Illustration 9A: Refurbishment Costs – No Legislative Requirement
A furnace has a lining that needs to be replaced every five years for technical reasons. At the balance sheet date, the lining has been in use for three years.
Present obligation as a result of a past obligating event – There is no present obligation.
Conclusion – No provision is recognised (see paragraphs 14 and 16-18).
The cost of replacing the lining is not recognised because, at the balance sheet date, no obligation to replace the lining exists independently of the company’s future actions – even the intention to incur the expenditure depends on the company deciding to continue operating the furnace or to replace the lining.