What is the accounting treatment when an entity incurs further costs on existing fixed assets? When should it be expensed, and when can it be capitalized?
Keywords: Mazars, Thailand, Accounting, TFRS, NPAEs, Property, Plant and Equipment
13 June 2018
Company A spent THB 1.5 million for major repairs and maintenance of its machinery. The management’s view supported by other factual evidence is that the maintenance and repairs will extend the machinery’s useful life and/or increase its capacity.
How should such costs be treated and recognized in the financial statements?
Applicable Accounting Guidelines
Paragraph 124 of the Thai Financial Reporting Standards for Non-Publicly Accountable Entities (TFRS for NPAEs) states that an entity must recognize initial costs to acquire or construct an item of property, plant, and equipment, as well as subsequent costs incurred to add to, replace part of, or service an item as an asset if, and only if:
a. It is probable that future economic benefits associated with the item will flow to the entity; and
b. The cost of the item can be measured reliably.
However, under the recognition principle in paragraph 124, an entity does not recognize the costs of the day-to-day servicing of an item of property, plant, and equipment in the carrying amount if the purpose of these expenditures is for “repairs and maintenance” of the item. Rather, these costs are recognized in the income statement as incurred.
Therefore, as in this case the repairs and maintenance are major and expected to increase the items useful life and/or capacity, Company A should capitalise these expenditures as costs of the asset in the form of machinery in the statement of financial position. These amounts should be depreciated on a straight-line basis over the revised estimated useful life of the machinery, and depreciation recorded as an expense in the income statement.
References: www.fap.or.th and TFRS for NPAEs