Definition: An extraordinary repair is a major repair to an asset that extends its useful life beyond what was originally predicted. In other words, an extraordinary repair is an upgrade or overhaul that makes an asset last longer or increases its usability. These are not general repairs and maintenance that happen periodically throughout an asset’s life. These are major expenditures.
What Does Extraordinary Repair Mean?
Since extraordinary repairs extend the life of the asset, they are not immediately expensed on the income statement like normal repairs are in the current year. Instead, extraordinary repairs are capitalized and reported on the balance sheet as an increase in value to the asset they upgraded.
Let’s take a look at an example.
Many companies have delivery vehicles that are used to bring packages and orders to customers. These delivery trucks have routine maintenance done on them every year. Oil changes, tire rotations, and light bulb replacements are small expenditures that don’t really extend the life of the vehicle. These types of repairs are expensed when they are incurred.
Larger repairs that make the delivery trucks last longer, on the other hand, are capitalized because they add to the asset’s life. Replacing a motor or a transmission is an example of an extraordinary repair. This type of repair is infrequent and usually expensive compared with the value of the asset. It also extends the useful life of the vehicle. A new transmission or motor can extend the life of a vehicle by 5 to 10 years.
Since the benefits of these repairs will extend into future periods, GAAP requires that we record this transaction as an additional asset. Sometimes these repairs are reported as a separate asset and sometimes they are reported as an addition to the existing asset. For example, if the delivery truck was on the books for $5,000 and $1,000 was paid for a transmission upgrade, the vehicle would be reported at $6,000 on the next balance sheet.