What Is Future Capital Maintenance?
Future capital maintenance is a term used to account for future expenses that a company expects to incur in order to maintain its fixed assets or equipment needed to help generate income.
Future capital maintenance is typically estimated by an accounting department and is written as a line item on a company's financial statements. Any funds that are necessary in order to renew, repair, or replace an asset or piece of equipment in order for it to continue to function can be counted within the future capital maintenance category.
The company owning the assets likely has an idea of the frequency at which the asset will need to be repaired or replaced. Thus, the company makes a line item on its financial statements to account for this regularly occurring expense and sets aside a portion of money for this regular maintenance or upgrade. When a repair needs to be made to the asset, the total needed for the repair is taken from the saved balance and the expense is recognized.
- Future capital maintenance is a term used to account for future expenses that a company expects to incur in order to maintain its fixed assets.
- Future capital maintenance is written as a line item on a company's financial statements and includes the funds necessary to renew, repair, or replace an asset in order for it to continue to function as needed.
- In order to obtain accurate earnings projections, the value of capital including future maintenance costs must first be determined. Otherwise, certain financial ratios may be skewed.
How Future Capital Maintenance Works
Future capital maintenance is a line item on a company's financial statements that accounts for regularly occurring, expected maintenance of fixed assets. In order to obtain accurate earnings projections, the value of capital including future maintenance costs must first be determined. Otherwise, certain financial ratios may be skewed once calculated. State, county, and local governments can issue municipal bonds to raise funds for future capital maintenance costs.
Under generally accepted accounting principles (GAAP), companies must indicate whether the expenses fall under maintenance or capital expenses. As indicated, maintenance expenses include costs incurred to fix a laptop necessary for work, troubleshoot a piece of machinery needed in a clothing factory, or pay for regular vehicle inspections for a car rental company. Meanwhile, capital expenses include any upgrades or purchases of new equipment.
Example of Future Capital Maintenance
For example, a certain XYZ Corp makes widgets. The company owns a widget press which requires yearly maintenance to remain functional and continue producing widgets. In addition, every 10 years, the company needs to buy a new widget press. Thus, XYZ Corp utilizes future capital maintenance as an item on its financial statements to incorporate this regular and expected cost into their budget and reporting figures.
With this project, XYZ Corp is able to better plan its expenses, calculate its profitability, and have a more accurate picture of its financial health.