ADDITIONS TO BUILDINGS
Additions to buildings are capitalizable if they increase the service potential of the related building.
Criteria to be met
- Additions costing $50,000 or above should be capitalized
- Additions costing less than $50,000 are to be treated as repairs and maintenance
Special Notes: Additions to Buildings
Useful life
If the useful life of the addition is different from the the building to which it relates, the addition should be treated as a separate asset. It should also be depreciated over its estimated useful life, regardless of the life of the original asset.
Otherwise, the useful life of the addition must be determined in relation to the original building. In this case, the cost of the addition is depreciated over the lesser of the estimated life of the addition or the remaining life of the original building.
Capitalized Costs
If the original building was constructed with a plan to expand, cost related to the original building incurred when the addition takes places should be capitalized.
However, costs that could have been avoided with appropriate planning at an earlier date should be expensed rather than capitalized.
IMPROVEMENTS TO BUILDINGS
Improvements represent the substitution of a new part of an asset for an existing part. There are two types of substitution:
- Replacement – if the new part of the asset is similar in nature to the part being eliminated
- Betterment – if the new part represents an improvement in quality over the part being eliminated
Both replacements and betterments should be capitalized if the cost is $50,000 or more.
Accounting Treatment for Improvements to Buildings
If the original part of the existing asset is separately identifiable
The new expenditure should be substituted for the portion of the book value being replaced or improved.
The separately identified asset is depreciated over the shorter of the expected life of the separate asset or the remaining life of the building.
If separate identification is not possible
The cost of replacements and betterments is treated as an increase in the book value of the Building, thereby increasing the basis for depreciation over the remaining life of the Building.
If the replacement or betterment is designed primarily to enhance the quality of the service potential of the building, the cost is charged to the Building asset account.
Special Notes: Improvements to Buildings
- An appropriate increase in depreciation expense is recognized in future years but the useful life is not increased.
- If the replacement is designed primarily to extend the length of the service life of the asset, the book value is increased by debiting Accumulated Depreciation. The revised book value is then depreciated over the revised useful life.
- Alterations that modernize rather than improve the quality of a building should be expensed unless the alteration is so extensive as to increase the estimated life of the building.
- Re-roofing costs that are not replacing a separately identified asset should not be capitalized unless they are part of a major renovation of a building.
- Asbestos removal costs that can be separately identified should be expensed.
- As assets near the end of their estimated lives, the estimates should be reviewed for accuracy of the original estimate and adjusted to reflect the anticipated number of years of continued use. Any adjustment of estimated lives is a change in accounting estimate and should be applied to current and future depreciation calculations.
Here are some examples
- An old gymnasium is converted to a block of individual rooms at a cost of $500,000. This is considered a major renovation and would be a building capitalization. This renovation enhances the service quality of the building but does not extend the life of the building.
Debit: Building $500,000 Credit: Cash $500,000 - A deteriorating roof on an existing building (the original roof costs are not separately identified) is replaced at a cost of $55,000. These costs should be expensed in the year(s) costs are incurred.
Debit: Maintenance of buildings $55,000 Credit: Cash $55,000 - A dormitory is completely renovated at a cost of $1,000,000 including a new roof. It is estimated that the renovation will add an additional 10 years to the life of the building. The entire project costs would be capitalized under buildings.
Debit: Accumulated depreciation $1,000,000 Credit: Cash $1,000,000 - Note: The life of the building should be changed to reflect the additional 10-years of service. The debit to accumulated depreciation is the accumulated depreciation on the original building. A parking lot is repaved at a cost of $20,000 in order to restore to its original condition. This would be considered maintenance and would not be capitalized.
Debit: Paving expense $20,000 Credit: Cash $20,000