Capitalise what improves; expense what maintains; show cost less accumulated by class

Money spent on an asset you already own

Module 6 settled the day of purchase. Assets keep costing money afterwards, and every later outlay faces one question: does it make the asset better than it was, or does it keep it as it was? ASPE s.3061 calls the first a betterment and gives four tests — the expenditure counts as a betterment if it does any one of these:

1. increases the asset’s capacity or service potential;
2. extends its useful life;
3. improves the quality of its output;
4. lowers its operating costs.

A betterment is capitalised — debited to the asset account and amortised over the remaining life (a revision, as in L11.4). Anything that only restores or maintains the asset’s original condition — however large the bill — is a repair, expensed when incurred.

Worked example — two bills for the groomer

Northlake Nordic Centre Inc. spends 24,000 on the original groomer: a heated cab and a fuel-injection conversion that the manufacturer says will extend its life by two years and cut fuel use by a fifth. Two of the four tests are met (life, operating cost); it is a betterment:

Equipment                                24,000
    Accounts Payable                              24,000
Groomer: cab and fuel-injection conversion — betterment.

The same month, a 1,900 tune-up and blade change: the groomer grooms exactly as it did before. No test is met — a repair:

Repairs Expense                           1,900
    Cash                                           1,900

Now the size trap. A 9,000 engine rebuild that puts the groomer back in its original condition is still a repair, and the 850 hydraulic line of L6.1 would still be a repair at ten times the price. Size is never the test; what the money does is. Two habits from US texts do not apply here: debiting an overhaul to Accumulated Amortization (a US practice — under ASPE the betterment goes to the asset), and a dollar threshold (“capitalise anything over 5,000”), which is a bookkeeping convenience for immaterial items, not a rule of classification.

Presenting property, plant and equipment

On the balance sheet, PP&E is shown by class, at cost less accumulated amortization, with both figures visible — either on the face or in a note. Northlake at a year end, with the balances given:

Property, plant and equipment
Land                                              200,000
Land improvements              20,000
  Less accumulated amortization   6,000              14,000
Building                      610,000
  Less accumulated amortization  40,500            569,500
Equipment                     306,000
  Less accumulated amortization  92,500            213,500
Total property, plant and equipment               997,000

Land carries no contra — it is not amortised. Each other class shows the cost, the accumulated amortization in brackets, and the carrying amount in the outer column. Showing only the net figures hides the age of the assets: a reader who sees Equipment 213,500 cannot tell whether that is a new fleet or a worn-out one, and 306,000 less 92,500 tells her. Showing only the costs overstates the assets. The amortization method and the useful lives are disclosed in the accounting-policy note — which is where the bank reads what pattern Northlake chose.