Minor vs.

Major Repairs

Minor repairs shall be directly charged to expense account “Repairs and

Maintenance” of the specific PPE while major repairs shall be added to the carrying
amount of the PPE and shall be depreciated over the remaining life of the PPE.

Routinary Repair and Maintenance

Repairs and maintenance which are necessary to obtain the expected service
potential of a capital asset for its estimated useful life shall be expensed when
incurred. These include repairs to restore assets damaged by fire, flood, accidents or
similar events, to the condition just prior to the event; and routine maintenance and
expenditures, such as repainting, cleaning and replacing minor parts.

Materiality Rule/Recognition Principle

An entity shall capitalize the costs incurred for repair of existing PPE if the amount is
material and:

a. where the expenditure results in an effective increase in the future economic

benefits or service potential that is expected to be derived from using the asset and
the increase in future economic benefits or service potential will be realized;

b. there has been an effective increase in the quality of the services provided by
the asset beyond that previously determined; or

c. there has been an effective extension to the asset’s useful life as a result of the
expenditure.

Generally, costs incurred will require capitalization, in order to do the following to tangible
property:

1. Betterments:
o Fixing defects
o Enlarging, expanding, or adding
o Increasing ability
2. Restorations:
o Restoring deteriorated property
o Replacing major parts
o Rebuilding to pristine condition
o Included property in the which the basis was adjusted based on gains and
losses incurred
3. Adaptations:
o Converting to a new or different use
Repairs vs Capital Improvements
Guidance for determining whether a project is a repair or a capital improvement is as
follows:

 Costs to maintain an asset in its normal state of repair are considered ordinary repairs
and replacements. Such items are reported as operating expenses and are not
capitalized. Examples are: replacement or repair of floor covering or roofs,
reconditioning by replacing small parts, painting, or regular maintenance costs.
 Costs to replace an existing asset, or asset portion, with an improved or superior asset,
usually at a cost materially in excess of the replaced item are considered improvements.
Usually an improvement results in a better, more efficient or more productive asset.
 Improvements may also include extraordinary repairs and replacements, which are
major repairs and replacements made, not to keep an asset in its normal state of repair,
but to extend its useful life beyond that originally estimated.
DIRECTLY ATTRIBUTABLE COSTS

In the paragraph 17 of IAS 16 there are the examples of what expenses are considered to be
directly attributable and therefore, can be capitalized (or included in the cost of an asset):

 Costs of employee benefits (IAS 19 Employee benefits) arising directly from the
construction or the acquisition of the item of PPE,
 Costs of site preparation,
 Initial delivery and handling costs,
 Installation and assembly costs,
 Costs of testing whether the asset is functioning properly, after deducting the net
proceeds from selling any items produced while bringing the asset to that location
and condition, and
 Professional fees.

As opposed to that, the paragraph 19 of IAS 16 lists examples of costs that are not costs of
an item of PPE and therefore, cannot be capitalized:

 Costs of opening a new facility

 Costs of introducing a new product or service
 Costs of conducting a business in a new location or with a new class of customer,
and
 Administration and other general overhead costs.

On top of that, IAS 16 clarifies in the paragraph 20 that costs of operation below full
capacity, initial operating losses and relocating or reorganizing entity’s operations are not
to be capitalized.

Other expenses you CAN capitalize

 Fees for environmental permits, certifications whether an asset works properly

 Expenses for necessary repairs during the construction phase
 Expenses for removing hurdles on the site (e.g. demolition of old building)