Accendo Reliability

Your Reliability Engineering Professional Development Site

  • Home
  • About
    • Contributors
  • Reliability.fm
    • Speaking Of Reliability
    • Rooted in Reliability: The Plant Performance Podcast
    • Quality during Design
    • Critical Talks
    • Dare to Know
    • Maintenance Disrupted
    • Metal Conversations
    • The Leadership Connection
    • Practical Reliability Podcast
    • Reliability Matters
    • Reliability it Matters
    • Maintenance Mavericks Podcast
    • Women in Maintenance
    • Accendo Reliability Webinar Series
    • Asset Reliability @ Work
  • Articles
    • CRE Preparation Notes
    • on Leadership & Career
      • Advanced Engineering Culture
      • Engineering Leadership
      • Managing in the 2000s
      • Product Development and Process Improvement
    • on Maintenance Reliability
      • Aasan Asset Management
      • CMMS and Reliability
      • Conscious Asset
      • EAM & CMMS
      • Everyday RCM
      • History of Maintenance Management
      • Life Cycle Asset Management
      • Maintenance and Reliability
      • Maintenance Management
      • Plant Maintenance
      • Process Plant Reliability Engineering
      • ReliabilityXperience
      • RCM Blitz®
      • Rob’s Reliability Project
      • The Intelligent Transformer Blog
    • on Product Reliability
      • Accelerated Reliability
      • Achieving the Benefits of Reliability
      • Apex Ridge
      • Metals Engineering and Product Reliability
      • Musings on Reliability and Maintenance Topics
      • Product Validation
      • Reliability Engineering Insights
      • Reliability in Emerging Technology
    • on Risk & Safety
      • CERM® Risk Insights
      • Equipment Risk and Reliability in Downhole Applications
      • Operational Risk Process Safety
    • on Systems Thinking
      • Communicating with FINESSE
      • The RCA
    • on Tools & Techniques
      • Big Data & Analytics
      • Experimental Design for NPD
      • Innovative Thinking in Reliability and Durability
      • Inside and Beyond HALT
      • Inside FMEA
      • Integral Concepts
      • Learning from Failures
      • Progress in Field Reliability?
      • Reliability Engineering Using Python
      • Reliability Reflections
      • Testing 1 2 3
      • The Manufacturing Academy
  • eBooks
    • Reliability Engineering Management DRAFT
  • Resources
    • Accendo Authors
    • FMEA Resources
    • Feed Forward Publications
    • Openings
    • Books
    • Webinars
    • Journals
    • Higher Education
    • Podcasts
  • Courses
    • 14 Ways to Acquire Reliability Engineering Knowledge
    • Reliability Analysis Methods online course
    • Measurement System Assessment
    • SPC-Process Capability Course
    • Design of Experiments
    • Foundations of RCM online course
    • Quality during Design Journey
    • Reliability Engineering Statistics
    • An Introduction to Reliability Engineering
    • An Introduction to Quality Engineering
    • Process Capability Analysis course
    • Root Cause Analysis and the 8D Corrective Action Process course
    • Return on Investment online course
    • CRE Preparation Online Course
    • Quondam Courses
  • Webinars
    • Upcoming Live Events
  • Calendar
    • Call for Papers Listing
    • Upcoming Webinars
    • Webinar Calendar
  • Login
    • Member Home

by Mike Sondalini Leave a Comment

How Accounting Policies Affect Maintenance Costs

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.

Filed Under: Articles, on Maintenance Reliability, Plant Maintenance

« Exploiting New Challenges in Enterprise Risk Management
Enabling Customer Value in Product Design »

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Article by
Mike Sondalini
in the
Plant Maintenance series articles provided courtesy of Feed Forward Publications and Lifetime Reliability Solutions.

Join Accendo

Receive information and updates about articles and many other resources offered by Accendo Reliability by becoming a member.

It’s free and only takes a minute.

Join Today

Recent Articles

  • Terrorism Risk Insurance Act Exclusions: Gray Coverage Areas
  • Why Total Productive Maintenance Is The Answer To Reliability-Centered Culture
  • 17 Powerful Insights on Effective Communication Using FINESSE
  • Surprising Insights from Simple Run Charts
  • Risk is Round

© 2023 FMS Reliability · Privacy Policy · Terms of Service · Cookies Policy

This site uses cookies to give you a better experience, analyze site traffic, and gain insight to products or offers that may interest you. By continuing, you consent to the use of cookies. Learn how we use cookies, how they work, and how to set your browser preferences by reading our Cookies Policy.