What Are Extraordinary Repairs?
Extraordinary repairs, in the field of accounting, are extensive repairs made to an asset, such as property or equipment (PP&E), which prolongs its useful life and increases its book value.
This may be set in contrast to ordinary repairs, which are considered to be normal and preventive maintenance. Ordinary repairs are expensed immediately rather than being capitalized.
- Extraordinary repairs are capitalized expenses that increase the future deprecation of an asset over the remainder of its useful life.
- Extraordinary repairs must extend the useful life of the asset beyond one year, and the value of the repair must be materially significant.
- Ordinary repairs, on the other hand, are expensed immediately and reported on the income statement in the current period.
Understanding Extraordinary Repairs
Extraordinary repairs are capitalized, which means the repair cost increases the book value of the fixed asset that was improved as a result of the repair. The extraordinary repair cost may be added to the original fixed asset or it could be identified as a separate fixed asset item directly underneath the original, in order to keep clean accounting records.
Fixed assets are then consolidated and presented in the long-term asset section on a company's balance sheet. Recording extraordinary repairs in this manner also increases the periodic depreciation expense recorded over the revised remaining life of the asset. The depreciation expense flows through to the company's income statement.
Qualifications for Extraordinary Repairs
If the amount spent on an extraordinary repair is immaterial, it is more efficient from an accounting perspective to charge the cost to expense as incurred, rather than adjusting the book value of the fixed asset. Similarly, if a machine’s expected life is only prolonged by a few months, it is more prudent to expense the repair cost.
According to generally agreed accounting principles (GAAP), extraordinary repairs are generally capitalized if the useful life is increased by more than a year.
Extraordinary Repairs vs. Ordinary Repairs
The accounting treatment of extraordinary and ordinary repairs is different. Ordinary repairs are simply recorded as expenses in the current accounting period, leaving the book value of the related fixed asset unchanged. Expenses are costs recorded on a company's income statement in the period in which the cost is incurred.
Installing a new engine in a truck would be an extraordinary repair, while getting an oil change would be an ordinary repair.
Example of Extraordinary Repairs
Assume that ABC Boating Company owns several docks and hundreds of boats. In order to adequately maintain the docks and provide safe storage for its boats, ABC must routinely replace rotten or damaged boards on the docks. These costs are incurred as part of general maintenance and do not extend the life of the dock at all. This would be an ordinary repair, and the accountants at ABC would record the transaction as a debit to repairs expense and a credit to the cash balance.
On the other hand, assume that ABC Boating Company has decided to overhaul one of its lines of boats. Twenty of the boats' older engines are swapped out for new, more powerful engines. The new engines are predicted to extend the useful life of the boat for an additional five years. ABC spends $20,000 on each boat, for a total of $400,000, which is a material cost to the company.
This qualifies as an extraordinary repair. As a result of this transaction, ABC's accountants will debit (increase) their fixed asset account and credit accounts payable (AP) by $400,000. The fixed assets on the balance sheet will show this increase in value immediately in the current accounting period.
Say the line of boats originally had five years remaining on their useful life. With the new engines that extend that life by five years, the boats now have a remaining useful life of 10 years. The increase in value to the fixed asset will add an additional $40,000 ($400,000 increase in value / 10 years) to each year's depreciation expense. This additional cost will flow through to the income statement over the course of those 10 years.