Question Tag: Asset Recognition

According to IAS 16, subsequent costs are capitalized and added to the carrying amount of an asset if they meet the following criteria:

1. Enhancement of Future Economic Benefits:
   The costs are capitalized if they enhance the future economic benefits expected from the asset. This means that the expenditure must improve the asset’s performance, increase its useful life, or adapt it to new technology or standards.
2. Replacement of Significant Parts:
   When a part of an asset is replaced, the cost of the replacement is capitalized, provided that the part being replaced is derecognized and removed from the asset’s carrying amount. The replacement part must bring future benefits to the entity.
3. Major Inspections or Overhauls:
   If a major inspection or overhaul is necessary for the continued use of the asset, the cost of the inspection is capitalized as a replacement, provided that it meets the recognition criteria. Routine maintenance and repairs are not capitalized but expensed as incurred.

Conclusion: Routine maintenance and repairs that do not enhance the future economic benefits of the asset are expensed in the period incurred and not capitalized.