Definition
The financial accounting term repairs to property, plant, and equipment refers to a category of cost subsequent to acquisition. Repairs are typically broken down into two subcategories: ordinary and major. Ordinary repairs are typically expensed, while major repairs may be capitalized if certain criteria are met.
Explanation
Subsequent to assets being placed into service, they oftentimes require additional investments to either improve or maintain their productivity. Repairs are one of four categories of these investments; the others include additions, reinstallations, and improvements and replacements.
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.
Generally, there are two forms of repairs companies make to existing equipment:
Ordinary: includes normal maintenance to equipment to provide adequate operating performance. Lubrication, painting, cleaning, and replacement of inexpensive or expendable parts are examples of these ordinary repairs. By their very nature, these are operating expenses and costs would typically flow to the income statement.
Major: includes costs that would extend the serviceable life of the asset such as the complete overhaul of machinery or equipment. If a major repair is material, the cost can be capitalized. Depending on the nature of the repair, the capitalization treatment would be carried out in the same manner as an addition, replacement or improvement.
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