Recognition of Subsequent Repair Cost Incurred After Completion of Useful Life of PPE
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- Last Updated on 25 July, 2024
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A Limited herein referred to as “the company” is engaged in the business of mining and production of raw coal. Mining of coal is complicated process and requires the use of heavy plant and machinery. One of such plant is coal washeries which ascertains the quality of coal produced. Hence, the company has also installed various coal washeries.
The company’s washery plant named as “ R washery plant” has completed its useful life in the FY 2001-02. However, due to consistent repair and maintenance, the R washery plant was in operation even after completion of its useful life. The company observed that the capacity utilisation of the plant was declining constantly and also there was increase in the breakdown hours. To study the operational constraints and for suggesting the remedial measures, the company has appointed an expert. The expert suggested the remedial measures and estimated the restoration cost to be Rs. 50 crore. The company agreed to the expert’s report and awarded the work to S Limited. The company has paid an amount of Rs. 30 crore to S ltd. by the end of FY 2022-23.
The management of company considers that the aforesaid restoration activities shall improve the particular section of plant and not plant as a whole, hence the probability of future economic benefits associated with the item as a whole could not be established. Furthermore, the asset has surpassed its useful life and hence reliable estimation of the enhancement of further useful life of PPE could also not be technically established. Considering the aforesaid fact, the management of company is of contention that the amount of Rs 30 crore paid for restoration of plant shall be treated as “Revenue Expenditure” and shall be charged in the “Statement of Profit and Loss” for the FY 2022-23.
To understand, whether management contention of recognizing the subsequent expenditure on restoration of plant after completion of its useful life as “Revenue Expenditure” is correct or not.
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