How to Analyze Betterment Under IFRS for CPA Canada Exam Cases (IAS 16 and ASPE 3061)

Whether you are at CPA PEP Core 1, the electives, or the CFE, you have likely seen the “betterment” Financial Reporting (FR) issue. Betterment is covered under the CPA Canada Handbook and, in simple terms, it means enhancing a capital asset. For example, a building renovation, adding a new roof to a house, major repairs, etc. Here are the accounting treatments under both ASPE and IFRS.

Betterment under ASPE (ASPE 3061)

The ASPE 3061 section on Property, Plant and Equipment, specifically covers betterment. According to ASPE 3061, para. 14, betterment is: “The cost incurred to enhance the service potential of an item of property, plant and equipment is a betterment. Service potential may be enhanced when there is an increase in the previously assessed physical output or service capacity, associated operating costs are lowered, the life or useful life is extended, or the quality of output is improved. The cost incurred in the maintenance of the service potential of an item of property, plant and equipment is a repair, not a betterment. If a cost has the attributes of both a repair and a betterment, the portion considered to be a betterment is included in the cost of the asset.”

In CPA cases, do the following:

  1. Quote the above ASPE 3061.14 standard
  2. Use case facts to prove that there is enhancement
    1. > This can be done through a discussion of  enhancing the asset’s quality, estimated useful life, reducing operating costs,  and output quantity (memory aid: “a better QLOQ”)
  3. Analyze which costs can be capitalized
    1. > Just because it is betterment, it does not mean all expenditures can be capitalized. You can only capitalize “directly attributable cost necessary to bring the asset to the intended use.” Discuss the relevant costs and conclude which ones qualify for betterment
  4. Recommend

Betterment under IFRS (IAS 16)

The IAS 16 section on Property, Plant and Equipment, does not use the word betterment. Instead, the terms major replacement and major inspection are used. An example of major replacement is replacing the interior wall of a building or the engine of a plane. An example of major inspection is an airline company that does major inspections every few years.

In CPA cases, do the following:

  1. Quote the standard (IAS 16) and write that there are major replacements and major inspections
  2. Use case facts to prove that the event is either a major replacement or inspection
  3. Discuss that under IFRS, as long as there is future economic benefit (FEB) and costs reliably measurable, you can capitalize
  4. Use case facts to prove that there is FEB and costs are reliably measurable
    1. Similar to ASPE, only directly attributable cost necessary to bring the asset to the intended use can be capitalized
  5. Add that the carrying amount of the parts that are replaced (ie, the old parts) should be de-recognized
  6. Recommend

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