Definition: A repair is a maintenance job performed over any equipment, vehicle, machinery, building or any other item, either physical or intangible. It is an activity that aims to improve or enhance the current situation of certain asset.
What Does Repair Mean?
From an accounting perspective, repairs are normally considered ordinary expenses. Nevertheless, depending on the nature and impact of the maintenance, such repairs could be capitalized. In the first scenario, a repair would be a minor replacement of certain piece or a regular maintenance.
In such cases, the repair would be considered an expense and it will be deducted from revenues or income at the Income Statement.
On the other hand, large repairs are often capitalized to the asset value, as long as they actually increase the value of the property. This would be the case for a remodeling job in an old building or an engine replacement in certain vehicle.
These modifications increase the market value of the asset and that means that the cost of the repair will be added to the current net value of the property in order to arrive to a new value. This newly recorded figure will be properly depreciated according to a new useful life assigned to it after the major repair is finished.
Parking Space Co. is a company that provides parking services through automated buildings in many cities across the U.S. The company has more than 78 facilities currently operating and most of them were built more than 5 years ago. Three of these buildings currently need intensive repairs. The automated system is constantly presenting errors and some cars have been damaged because of this situation.
The value of these buildings and the business within them has decreased because of this situation. In order to reestablish the building’s value the company decided to engage in major remodeling jobs for each of them. These repairs, in the aggregate, will cost more than 2.5 million dollars and since this cost will increase the value of the properties the company decided to capitalize the expense as part of the historical cost of such assets.