Definition
The financial accounting term reinstallation and rearrangement refers to a category of cost subsequent to acquisition. A rearrangement or reinstallation occurs when equipment is moved from one location and installed in another. This is typically performed to increase production at the receiving location.
Explanation
Subsequent to assets being placed into service, they oftentimes require additional investments to either improve or maintain their productivity. Reinstallations and rearrangements are one of four categories of these investments; the others include additions, improvements and replacements, and repairs.
To capitalize costs associated with existing property, plant and equipment, one of the following three conditions must be met:
The quality of output is enhanced in some manner. The units produced contain functionality that was not present prior to the investment.
The useful life of the asset is extended. For example, the expected service life of the asset is longer after the investment.
The capacity or productivity of the equipment increases. The units of output are higher.
Oftentimes companies move in-service equipment from one location to another. This can be done to increase or consolidate production at the receiving location. If one of the above criteria is met, the cost associated with rearranging the location of the equipment can be capitalized if material; if not, the cost should be expensed in the current accounting period.
If the rearrangement and reinstallation is capitalized, the company has two options:
Replacement: if the original cost and accumulated depreciation of the equipment is known or can be reasonably estimated, the cost can be treated in the same manner as a replacement.
Amortization: if the original cost and accumulated depreciation of the equipment cannot be estimated, the cost to rearrange or reinstall the equipment should be capitalized and amortized over the remaining serviceable life of the equipment.
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