Accounting!!!?

Question

Over what period should an addition to an existing long-lived asset be depreciated?

Answer 1

These costs are incurred subsequently to add to, replace part of, or service the original asset and can be added to the carrying value of the asset only if all the recognition criteria are met:

Items of property, plant, and equipment should be recognised as assets when it is probable that: [IAS 16.7]

* the future economic benefits associated with the asset will flow to the enterprise; and
* the cost of the asset can be measured reliably.
This recognition principle is applied to all property, plant, and equipment costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it.

Once this has been ascertained the depreciable amount (cost less prior depreciation, impairment, and residual value) should be allocated on a systematic basis over the asset's (remaining) useful life [IAS 16.50].

As an e.g. let's say you had an asset with an estimated useful life of 10 yrs initially. After 3 yrs you incurred expenditure which meets the recognition criteria and you add this to your original cost. If at that time the assessment is that the asset has 7 years of useful life left, then there is no change in a/cg estimate and you depreciate the whole asset (original plus addition) over the next 7 yrs.

Answer 2

There are three scenarios
1.) The asset's useful life has been extended
2.) The asset's residual value has been increased
3.) The asset's useful life and residual value have changed.

For all three, you do not alter prior year expenses, but rather you update your current depreciation schedule to reflect the addition. In all of these cases, you add the cost of the addition to the cost of the asset. The procedures below should work regardless of the depreciation method employed.

If the useful life was extended (without changing the residual value), you would continue to depreciate the same amount periodically...just for a longer amount of time.

If the residual value has increased (without changing the residual value), you would allocate a proportionate amount of the addition to the existing depreciation periods for the original cost of the asset.

If the useful life and the residual value have changed, determine the depreciable cost...

Original acquisition cost of the asset
+ Addition cost
- Recognized depreciation expense
= Depreciable cost

Then allocate the depreciable cost over the remaining useful life of the asset using the desired depreciation method. The method chosen for the addition should normally be the same as the original asset.