Provision for Future Expenses

Question

Hi,

I have a specific scenario for making provision that I'm still not clear about, hope you could help to clarify. Specifically, this has to do with the airlines industry, where leased aircraft have major future maintenance costs associated with them, for the life of the asset. These costs often are detailed in the lease agreements. The maintenance costs, therefore should be provisioned for. 

But since the provision will be quite large, and are spread over a long period of time, I imagine we should not expense the whole amount upfront in year when the assets are leased. How should I treat this provision in the first year, and how should I "expense" them when the cost are due. 

Should I book a corresponding asset account (as per IAS 37.8 , a pre-payment?) against the provision entry in the first year? Then as the aircraft as used over time (usually by the number of hour flown), the expense is amortized (Cr. to Asset) against a reversal of the original provision (Dr. Provision)? If that is the case, should I then also book an Expense entry against Cash to recognize the actual maintenance expenses? 

Thanks for your help!

V

Answer 1

Can you identify the maintenance cost in relation to any specific usage pattern such as flying hours or so? If so you can make a provision on that basis.

If not you may arrive at an annual maintenance cost considering the total maintenance and the life span and book a provision accordingly. When a payment comes it can be debited to this provision. But if the payment is more than the existing provision then it may be considered as a prepayment.

Let see how others propose