Subsequent Expenditure and Depreciation under IAS 16

Understand Subsequent Expenditure and Depreciation

Key rules to remember

Depreciable amount

Depreciable amount = Cost − Residual value

Cost includes all costs to bring the asset to working condition. Residual value is the amount you expect to get at the end of its life, net of disposal costs.

Straight-line depreciation

Annual charge = (Cost − Residual value) ÷ Useful life

Pro-rate by months if the asset is bought or sold part-way through the year, if the question says so.

Reducing balance depreciation

Annual charge = Rate × Opening carrying amount

Residual value is not deducted before applying the rate. The rate itself takes account of it.

Change in estimate

New annual charge = (Carrying amount at date of change − New residual value) ÷ Remaining useful life

Applied prospectively. No prior year adjustment and no restatement.

Capital vs revenue test

Capitalise if it enhances, extends or replaces a component and future economic benefits flow; otherwise expense

Repairs and day-to-day servicing are always expensed.

Component replacement

New carrying amount = Old carrying amount − Carrying amount of replaced part + Cost of new part

The old part is derecognised, and any loss on it goes to profit or loss.

How to solve Subsequent Expenditure and Depreciation questions

1. 1Read each item of spending and classify it: does it improve, extend or replace a part, or does it only maintain? Mark it capital or revenue.
2. 2Identify the significant components and their separate costs, useful lives and residual values.
3. 3Work out the carrying amount at the start of the year: cost less accumulated depreciation to date.
4. 4Adjust for any replacement: remove the old part's carrying amount and add the new cost.
5. 5Calculate the year's depreciation for each component using the stated method, pro-rating for time where needed.
6. 6If an estimate changes, take the carrying amount at the date of change and spread it over the remaining life with the new residual value. Do not restate earlier years.
7. 7Post the entries: Dr Depreciation expense, Cr Accumulated depreciation. Dr Repairs expense for revenue items. Show the closing carrying amount.

Quickest way: Carrying amount roll-forward

Common mistakes in Subsequent Expenditure and Depreciation

• Capitalising repairs and routine maintenance.

  The spending is large or the question says it is for the asset, so it feels like part of it.

  Fix: Ask whether it adds a new benefit or only restores the original standard of performance. If it only restores, expense it.

• Restating prior years when useful life changes.

  Students confuse a change in estimate with an error correction.

  Fix: A change in estimate is prospective under IAS 8. Spread the carrying amount over the remaining life from the date of change.

• Deducting residual value under reducing balance before applying the rate.

  Straight-line habits carry over.

  Fix: Apply the rate to the opening carrying amount only. The residual value is built into the rate.

• Using the original total life instead of the remaining life after a change.

  Students forget that some life has already been used.

  Fix: Write down the years already elapsed and subtract them from the revised total life to get the remaining life.

• Forgetting to derecognise the old component when a replacement is capitalised.

  Students just add the new cost to the asset.

  Fix: Remove the old part's carrying amount and recognise any loss in profit or loss, then add the new part.

• Depreciating land or depreciating a whole asset as one block when components have different lives.

  It is quicker and the question may not shout about components.

  Fix: Look for a split of costs or different lives in the data. Split the asset and depreciate each part separately. Never depreciate land.

Worked examples