Which costs should not be capitalised under IAS 16?

Which costs should not be capitalised under IAS 16?

• A. The costs of day to day service cannot be capitalised and should be recognised in the P&L
• B. The expenditure that improves the future economic benefit the asset will generate
• C. Replacement of a component with derecognition of the old component
• D. Initial legal fees included in asset cost

Answer: (A)

Under IAS 16, only costs that bring the asset to the condition and location required for its use are added to the asset’s cost. Routine day-to-day servicing and maintenance do not meet this criterion, so they are expensed in the period they are incurred. That’s why day-to-day service costs should not be capitalised. In contrast, costs that genuinely add future economic benefits to the asset are capitalised. If a component is replaced, the cost of the new component is included in the asset’s carrying amount and the old component is removed from the asset. Initial legal fees that are directly attributable to acquiring the asset or bringing it to use are also included in the asset’s cost. So, the costs that should not be capitalised are those day-to-day servicing costs; all the other described costs can be capitalised when they meet IAS 16’s criteria.

Under IAS 16, only costs that bring the asset to the condition and location required for its use are added to the asset’s cost. Routine day-to-day servicing and maintenance do not meet this criterion, so they are expensed in the period they are incurred. That’s why day-to-day service costs should not be capitalised.

In contrast, costs that genuinely add future economic benefits to the asset are capitalised. If a component is replaced, the cost of the new component is included in the asset’s carrying amount and the old component is removed from the asset. Initial legal fees that are directly attributable to acquiring the asset or bringing it to use are also included in the asset’s cost.

So, the costs that should not be capitalised are those day-to-day servicing costs; all the other described costs can be capitalised when they meet IAS 16’s criteria.