Discussion (INT1030_09-04_COMPdec13_01-14)

AASB 116 requires the depreciable amount of an asset to be allocated over the asset’s useful life on a systematic basis that reflects the consumption of the asset’s future economic benefits.  AASB 116 defines depreciable amount as the cost of an asset, or other amount substituted for cost, less in either case the residual value of the asset.  The Standard also requires that expenditure subsequent to the initial recognition of a non-current asset is to be capitalised when, and only when, it is probable that future economic benefits associated with the expenditure will flow to the entity and the cost can be measured reliably.

This Interpretation requires the depreciation expense to be determined by reference to the depreciable amount of the asset after consideration of such matters as obsolescence and other factors that might give rise to consumption or loss of the future economic benefits represented by the asset.  The Interpretation also requires maintenance and asset enhancement expenditures to be separately identified and recognised in accordance with the requirements of AASB 116 where these amounts can be reliably determined.

Condition assessments are used as a mechanism to determine whether, and the extent to which, the future economic benefits of an infrastructure or other long-lived asset have been consumed during the reporting period, and to confirm the pattern of consumption of those future economic benefits.  Condition assessments do not involve the pricing of the future economic benefits consumed during a reporting period but can provide input for such purposes.  The methodologies adopted for condition assessments will often generate reliable measures of the future economic benefits consumed during the reporting period in accordance with the requirements of AASB 116.

Under some CBD and similar methods, the depreciation expense for a reporting period is determined by reference to the current replacement cost, as at the end of the reporting period, of the future economic benefits consumed during that period.  Consistent with the requirements of AASB 116, this Interpretation does not allow such an amount to be recognised as a depreciation expense where it would be materially different from that which would be determined by reference to the depreciable amount of the asset.  However, where such CBD or similar methods are adopted by public or private sector entities that revalue their assets to current values on a regular basis, the depreciation expense determined under the CBD or similar method may not be materially different from the expense that would have resulted had depreciation expense been determined by reference to the depreciable amount of the asset.

This Interpretation prohibits the use of the renewals method of accounting for financial reporting purposes.  The renewals method of accounting assumes that the asset is in a steady state and that subsequent expenditure on the asset will not increase future economic benefits of the asset, but will maintain the future economic benefits at existing levels.  As such, all expenditure on the asset is treated as maintenance expenditure and recognised as an expense in the period in which it is incurred, and an additional depreciation expense is not recognised.  This Interpretation reflects the view that rarely, if ever, will it be possible to reliably determine that an asset is in a steady state.  In addition, such a steady state is likely to change at any time as, for example, consumer demand and entity objectives change.  Whether an asset is maintained in a steady state as a consequence of expenditure on the asset during the period will be reflected by:

(a)      an analysis of whether the future economic benefits provided by the asset have been consumed during the reporting period and whether expenditure on the asset has restored or increased those future economic benefits; and

(b)     the recognition of maintenance and depreciation expense in accordance with the requirements of AASB 116.

Some CBD and similar methods propose that a provision for future maintenance be recognised.  However, AASB 137 Provisions, Contingent Liabilities and Contingent Assets indicates that a provision for future maintenance cannot be recognised as a liability.  Furthermore, AASB 116 states that when each major inspection is performed, its cost is recognised in the carrying amount of the item of property, plant and equipment as a replacement if the recognition criteria are satisfied.