When to Capitalize Repairs and Maintenance according to COA?

What does it mean by “to capitalize”?

According to Investopedia, to capitalize means to record a cost/expense on the balance sheet [i.e., Statement of Financial Position] for the purposes of delaying full recognition of the expense.

This means, when you capitalize, your intention is to spread the cost/expense over a certain period of time.

Simply, when you capitalize a cost of an asset, you spread the cost of the asset over its estimated useful life. For instance, the cost of a property, plant and equipment is spread over its estimated useful life thru depreciation.

But what about repairs and maintenance of a fixed asset? When do we capitalize repairs and maintenance? Or, do we need to capitalize repairs and maintenance?

This is what the Commission on Audit says about when to capitalize repairs and maintenance.

Section 24 (Repairs and Maintenance) of the Government Accounting Manual for National Government Agencies (GAM for NGAs) provides, to wit:

Repairs and maintenance primarily maintain or improve the functionality and capacity of the PPE; increase its service life; improve the quality of its output; or reduce the operating cost. These may be categorized into major and minor repairs.

Minor vs. Major Repairs

Minor repairs shall be directly charged to expense account “Repairs and Maintenance” of the specific PPE while major repairs shall be added to the carrying amount of the PPE and shall be depreciated over the remaining life of the PPE.

Where cost cannot easily be differentiated between a minor or major repair, it shall be treated as expense.

Routinary Repair and Maintenance

Repairs and maintenance which are necessary to obtain the expected service potential of a capital asset for its estimated useful life shall be expensed when incurred. These include repairs to restore assets damaged by fire, flood, accidents or similar events, to the condition just prior to the event; and routine maintenance and expenditures, such as repainting, cleaning and replacing minor parts.

Materiality Rule/Recognition Principle

An entity shall capitalize the costs incurred for repair of existing PPE if the amount is material and:

a. where the expenditure results in an effective increase in the future economic benefits or service potential that is expected to be derived from using the asset and the increase in future economic benefits or service potential will be realized;

b. there has been an effective increase in the quality of the services provided by the asset beyond that previously determined; or

c. there has been an effective extension to the asset’s useful life as a result of the expenditure.

What budget to use: MOOE vs. Capital Outlay?

Basically, the budget under Maintenance and Other Operating Expenses (MOOE) should be used to cover repairs and maintenance cost.

On the other hand, the capital outlays of the national government are appropriations spent for the purchase of goods and services, the benefits of which extend beyond the fiscal year and which add to the assets of government, including investments in the capital stock of government-owned or controlled corporations and their subsidiaries. The capital outlays of the national government may be broadly classified as follows: infrastructure outlays, equity contributions to government corporations, capital transfers to local government units, and other capital outlays. [DBM]

The question, however, is what if the cost of the repair, foregoing considered, is deemed capitalizable, what budget is more appropriate to use — MOOE or Capital Outlay?

The existing rules and regulations of COA and DBM have not given straight or direct answer to this question. What we only know is, the cost of routinary repairs and maintenance, regardless of the amount, is expensed outright.

On the other hand, if the cost of an asset qualifies under the capitalization thresshold [i.e., P15,000.00 and above] set by the Commission on Audit, then we shall use the budget for Capital Outlay.

Nonetheless, we hope that the concerned agencies will give a more direct and straight answer to this question.