Principles for Overhauls, Repairs or Maintenance of Assets
The same principle of “future years' benefits" applies when determining if the overhaul, repair, and maintenance expenses that will be added to the assets' book value. However, it is important that the company sets specific policies on how major expenditures for plant, property, and equipment should be treated in their books, inasmuch as the principle of “consistency" is a significant rule that should be adhered to.
An expense is added to the book value of a particular asset if it prolongs or extends the remaining life of the equipment or machinery. The related depreciations are likewise spread over the lengthened life to address the expense recognition The accounting entry involves a debit to the asset account and a credit to cash or accounts payable, whichever is applicable.
Another accepted method is to reduce the accumulated depreciation of the asset; which is often applicable for major overhauls or cost of replacement parts for motorized vehicles. The underlying reason for the use of this method is the enhancement of the serviceability of the asset, and not necessarily prolonging the length of its services. The accounting entry for this type of approach is as follows:
Dr. Accumulated Depreciation (Asset Type)_________
Cr. Cash or Accounts Payable __________
The effect of this accounting entry is reflected in the presentation of the net book value, while its acquisition or historical cost remains unchanged.
The matter of defining the materiality of the amount is important when establishing policies for capitalized expenses. Vehicles may require certain replacement parts that enhance serviceability. However, one has to consider the proportion of the expense against the income generated by determining if the expenditure has minimal impact or is regarded as an ordinary occurrence.
The classification of improvements should have clear-cut policies to maintain consistency. Under GAAP's capitalization rules, an air conditioning unit is classified as equipment to be depreciated according to its allowable estimated life. This stands opposed to the installation of a centralized air-conditioning system, in which the related costs are added to the value of the building and depreciated according to the allowable remaining life of the building.