For accounting, an asset obtain by an enterprise is considered a fixed asset (hereinafter –FA), if the term of its use is less than one year. In accounting, FA is recognized as an asset if it is probable that future economic benefits associated with the item will flow to the enterprise and the cost of the item can be measured reliably (item 6 of NAS 7).
In order for a fixed asset to bring economic benefits, it should be maintained, namely: through repairs, and in some cases improvements. Consider each of the types of such operations.
Criteria for dividing fixed assets into categories
According to NP (S) BU 7 in accounting, the costs of FA maintenance are classified depending on what such measures are aimed at. Thus, if the transactions are aimed at:
- maintaining the facility in working condition and obtaining the initially determined amount of future economic benefits from its use, such operations are repairs. They include operations with technical inspection, supervision, maintenance and current repair of FA (item 15 of NAS 7);
- improving it, which leads to an increase in future economic benefits, originally expected from the use of such a facility, such operations are an improvement of FA. This includes operations for modernization, modification, completion, reconstruction or overhaul (item 14 of NAS 7).
Thus, the main factor that puts the transactions in one category or another is the fact of receiving future economic benefits.
Determining the nature of the transactions
Decisions about the nature and characteristics of the work performed by the enterprise related to fixed assets, ie to determine whether such transactions are aimed at improving the technical and economic capabilities of the object (namely, if the operations are an improvement) or are aimed at supporting of the object in a usable condition (belonging to repair), is accepted by the head of the enterprise taking into account results of the analysis of a situation, and also materiality of such expenses (item 29 of Methodical recommendations for accounting of fixed assets approved by Order of the Ministry of Finance No. 561 of September 30, 2003; hereinafter – Methodical recommendations No. 561). The decision will be based on the conclusions made by a specialist. Such a specialist is usually the chief engineer, machine operator or other competent person.
In addition, the specialist must inform the head of the direction of work by providing appropriate technical opinions on the direction of activities carried out with the fixed asset. This conclusion indicates the essence of the operation and describes all the work performed (individual stages of work), pre-dividing them into those that cause an increase in future economic benefits, and those that do not.
So, for example, if the company repairs the car, in particular changes bearings, oil or filters, such operations are aimed at maintaining the FA in good condition. Therefore, the implementation of such operations does not increase the economic benefits from the use of FA. That is, such operation is simple repair.
If, for example, a new, more powerful engine is installed on a car or its equipment is upgraded (for example, a new trailer mechanism is installed on a truck, which allows a trailer with a larger load capacity to be attached to it), such operations increase the benefits of using such equipment, and therefore such operation is improvement.
The accounting of such operations will depend on how the operation will be qualified (as repair or as improvement).
