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Commission Regulation (EC) No 1725/2003 of 29 September 2003 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council.

Content

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Property, plant and equipment - major inspection or overhaul costs

Paragraph 11 of IAS 1 (revised 1997), presentation of financial statements, requires that financial statements should not be described as complying with International Accounting Standards unless they comply with all the requirements of each applicable standard and each applicable interpretation issued by the Standing Interpretations Committee. SIC interpretations are not expected to apply to immaterial items.

Reference: IAS 16, property, plant and equipment (revised 1998).

Issue

1. IAS 16.23 (revised 1998) 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.

2. IAS 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.

3. 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.

4. 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.

Consensus

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:

(a) consistent with IAS 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);

(b) it is probable that future economic benefits associated with the asset will flow to the enterprise; and

(c) 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.

Date of consensus: October 1999.

Effective date: This interpretation becomes effective on 15 July 2000. Implementation of the components approach described in this interpretation is a change in the method of depreciation and is treated as a change in accounting estimate, consistent with IAS 16.52. As a result, the depreciation charge for the current and future periods is adjusted.

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