All other subsequent expenditure should be recognised in the statement of profit or loss, because it merely maintains the economic benefits originally expected
Illustration 2 – Subsequent expenditure
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A piece of machinery has an annual service costing $10,000. During
the most recent service it was decided to replace part of the
engineering meaning that it will work faster and produce more units of
product per hour. The cost of the replacement part is $20,000.
Would this expenditure be treated as asset or expense items?
Solution
$10,000 servicing cost is an expense item, written off to the
statement of profit or loss.
$20,000 replacement part enhances future economic benefits and
so is an asset and increases the cost of non-current assets in the
statement of financial position.
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2 Depreciation
Definitions
'Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life' (IAS 16, para 6).
'Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value' (IAS 16, para 6)
Depreciation must be charged from the date
the asset is available for use, i.e. it is capable of operating in the manner intended by management.
This may be earlier than the date it is actually brought into use, for example if
staff need to be trained to use it. Depreciation is continued even if the asset is idle.
The depreciation method used should reflect as fairly as possible the pattern in which the asset’s economic benefits are consumed by the entity. Possible
methods include:
straight line
reducing balance
machine hours.
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