How Accounting Policies Affect Maintenance Costs

Accounting decisions can greatly affect maintenance costs. Two examples are the decision to purchase items as maintenance or capital and plant item asset numbering.

Maintenance costs are expensed in the financial year incurred and are claimed as a tax deduction at the company tax rate (soon 30% in Australia) in the year they are spent. Capital expenditure, on the other hand, is depreciated and can only be claimed as a tax deduction over the usable life of the equipment. Depending on the industry, the depreciation rate for industrial equipment is 20% per year. It can be as little as 2.5% per year for office buildings. There is a clear tax advantage to claim as much expenditure as possible as a maintenance cost and not a capital cost. 

The second way that maintenance cost is affected by accounting decisions is in specifying the asset number. The accounting standards and tax law allow repairs and replacement of parts of an asset to be claimed as a maintenance cost. For example, if an asset number were given to a pump set then the motor, coupling or pump could be replaced item by item as new equipment and the cost would be a maintenance cost. If the entire pump set were replaced as one unit then that cost would be a capital cost since the whole equipment has been totally renewed.

Suppose instead that the asset was considered to be the entire production plant. It would then be acceptable to replace the entire pump set with a new one and the cost would be considered a maintenance cost. Because of an accounting decision the cost of maintenance has gone up.

There are a couple of points to consider if your business operates in the fashion mentioned above. By classifying large parts of the plant as one asset the profit from the business will be lowered. Maintenance costs reduce bottom-line operating profits more heavily than the depreciation of capital items. Not classifying purchases of complete new equipment as capital will reduce profits. Secondly if expensive, new equipment is brought under maintenance, the realisable sale value of the business is not maximised. Unless a new item is listed in the asset register of a business there is no proof that the business has increased in value by the cost of the equipment. This undervalues the business.