ACCA Strategic Business Reporting (SBR) Practice Exam

What happens to repairs and maintenance expenditures under IAS 16?

1. They are capitalised as part of the asset

2. They are expensed when incurred

3. They can be deferred to future periods

4. They are treated as intangible assets

The correct answer is: They are expensed when incurred

Repairs and maintenance expenditures under IAS 16 are generally expensed when incurred. This treatment reflects the principle that routine repairs and maintenance typically do not enhance the value or extend the useful life of the asset significantly; rather, they maintain the asset's existing condition. Such expenditures are recognized in profit or loss in the period they are incurred, ensuring that the financial statements accurately reflect the costs associated with maintaining operational assets without inflating the asset's carrying value. According to IAS 16, costs should be capitalized as part of the asset only when they enhance the asset's performance beyond its originally assessed standard of performance, typically through improvements or upgrades rather than simple maintenance. This is why routine repairs do not meet the criteria for capitalization. Moreover, the concept of deferring expenses to future periods or treating them as intangible assets misaligns with the fundamental accounting principles established by IAS 16, which specifically addresses tangible assets. Thus, the standard maintains clarity and consistency in financial reporting.