IAS 16: Recognition of new part - recognition criteria met?

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Pellwieserxx
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Joined: 16 Nov 2021, 10:48

IAS 16: Recognition of new part - recognition criteria met?

Post by Pellwieserxx »

Hello all,

I have the problem of determining whether recognition criteria for assets (IAS 16.7) are met in a certain case. It is as follows:

We have a ship, the engine of which was replaced by a newer, much different engine. My question is whether the new engine can be recognized in the sense of IAS 16.70, which is based on the general recognition criteria in IAS 16.7. The replaced engine has a certain price so the cost can be measured reliably. I was just wondering to what extend economic benefits can flow to the company. The engine on a stand-alone basis cannot produce any economic benefits (considering that my definition of economic benefits as some form of cash flows is correct). While it can generate economic benefits together with the ship, my question is then to what extent can those economic benefits then be attributed to the engine and not the ship. I feel like I am missing something obvious or did not understand something correctly...

Thanks in advance for my taking your time to read my question. Much appreciated!
Hofwegen
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Joined: 27 Oct 2021, 10:39

Re: IAS 16: Recognition of new part - recognition criteria met?

Post by Hofwegen »

The engine is indeed an essential part of the ship, and will alone not be able to generate economic benefits. However, this is true for most components of any larger property, plant and equipment under IAS 16. Take for example the acquisition of a building by a company. The company will need to split the building in different components with a different useful life (for example walls, windows, roof, elevators etc.). These components do not generate any economic benefits themselves, but have to be separately recognized. It is expected that the components with a shorter useful life will be replaced after their useful life and a new asset will be recognized.

The split of an asset in different components has not much to do with the ability to generate economic benefits, but is related to a difference in useful lives between the components.
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Marek Muc
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Re: IAS 16: Recognition of new part - recognition criteria met?

Post by Marek Muc »

Just make sure you derecognise the old engine,

IAS 16.13:
Parts of some items of property, plant and equipment may require replacement at regular intervals. For example, a furnace may require relining after a specified number of hours of use, or aircraft interiors such as seats and galleys may require replacement several times during the life of the airframe. Items of property, plant and equipment may also be acquired to make a less frequently recurring replacement, such as replacing the interior walls of a building, or to make a nonrecurring replacement. Under the recognition principle in paragraph 7, an entity recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if the recognition criteria are met. The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of this Standard (see paragraphs 67–72).
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