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Below Provisions were lifted from Government Accounting Manual

Sec. 24. Repairs and Maintenance. Repairs and For example, a road may need resurfacing every few years.
maintenance primarily maintain or improve the functionality Under the recognition principle, the cost of resurfacing shall
and capacity of the PPE; increase its service life; improve the be recognized in the carrying amount of the road. However,
quality of its output; or reduce the operating cost. These the carrying amount of those parts that are resurfaced shall
may be categorized into major and minor repairs. Minor be derecognized in accordance with the derecognition
repairs shall be directly charged to expense account “Repairs provisions of this Chapter.
and Maintenance” of the specific PPE while major repairs
shall be added to the carrying amount of the PPE and shall Where a cost cannot easily be differentiated between a
be depreciated over the remaining life of the PPE. Where repair and betterment, the cost shall be treated as an
cost cannot easily be differentiated between a minor or expense with respect to the accounting principle of
major repair, it shall be treated as expense. conservatism.

a. Spare parts and servicing equipment carried as inventory Some parts of an item of PPE may require
shall be recognized in surplus or deficit as consumed. replacement/betterment at regular intervals, of which these
However, major spare parts and stand-by equipment qualify are capitalized. Replacements/Betterments improve the
as PPE when an entity expects to use them during more than functionality or increase the useful life of the PPE, while
one period. Similarly, if the spare parts and servicing repairs and maintenance primarily maintain the
equipment can be used only in connection with an item of functionality of the asset.
PPE, they are accounted for as PPE.
An entity shall capitalize the costs incurred for repair,
b. Parts of some items of PPE may require recurring betterment, enhancement, expansion or upgrade of existing
replacement such as a road needing resurfacing every few PPE if the amount is material and:
years or non-recurring replacement such as replacing the
interior walls of a building. Under the recognition principle, a. where the expenditure results in an effective increase in
an entity recognizes in the carrying amount of an item of PPE the future economic benefits or service potential that is
the cost of replacing part of such an item when that cost is expected to be derived from using the asset and the increase
incurred if the recognition criteria are met. The carrying in future economic benefits or service potential will be
amount of those parts that are replaced is derecognized. realized;
b. there has been an effective increase in the quality of the
Repairs and maintenance which are necessary to obtain the services provided by the asset beyond that previously
expected service potential of a capital asset for its estimated determined; or
useful life are not betterments. These costs shall be c. there has been an effective extension to the asset’s useful
expensed when incurred. These include repairs to restore life as a result of the expenditure.
assets damaged by fire, flood, accidents or similar events, to
the condition just prior to the event; and routine Sec. 26. Additions and Rearrangements. Additions are
maintenance and expenditures, such as repainting, cleaning modifications which increase the physical size or function of
and replacing minor parts. the PPE. Two types of expenditures which shall be both
capitalized are namely, entirely new unit and expansion, and
Sec. 25. Betterments. Betterments are enhancements to enlargement or extension of the old asset. For example, the
the future economic benefits or service potential of a capital addition of a wiring to a building or the addition of an air
asset, such as: conditioning system increases the service potential of that
facility and shall be capitalized. On the other hand,
a. an increase in the previously assessed physical output or rearrangements are cost incurred in moving an asset from
service capacity; one location to another that will benefit future periods but
b. a reduction in associated operating costs; do not represent additions, replacements or improvements.
c. an extension of the estimated useful life; or
d. an improvement in the quality of output. The cost of an addition which is a new unit is depreciated
over its useful life. But the cost of an expansion shall be
Betterments which meet the threshold of the applicable depreciated over its useful life or remaining life of the PPE of
capital asset category are capitalized. Otherwise, they are which it is part, whichever is shorter. Rearrangement cost is
expensed. Where betterment enhances the future economic the relocation or reinstallation of an asset which proves to
benefits or service potential of a capital asset without be less efficient in its original location. This cost is also known
increasing its estimated useful life, the depreciation period as “moving cost”, “reinstallation cost” or “relocation cost.”
shall remain the same. Where betterment increases the This cost is capitalized and amortized over the remaining life
estimated useful life of a capital asset, its useful life shall be of the asset for which it pertains. The undepreciated amount
changed. The revised depreciation period shall not exceed of the original installation cost shall be expensed and the
the estimated useful life of that capital asset. Where pertinent accumulated depreciation accordingly
betterment involves the replacement of an identifiable derecognized.
component of a capital asset, the original cost of that
component and the related accumulated depreciation shall
be derecognized.