Subsequent expenditures refers to such costs which are incurred after the asset is recognized in the financial statement and brought to the location and condition intended. Examples of such expenditures include repair and maintenance, overhauling, upgradation, replacement costs etc.
However, not all the subsequent costs can be capitalized in the carrying amount (carrying value or book value) of the asset in the statement of financial position.
Previously there used to be two separate criteria (recognition principles) for recognizing initial costs and subsequent costs. But the recognition criteria has now been unified and same recognition principle is applied on initial cost and subsequent expenditure which is as follows:
The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:
- it is probable that future economic benefits associated with the item will flow to the entity; and
- the cost of the item can be measured reliably.
Some parts of the asset may require replacement and/or major inspections at regular intervals. If these replaced parts or costs incurred on inspections fulfill the criteria mentioned above then the cost incurred on such parts can be recognized in the cost of the asset.
However, the costs which are of the nature of day-to-day servicing are not included in the cost of the asset but shall be treated as expense in the profit or loss.
Also, the following expenditure incurred subsequent to recognition are not recognized in the cost (carrying amount) of the asset:
- costs incurred in using or redeploying an asset once asset is brought into the location and condition intended
- costs incurred while an item capable of operating in the manner intended by management has yet to be brought into use or is operated at less than full capacity;
- Initial operating losses
- relocation or reorganization costs incurred on part or all of the entity’s operations.