Sad but true, costs related to property, plant, and equipment (PP&E) don’t stop at the purchase point. After getting plant assets up and running, repair and maintenance (R&M) expenses will eventually follow.
R&M expenses are inevitable — that is, unless the company has an extremely neurotic replacement policy and replaces serviceable equipment instead of fixing it!
The pressing question here is when the cost of R&M should go on the balance sheet versus the income statement. Just off the top of your head, you may think that it’s the nature of the beast for R&M to always go to the income statement. After all, it’s an expense, right?
Well, kinda sorta. It all depends on the type of the R&M and how materially it affects the asset. To add the cost of the R&M to the balance sheet instead of expensing it on the income statement, one of the following conditions apply:
The useful life of the asset increases. For example, a company may totally rebuild the motor for a piece of equipment on an assembly line.
The number of units the asset produces must increase. Before the repair, the company expects the equipment to tap out at another 1,000 units. After the repair, the old gal has new life, and the company estimates that another 5,000 units will come shooting out of the machine.
The quality of the units the asset produces must increase. Prior to the repair, the assembled units had all sorts of quality control problems that the repairs subsequently eliminated.
This situation is one of those weird “opposite world” issues between GAAP and tax. Companies like to capitalize as many costs as possible to beef up the bottom line, but they also like to expense as many costs as possible to reduce taxable income. Sigh! The life of an accountant is never easy — but it sure is a good challenge.
Many maintenance costs, such as oiling machines or changing the toner in a copier, are obviously income statement expenses and are not capitalized.
Capitalized costs follow the asset to which they relate. The cost increases the book value of the asset and is subject to depreciation over the course of the remaining useful life.
