representing major inspection or overhaul and has already depreciated that component to reflect the consumption of benefits which are replaced or restored by the subsequent major inspection or overhaul (whether the asset is carried at historical cost or revalued);
- it is probable that future economic benefits associated with the asset will flow to the enterprise; and
- the cost of the major inspection or overhaul to the enterprise can be measured reliably.
If these criteria are met, the cost should be capitalised and accounted for as a component of the asset. |
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BASIS FOR CONCLUSIONS |
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| 6. |
Under FRS 16.07, an item of property, plant and equipment should be recognised as an asset when it is probable that future economic benefits associated with the asset will flow to the enterprise and the cost of the asset to the enterprise can be measured reliably. FRS 16.15 indicates that the cost of an item of property, plant and equipment includes the directly attributable costs of bringing the asset to working condition for its intended use. |
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FRS 16.26 states that the appropriate accounting treatment for subsequent expenditure depends upon the circumstances that were taken into account on the initial recognition and measurement of the related item of property, plant and equipment. On the initial recognition and measurement of an item of property, plant and equipment, an enterprise assesses the standard of performance of the asset to determine its useful life, residual value and the appropriate allocation of the depreciable amount of the asset. As stated in FRS 16.41, the depreciation method used reflects the pattern in which the asset's economic benefits are consumed by the enterprise. |
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| 8. |
In determining the depreciation method, an enterprise considers the need for future expenditure on major inspections and overhauls, for example the requirement for aircraft to be overhauled on a regular basis. This need for periodic major overhauls and inspections reflects a pattern of consumption of the economic benefits of the asset, which it is appropriate to recognise in accordance with FRS 16.12 and .41, by depreciating that component part of the asset representing the major inspections or overhauls at a faster rate than the remainder of the asset. |
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FRS 16.27 indicates that it is appropriate to treat major components of items of property, plant and equipment that may require replacement at regular intervals as separate assets for depreciation purposes because they have useful lives different from those of the items of property, plant and equipment to which they relate. The approach in this Interpretation is consistent with FRS 16.27. |
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Assets which are acquired or constructed and are already in working condition for their intended use may contain an inherent component attributable to a major inspection or overhaul. This inherent component may not have been separately invoiced or specifically identified; however, it may be estimated based on the current cost of the expected occurrence of a major inspection or overhaul. For example, an enterprise that purchases a new asset might measure the inherent component at the time of purchase based on the inspection or overhaul activities which will occur at the end of three years and the cost of those activities if they had been performed at the time of the purchase of the new asset. |
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Effective Date: INT FRS 23 comes into effect on 1 February 2003. Implementation of the components approach described in this INT FRS is a change in method of depreciation and is treated as a change in accounting estimate, consistent with FRS 16.52. As a result, the depreciation charge for the current and future periods is adjusted. |
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