IAS 16 - Property, Plant & Equipment (RECOGNITION)

If it is really an asset worth considering on the balance sheet, then it is will secure the entity with future economic benefits. That is to say, that it´s use and operability will most likely result in future cashflows to the entity. Apart from this, it must be possible to measure the worth of the asset in some reliable way.

Spare parts and equipment used in servicing customers is generally thought of as inventory since a portion is expensed regularly when the income statement is prepared and it is known what portion has been used up during a given period. This is normally not the case with major spare parts and equipment that are used in connection with an actual item of property, plant or equipment. In such an instance, these items are classified and accounted for as Property, Plant & Euipment; however, there is no defining measurement that distinguishes major and minor as classification criteria. Items which are smaller, may still be aggregated, such as moulds, tools and dies which together may be recognized as being acquired to construct an item of property, plant or equipment and subsequently to improve, replace or service that peice of property, plant or equipment. The important fact is that these items were purchased with the given intent to add to, improve, service or otherwise construct an item of property, plant or equipment. Day to day servicing are not considered.

This brings to mind two types of costs when deciding whether to recognize an item of Property, Plant or Equipment.

a) Initial Costs, and

b) Subsequent Costs

Initial Costs

Today´s safety and environmental regulations may require an entity to update a product to bring it into acceptable standards of operability. These costs may not result in direct cash flows to the entity or attribute to increased future economic benefits. Nonethess, they do allow the entity to put the assets to use, which would not be possible without them. Because of these items, certain assets may in themselves attribute to future increased economic cashflows; therefore, are capitalized and included in the initial cost of the property, plant or equipment.

Subsequent Costs

As mentioned already, day-to-day servicing costs are not considered. These costs are expensed directly to the income statement in the period they are incurred. Day to day servicing includes parts, consumables and labour. These costs are referred to as "repairs and maintenance".

Extra-ordinary repairs and maintenance are considered. This includes parts that prolong the life of the asset beyond regular servicing. That would mean that these costs benefit the asset to such an extent that servicing in the future would take place at less frequent intervals or replacement of a part took place that allowed the asset to go on operating. When parts are capitalized, then the parts which were replaced become derecognized. Often, judgement is required from a technical expert to know the worth of an asset. An inspection should be done regularly in order to indicate that component of the property, plant or asset that is still associated with the item when it was acquired or constructed.