Provision for future maintenance expenses - IFRS

Discussion in 'Technical Queries' started by Viet, Mar 30, 2016.

  1. Viet

    Viet

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    Hi,

    I have a specific scenario for making provision.

    Specifically, this has to do with the airlines industry, leased aircraft have major future maintenance costs associated with them, for the life of the asset. These costs often are detailed in the lease agreements. The maintenance costs, therefore should be provisioned for.

    But since the provision will be quite large, and are spread over a long period of time, I imagine we should not expense the whole amount upfront in year when the assets are leased. How should I treat this provision in the first year, and how should I "expense" them when the cost are due.

    Should I book a corresponding asset account (as per IAS 37.8 , a pre-payment?) against the provision entry in the first year? Then as the aircraft as used over time (usually by the number of hour flown), the expense is amortized (Cr. to Asset) against a reversal of the original provision (Dr. Provision)? If that is the case, should I then also book an Expense entry against Cash to recognize the actual maintenance expenses?

    Thanks for your help!

    V
     
    Viet, Mar 30, 2016
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  2. Viet

    Fidget VIP Member

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    It's IAS 16 that deals with this rather than IAS 37, and, if the maintenance amounts to what would be expected routine to keep an aircraft/fleet thereof, flying, then these costs are expensed as they occur in the same way as the general upkeep of any non-current asset.

    What may be possible to capitalise is the cost of a period inspection/overhaul of assets such as aircraft.But it's done on the basis from one inspection/overhaul to the next.
     
    Fidget, Mar 31, 2016
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