Question

We operate a chiller plant through which we provide cooling services to our customers.

However the soil around the plant is of poor quality due to a leakage of water from the plant. It caused some underground leaks. We are able to identify the leaks only by performing the excavation and the road reinstatement works. If we don’t carry out this work, then there is a risk of sinking and destroying the plant.

This reinstatement work requires huge amount of money.

On this ground can we capitalise this cost instead of charging as repairs and maintenance expenses?
 

Answer

In my opinion yes, you can.

IAS 16 states that you should expense subsequent expenditures for property, plant and equipment when they represent day-to-day servicing, mostly consumables and labour.

However, in my opinion this is not the case.

This work is a huge reinstatement work that is absolutely necessary to perform in order for the whole plant being able to operate. I assume that this work will also extent plan’t useful life.

Thus I would say that if you apply IAS 16 paragraphs 13 and 14 analogically, you would include this cost into the cost of the plant rather than expense it in profit or loss.

Also, paragraph 11 analogically describes the acquisition of assets for environmental reasons. It is not the same situation, but the principle is the same.