Mamatha (ACS) (45 Points)
26 December 2009Dear All,
We have replaced a major part of machinery in a manufactruing company, the cost of which is almost 75% of the current WDV of the Machinery.
My question is:
1. Can we capitalise the same by treating the same as partial replacement of asset or addition to the asset ?
2. Which is advantageous is capatalising it or deducting as deffered revenue expenses?
Thanks in Advance.
Mamatha H M
gokul
(Accountant)
(126 Points)
Replied 26 December 2009
AS 10 Accounting for Fixed Assets - Para 23 - "Subsequent expenditures related to an item of fixed asset should be added to its book value only if they increase the future benefits from the existing asset beyond its previously assessed standard of performance."
Please check whether the replacement is done to merely keep the asset running or for running in a better/efficient manner. If the replacement increases the performance, capitalize it else charge off.(This is as far as generally accepted accounting practize as per AS 10 is concerned).
But since the cost of replacement forms major part of the asset, it would be appropriate to capitalize the replacement cost even if there is no increase in future benefits.
As for as the second question is concerned, treating the expenditure as Deffered Revenue Expenditure is not appropriate.
Either Captialize or Charge off to P/L entirely in the year of expenditure.
Thanks
Regards
CAclubindia
