Dear All!
Please help me with the accounting in this situation.
The co has incurred an amount of Rs.14 lacs in replacing a gear box in the windmill due to the failure of the old gear box. The replacement of gear box does not improve the performance level. However, the windmill cannot run without that gear box. It forms an essential part of its functioning. Should the same be capitalised or not? Please substantiate your reply.
Thanks in Advance!
Dear,
If due to this no improvement in capicity and no increse in life of windmill then it should not be capitalized. (AS-10)
The amount spent by company in replacement of gearbox is in the nature of Repairs and cannot be capitalised. As you have mentioned that the capacity of windmill has not increased, hence there is no value addition to the asset and no further capitalisation is required.
In case of machineries almost all parts are essential without which a machinery cannot be put to use. However, replacement of essentials would not qualify for capitalisation. For instance if you change tyres of a vehicle, do you capitalise or charge off to revenue given the fact that a vehicle cannot run without tyres.?
Hi,
The expenses spent on the gear box need not be capitalised as it does not improve the performance of the windmill as you said.It just restores the previous performance of the windmill.So it can be treated as repairs and maintenance.
Thanks All!
CAclubindia
