It is very important to clearly determine for proper reflection in accounting of maintenance and improvement of leased assets whether such transactions increase the future economic benefits from fixed asset using. Expenditure records on maintenance or improvement will depend on it.
The company’s chief executive makes decision on type and attributes of specific works (para.29 Methodical recommendations on accounting of fixed assets, approved by order of the Ministry of Finance of Ukraine of 30.09.2003, № 561, hereinafter - Methodical recommendations № 561).
Thus, expenses for maintenance of the leased fixed asset in operation, which do not increase the initially expected amount of future economic benefits from its use, the tenant is entitled to immediately write off expenses: Dt 23, 91, 92, 93, 94 (expenditure account should be chosen depending on the purpose of use of the leased item of fixed asset (hereinafter – FA)).
As for the expenses associated with improvement (modernization, retrofitting, major repair, etc.) of FA item, which lead to an increase in future economic benefits, the tenant is obliged to reflect in accounting such expenses as capital investments to create other non-current tangible assets (para.2 of sec. 8 of Accounting Regulations 14 “Lease”, para.21 of Methodical recommendations № 561).
The mentioned expenses are accumulated on Dt of sub-account 153 “The acquisition (production) of other non-current tangible assets” and after the completion of relevant work they are to be written off on sub-account 117 “Other non-current tangible assets”. Accordingly, Dt 117 Сt 153 should be conducted.
As can be seen, conditional FA arises in accounting and it should be amortized over its useful life, starting with the month following the month of improving completion (commissioning). Taking into account the requirements of paragraphs 23, 24, 29 of Accounting Regulations 7, the amortization period for such “conditional” item should not exceed the term of the lease.
In case of return of the leased item of fixed assets, which in prior periods was improved, the tenant should write off “conditional” item formed in accounting (para.33 of Accounting Regulations 7 “Fixed Assets”).
Accordingly, Dt 976 “Write-off of non-current assets” Сt 117 (on the amount of residual value of improvements of “conditional” FA) and Dt 132 “Depreciation of other non-current tangible assets” Сt 117 (on the amount of accrued depreciation) should be conducted.
It is necessary to create the original document to make such a business transaction. It is possible to use a delivery and acceptance certificate of maintained, reconstructed and modernized facilities (standard form № FA-2, approved by the order of the Ministry of Statistics of Ukraine of 29.12.95, № 352). Certainly, having corrected it for specifics of the transaction. Also, it is possible to prepare a delivery and acceptance certificate of improvements in any form, indicating in it all the required details of the original document (see Regulations sec. 2 of Art.9 of the Law of Ukraine “On Accounting and Financial Reporting in Ukraine” of 16.07.1999, № 996-XIV).
