Below Provisions were lifted from Government Accounting Manual
Sec. 24. Repairs and Maintenance. Repairs and
maintenance primarily maintain or improve the functionality
and capacity of the PPE; increase its service life; improve the
quality of its output; or reduce the operating cost. These
may be categorized into major and minor 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. Where
cost cannot easily be differentiated between a minor or
major repair, it shall be treated as expense.
a. Spare parts and servicing equipment carried as inventory
shall be recognized in surplus or deficit as consumed.
However, major spare parts and stand-by equipment qualify
as PPE when an entity expects to use them during more than
one period. Similarly, if the spare parts and servicing
equipment can be used only in connection with an item of
PPE, they are accounted for as PPE.
b. Parts of some items of PPE may require recurring
replacement such as a road needing resurfacing every few
years or non-recurring replacement such as replacing the
interior walls of a building. Under the recognition principle,
an entity recognizes in the carrying amount of an item of PPE
the cost of replacing part of such an item when that cost is
incurred if the recognition criteria are met. The carrying
amount of those parts that are replaced is derecognized.
Repairs and maintenance which are necessary to obtain the
expected service potential of a capital asset for its estimated
useful life are not betterments. These costs 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.
Sec. 25. Betterments. Betterments are enhancements to
the future economic benefits or service potential of a capital
asset, such as:
a. an increase in the previously assessed physical output or
service capacity;
b. a reduction in associated operating costs;
c. an extension of the estimated useful life; or
d. an improvement in the quality of output.
Betterments which meet the threshold of the applicable
capital asset category are capitalized. Otherwise, they are
expensed. Where betterment enhances the future economic
benefits or service potential of a capital asset without
increasing its estimated useful life, the depreciation period
shall remain the same. Where betterment increases the
estimated useful life of a capital asset, its useful life shall be
changed. The revised depreciation period shall not exceed
the estimated useful life of that capital asset. Where
betterment involves the replacement of an identifiable
component of a capital asset, the original cost of that
component and the related accumulated depreciation shall
be derecognized.
For example, a road may need resurfacing every few years.
Under the recognition principle, the cost of resurfacing shall
be recognized in the carrying amount of the road. However,
the carrying amount of those parts that are resurfaced shall
be derecognized in accordance with the derecognition
provisions of this Chapter.
Where a cost cannot easily be differentiated between a
repair and betterment, the cost shall be treated as an
expense with respect to the accounting principle of
conservatism.
Some parts of an item of PPE may require
replacement/betterment at regular intervals, of which these
are capitalized. Replacements/Betterments improve the
functionality or increase the useful life of the PPE, while
repairs and maintenance primarily maintain the
functionality of the asset.
An entity shall capitalize the costs incurred for repair,
betterment, enhancement, expansion or upgrade 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.
Sec. 26. Additions and Rearrangements. Additions are
modifications which increase the physical size or function of
the PPE. Two types of expenditures which shall be both
capitalized are namely, entirely new unit and expansion, and
enlargement or extension of the old asset. For example, the
addition of a wiring to a building or the addition of an air
conditioning system increases the service potential of that
facility and shall be capitalized. On the other hand,
rearrangements are cost incurred in moving an asset from
one location to another that will benefit future periods but
do not represent additions, replacements or improvements.
The cost of an addition which is a new unit is depreciated
over its useful life. But the cost of an expansion shall be
depreciated over its useful life or remaining life of the PPE of
which it is part, whichever is shorter. Rearrangement cost is
the relocation or reinstallation of an asset which proves to
be less efficient in its original location. This cost is also known
as “moving cost”, “reinstallation cost” or “relocation cost.”
This cost is capitalized and amortized over the remaining life
of the asset for which it pertains. The undepreciated amount
of the original installation cost shall be expensed and the
pertinent accumulated depreciation accordingly
derecognized.