IAS 16 - Should Major Overhaul Costs Be Accrued in Advance?

💡 Learning IFRS with AuditCare Vietnam (ACV)

IAS 16 – Major Overhaul Costs and the “Accrual” Debate

IAS 16 – Property, Plant and Equipment

✈️ Should Major Overhaul Costs Be Accrued in Advance?

📅 Date: October 30, 2025
👤 By: Thủy Nguyễn ACCA
📘 Standards referenced: IAS 16, IAS 37, IFRS 16, Conceptual Framework

🧭 1. Why this topic matters

In practice — especially in aviation, oil & gas, and heavy manufacturing — many companies in Vietnam still “accrue” major maintenance costs for fixed assets, believing this approach ensures prudence and stable profits.

However, under IFRS, this long-standing practice does not comply with the definition of a liability and the recognition principles in IAS 16 and IAS 37.
This is a hot topic for airlines and lessors during IFRS conversion and audits.

⚙️ 2. IAS 16 – The principle of subsequent costs

IAS 16 distinguishes between day-to-day servicing and major inspections or replacements:

1️⃣ Routine maintenance → Expense as incurred (IAS 16.12)
2️⃣ Component replacement → Capitalise when the part is replaced, derecognise the old part (IAS 16.13)
3️⃣ Major inspection / overhaul → Capitalise when performed, depreciate until the next overhaul (IAS 16.14)

👉 In short: IFRS does not allow “pre-accruing” major repair costs that have not yet been incurred.

🧩 3. The IFRS conceptual logic – No “liability” without a past event

According to the Conceptual Framework (2018):

“A liability is a present obligation of the entity arising from a past event.”

A future overhaul — such as an aircraft’s D-check — is a future operating cost, not a present obligation.
The company can still avoid that obligation by discontinuing use of the asset.

Therefore, IAS 37 prohibits recognising provisions for future operating costs.
Only when a present legal or constructive obligation exists (e.g. return condition in a lease contract), can a provision be recorded.

✈️ 4. Application in the aviation industry

🛫 Owned aircraft

Capitalise the cost of major checks (C-check, D-check) when they occur.

Depreciate over the period until the next check.

Derecognise the remaining carrying amount of the previous check.

Do not accrue annually for future overhauls.

🛩️ Leased aircraft under IFRS 16

If the lease contract requires restoration to a specified condition → recognise a restoration provision (IAS 37) and add it to the ROU asset at commencement.

If the obligation is usage-based (e.g., tied to flight hours) → accrue costs progressively based on usage, not evenly across years.

This ensures consistency between economic consumption patterns and financial reporting.

⚖️ 5. IFRS vs VAS – Key differences

🧮 6. The IFRS approach: Component & inspection accounting

Instead of “saving up” for future overhauls, IFRS requires:

Capitalising the inspection cost when it happens;

Depreciating it until the next overhaul;

Derecognising any remaining balance of the previous component.

This avoids artificial liabilities and aligns expenses with asset use.

💬 7. Key takeaway

✅ Under IFRS, major overhaul or inspection costs cannot be accrued in advance unless there is a present legal or constructive obligation (IAS 37, IFRS 16).
✅ The correct approach is to capitalise when performed and depreciate to the next inspection.
✅ In industries like aviation, component accounting and proper cost tracking are essential for IFRS compliance.

🌐 8. Why it matters for Vietnamese companies

As Vietnam prepares for IFRS adoption, businesses need to:

Eliminate legacy “maintenance accruals”;

Implement component-based asset registers;

Review lease agreements for restoration clauses;

Train both finance and engineering teams to estimate component lives accurately.

This transition not only ensures compliance but also provides a more transparent and globally comparable financial position.

🧠 In short:

IFRS does not prohibit prudence — but it requires truth over tradition.
“Accruals” for future repairs may look safe, but they fail to meet IFRS liability criteria.

#LearningIFRS #AuditCareVietnam #IAS16 #IAS37 #IFRS16 #IFRSConversion #ComponentAccounting #AviationFinance #MajorOverhaul #PropertyPlantEquipment