posted September 27, 2017

Maintenance & Repair or Capital Asset?  

by Matthew Miller, CPA, Senior Associate

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There are times when it is easy to determine that an asset should be capitalized, such as purchasing a piece of equipment over the capitalization threshold. Other purchases may be more complicated, such as roofing, streets, and add-ons that may or may not extend the useful life of an asset. In this article, we’ll explore the rules regarding the classification of capital purchases and discuss why the related costs should or should not be capitalized.

To provide a brief overview of a capital asset, GASB Statement No. 34 describes capital assets as items with a useful life greater than one reporting period.In addition, “the cost of a capital asset should include ancillary charges necessary to place the asset into its intended location and condition for use. Ancillary charges include costs that are directly attributable to asset acquisition—such as freight and transportation charges, site preparation costs, and professional fees.” Most entities have a cost threshold which is utilized to determine which assets will be capitalized –typically $5,000 to $10,000.

Let’s first explore roofing costs.These can be either maintenance or capitalized expenses. The difference lies in what is being done to the roof as a whole. Generally speaking costs associated with maintaining the roof in its current condition, such as tarring, shingle replacement, etc. should be classified as maintenance costs. To classify for capitalization, the work being done must either completely replace the roof, which is common on older buildings, or repair it to such an effect that it extends the life of the roof. If, for example, we estimate a roof to last 20 years, any structural work done to the roof that would increase the useful life, would be capitalized and depreciated as such. Consistency in the application of such situations is also important for financial reporting purposes.The approach to such capital expenses should be consistently applied throughout the entity and from year to year.

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In our second example, let’s take a look at streets. Streets can be a bit more complicated, as there are different options after a street is placed in use. These include street reconstruction, rehabilitation and reclamation.

  • Reconstruction involves removing all existing asphalt surfacing and the road is rebuilt from the bottom up. Because the street is being completely rebuilt, the old street would be removed from capital assets as a disposal and the cost of the new street being built would be capitalized by the entity.
  • Rehabilitation could involve removing the top two inches of asphalt and replacement with one layer of asphalt. Costs associated with rehabilitating a street can be capitalized if the entity determines it will increase the life of the existing street. The cost of the old street may not be fully removed from the capital asset listing, but at least a portion should be if there is a significant portion of the street has been replaced.
  • Reclamation is a hybrid, which involves grinding up the existing asphalt material, compacting it in place, and paving new layers of asphalt pavement over the top. Costs associated with this method can be treated the same as the rehabilitation method.

Once again, the most important factor is that the entity develop an internal policy to determine what expenses extend the useful life of an asset and be consistent with that application. Further examples of repair and maintenance costs include expenses such as pothole repair, tarring, or fresh paint. These types of costs do not extend the useful life of a street, but maintain it in its current condition for normal use.

A final note to keep in mind for all capital assets items, is to ensure the old assets are removed from the capital asset listing when they are replaced. From an audit perspective, it is common to see entities add the new assets to the listing, but not necessarily remember to remove the old assets timely. Even though a fully depreciated asset does not have an impact for financial reporting purposes, it is necessary to remove those assets if they are no longer in use.

Because the authoritative guidance for capitalizing assets is not asset specific, it is up to the entity to determine whether or not the purchase meets the criteria outlined earlier for capitalization. Once policies are in place, it is imperative that the entity consistently apply policies for all capital purchases.


The content of these pages is for general information purposes only and does not constitute advice. Heinfeld, Meech & Co., P.C. tries to provide content that is true and accurate as of the date of writing; however, we give no assurance or warranty regarding the accuracy, timeliness, or applicability of any of the contents.