July 10, 2016

Facilities management defying accounting standards

IFRS 16 is an international accounting standard related to Property, Plant and equipment. It defines which expenses should be treated as an expense and which should be capitalized(considered or included in a balance sheet as an asset). It states that any expense which improves efficiency, performance or output of an asset should be treated as an asset. Whereas maintenance and training expense is treated as an expense. It's important to note that if untrained employees operate an ill-maintained machine, this will result in regular breakdowns and injuries to employees and regular breakdowns will decrease the performance of an asset, life and efficiency of an asset by a significant margin. But if a well-maintained machine is operated by a well-trained employee, in this can well-maintained machine can be used for a slightly longer period of time as compared to its given useful life. That slight increase in asset life would be due to better maintenance and training of employees. But these spendings are expensed out. I believe there must be a portion of such expenses which should be capitalized as this is an enabling asset to maintain or improve its performance. As its performance should deteriorate as an asset depreciates but neutralizing or minimizing that deterioration till some extent is an improvement in assets performance and life. I think either some part of maintenance and training of employees should be capitalized or a new definition should be drafted for IAS 16.


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