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Subsequent expenditures
Subsequent expenditures
Property, plant, and equipment (PP&E) and intangible assets need to be repaired and maintained. Sometimes these assets receive additions or improvements. Finally, sometimes these assets can be rearranged for a different use.Â
Is the expenditure expected to produce benefits beyond the current fiscal year?
Is the expenditure expected to produce benefits beyond the current fiscal year?
If yes, then we typically capitalize the cost.
How can an expenditure provide benefits beyond the current fiscal year?
How can an expenditure provide benefits beyond the current fiscal year?
By extending the useful life of the asset.
By increasing the efficiency of the asset.
By increasing the quality of the goods made by the asset (e.g., an assembly line machine).
Repairs and maintenance
Repairs and maintenance
Expenditures for repairs and maintenance generally are expensed when incurred.
Expenditures for repairs and maintenance generally are expensed when incurred.
Additions
Additions
Additions involve adding a new major component to an existing asset and such costs are usually capitalized.
Additions involve adding a new major component to an existing asset and such costs are usually capitalized.
Improvements
Improvements
An improvement involves the replacement of a major component of an asset and such costs are usually capitalized.
An improvement involves the replacement of a major component of an asset and such costs are usually capitalized.
There are three methods used to record the cost of improvement.
Substitution. Treat the old equipment as if it has been disposed and treat the new equipment as an acquisition.
Capitalization of new cost. If the value of the old equipment is small, just add the value of the improvement to the existing asset.
Reduction of accumulated depreciation. Assume the improvement lengthens the life of the existing asset. Reduce the value of the accumulated depreciation.
Rearrangements
Rearrangements
Example: Moving a machine on an assembly line to a new location in order to increase the efficiency of the line.
Example: Moving a machine on an assembly line to a new location in order to increase the efficiency of the line.
These costs should be capitalized if they clearly increase future benefits.
Costs of defending Intangibles
Costs of defending Intangibles
The costs incurred to successfully defend an intangible asset right should be capitalized.
The costs incurred to successfully defend an intangible asset right should be capitalized.
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