Major inspections of Business Assets

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Major inspections

A company might only be allowed to operate some assets if those assets are subject to regular major inspections for faults. The cost of such major inspections is recognised in the carrying amount of the asset as a replacement if the recognition criteria are satisfied.

When a major inspection is carried out any remaining carrying amount of the cost of the previous inspection is derecognised.

Measurement after initialrecognition All items of property, plant and equipment in a class can be accounted for using one of two models:

 Cost model - Property, plant and equipment is carried at cost less any accumulated depreciation and any accumulated impairment losses.

 Revaluation model - Property, plant and equipment is carried at a revalued amount.

This is the fair value at the date of the revaluation less any subsequent accumulated depreciation and any accumulated impairment losses.

The same model should be applied to all assets in the same class. For example, a company’s policy might be to value all its motor vehicles at cost, but to apply the revaluation model to all its land and buildings

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.

 

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The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal,

if the asset were already of the age and in the condition expected at the end of its useful life.

Useful life is: (a) the period over which an asset is expected to be available for use by an entity; or

(b) the number of production or similar units expected to be obtained from the asset by an entity.

Carrying amountis the amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment losses. (Net book value (NBV) is a term that is often used instead of carrying amount).

 

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Depreciation of an asset begins when that asset is available for use. This means when the asset is in the location and condition necessary for it to be capable of operating in the manner intended by management.

Depreciation ends at the earlier of when an asset is classified as held for sale in accordance with IFRS 5: Non-current assets held for sale and discontinued operations and when it is derecognised.

Depreciation does not cease when an asset becomes idle or is withdrawn or retired from active use.

Review of useful life IAS 16 requires useful lives and residual values to be reviewed at each year-end.

Any change is a change in accounting estimate. The carrying amount (cost minus accumulated depreciation) of the asset at the date of change is written off over the (revised) remaining useful life of the asset

 

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Residual value

The residual value of an item of property, plant and equipment must be reviewed at least at each financial year end and if expectations differ from previous estimates the depreciation rate for the current and future periods is adjusted.

A change in the asset’s residual value is accounted for prospectively as an adjustment to future depreciation. Review of depreciation method The depreciation method applied to property, plant and equipment must be reviewed periodically and, if there has been a significant change in the expected pattern of economic benefits from those assets, the method is changed to reflect the changed pattern.

Where there is a change in the depreciation method used, this is a change in accounting estimate. A change of accounting estimate is applied from the time of the change, and is not applied retrospectively.

The carrying amount (cost minus accumulated depreciation) of the asset at the date of the change is written off over the remaining useful life of the asset