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ACCA Strategic Professional · Strategic Business Reporting (International) · Non-current assets

The finance director of Orwell plc asks the financial controller to capitalise $1.2m of routine annual maintenance on factory machinery as part of property, plant and equipment, so that profit meets a bonus target. Under IAS 16 and professional ethics, what is the appropriate response?

Routine maintenance must be expensed as incurred because IAS 16 excludes day-to-day servicing costs from an asset's carrying amount. Capitalising them to meet a bonus target would be misleading reporting and breach the accountant's integrity, so the controller should refuse and escalate the matter through appropriate channels.

  1. ACapitalise it, as maintenance extends the asset's useful life
  2. BCapitalise it only if the auditor does not object
  3. CExpense the day-to-day servicing costs as incurred and, if pressure continues, escalate in line with ethical guidanceCorrect
  4. DCapitalise half and expense half as a compromise

Explanation

IAS 16 states that day-to-day servicing costs are recognised in profit or loss as incurred. Capitalising them to hit a bonus target would be intentional misstatement, threatening integrity and objectivity. The accountant should refuse, document concerns and escalate. A compromise split has no basis in the standard.

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