FRS15 Expenditure on Fixed Assets

sarahwilson

I have a fairly inane question but it wasn't covered in the textbook adequately so I shall ask you lot!!

FRS15 gives 3 circumstances in which expenditure on a fixed asset should be capitalised and therefore put to the balance sheet not the P&L.

Where it states that if it is the replacement or restoration of a major component is this major in terms of cost of repair to cost of item or major in terms of function of the item? Eg I would say replacing the engine in a works van should be capitalised but replacement tyres shouldn't be. Am I anywhere near?

Cullen

Good question! I dont know but Peugot should be able to difinitively advise you.

I wouldn't say replacing an engine in a van should be capitalised if the original engine blew up due to bad driving etc. I would think in terms of what is the expected useful life or value of the asset and has the expenditure increased this? I would think in terms of a building eg building an extension, or heavy machinery by investing in new technology. It may require assessing each instance of expenditure by considering both expense and function.

You have certainly got me thinking..................

peugeot

This is always a topic which gets people debating and thinking!!

Firstly, it would depend on the company's accounting policy for fixed asset expenditure. However, FRS 15, para 36 subsection (c) states:

.... where the subsequent expenditure relates to a major inspection or overheaul of a tangible fixed asset that restores the economic benefits of the asset that have been consumed by the entity and have already been reflected in depreciation These should be capitalised (this refers to subsequent expenditure).

I would therefore capitalise the replacement engine because it has restored the fixed asset and will extend its useful economic life. However, the replacement engine must be depreciated separately than the actual van itself.

Kind regards
Steve

Cullen

I knew you would know!

In this hypothetical situation:

Company buys van, £10,000, estimated useful life, 5 years

Year 2, engine dies due to White Van Man style of motoring, cost of replacement £2,000

The useful life isn't extended because the chassis will still only for the original 5 years, (and gears and suspension and.....oh all the other bits of a vehicle that I haven't a clue about) and the "consumption" isn't down to normal depreciation but poor management of the asset.

So, in this situation, Steve, would capitalising the subsequent cost of replacing the engine still apply?

(And did I see you win an award on another accountancy forum.....? You old devil, you...)

peugeot

Hi Cullen,

Yes I won technical contributer of the year on the other forum (I usually can't win an argument!!!)

What I would do in the situation you cite is to depreciate the new engine over the expected useful life of the remainder of the asset. So if the new engine costs £2,000, the net book value of the vehicle is £1,000 with 5 years left to run, then write the cost of the engine off over the remaining 5 years. This is why GAAP says to depreciate the subsequent expenditure (the engine) separately (the example GAAP cites is the situation where the roof blows off a building).

The main reason the engine is capitalised is because it essentially restores the performance of the main part of the vehicle and usually the cost of the new engine is quite significant.

Another way to view this is to look at it from a tax perspective. The Revenue would be quick to disallow the cost of such a major item of expenditue on a fixed asset because if you expensed it, you would writing off the full cost of the major part of the vehicle at the balance sheet date, whereas the "shell" ie the remainder of the vehicle is being written off over time.

Best wishes
Steve

sarahwilson

Thanks Steve for the explanantion, it wasn't as inane a question as I thought!!

peugeot

It certainly wasn't!! The number of debates I've listened to about such a question is amazing (I've heard full scale arguments in the past!!!). The problem is identifying the fine line that divides capital vs revenue expenditure. The trick is to understand how to treat the expenditure in terms of (a) the company's declared accounting policies (to enable comparability and consistency) and (b) whether the "subsequent" expenditure enhances both the life of the asset and its performance. FRS 15 (and the FRSSE equivalent) do try to illustrate these points but (understandably) they cannot offer exhaustive examples.

Kind regards
Steve