Financial Accounting: In an Economic Context

POSTACQUISITION EXPENDITURES: BETTERMENTS OR MAINTENANCE?

Costs are often incurred after an acquired or manufactured long-lived asset is placed into service. Such postacquisition expenditures serve either to improve the existing asset or merely to maintain it. Costs incurred to improve the asset are called betterments, and costs incurred merely to repair it or maintain its current level of productivity are classified as maintenance.

The following guidelines are used to distinguish betterments from maintenance expenditures. In order to be considered a betterment, a postacquisition expenditure must improve the long-lived asset in at least one of four ways:

1. Increase the asset's useful life over that which was originally estimated.
2. Improve the quality of the asset's output.
3. Increase the quantity of the asset's output.
4. Reduce the costs associated with operating the asset.

Betterments are usually infrequent and tend to involve large dollar amounts. Maintenance expenditures, on the other hand, fail to meet any of the criteria mentioned above and tend to be periodic. Also, maintenance items are normally small, but certain expenditures (e.g., replacing a building roof every ten years) can be significant.

Postacquisition expenditures classified as betterments should be capitalized, added to the cost of the long-lived asset, and then amortized over its remaining life. Expenditures classified as maintenance should be treated as current expenses. For example, note the following excerpt from ...