## **Learning Outcomes**

After reading this article, you will be able to explain the difference between repairs and improvements, distinguish between expenses and capitalised costs, and apply subsequent expenditure policies for non-current assets. You will understand how misclassification impacts financial statements and prepare appropriate accounting entries.

## **ACCA Maintaining Financial Records (FA2) Syllabus**

For ACCA Maintaining Financial Records (FA2), you are required to understand the classification and treatment of subsequent expenditure on non-current assets. Revision should focus on:

- Defining non-current assets and distinguishing them from expenses
- Identifying and correctly classifying repairs versus improvements
- Recording subsequent expenditure and its impact on the statement of profit or loss and the statement of financial position
- Understanding the effect of misclassification on reported profit and assets
- Making the correct double-entry for asset improvements and for repairs charged as expenses

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which of the following is considered capital expenditure?
   a) Routine painting of factory walls
   b) Replacement of a worn engine with a more powerful new engine in delivery van
   c) Replacement of old tyres with similar new tyres on a delivery van
   d) Purchase of cleaning supplies for office use

2. Repairs to a machine are incorrectly classified as improvements and capitalised. What is the effect on the financial statements?
   a) Profit is understated, assets understated
   b) Profit is overstated, assets overstated
   c) Profit is understated, assets overstated
   d) Profit is overstated, assets understated

3. True or False? The cost of restoring a non-current asset to its original working condition is always capitalised as an asset.

4. Briefly explain how you would distinguish a repair from an improvement to a company’s vehicle.

## **Introduction**

Subsequent expenditure on non-current assets—such as machinery, vehicles, or buildings—is common in all businesses. Correctly classifying whether these outlays are repairs (expenses) or improvements (capital expenditure) is essential for accurate financial reporting. The distinction determines whether a cost is charged to the statement of profit or loss immediately or added to the asset’s value and depreciated over time. Misclassification can significantly distort reported profit, asset values, and key ratios.

This article explains how to differentiate repairs from improvements, details the accounting policy for subsequent expenditure, and demonstrates the practical impact of each treatment. The approach is aligned to ACCA exam requirements and typical scenarios you will encounter.

> **Key Term: repair**
> Expenditure to restore an asset to its original condition or maintain its existing standard of performance. Recorded as an expense.
>
> **Key Term: improvement**
> Expenditure that increases the expected future benefits from an asset, such as extending its useful life, increasing efficiency, or upgrading capacity. Capitalised as part of the non-current asset.

## Assessing Subsequent Expenditure

When money is spent after acquiring an asset, it must be assessed carefully:

- Is the cost for routine maintenance or restoration—i.e., a repair?
- Does the cost improve the asset, extend its useful life, or add to its value—i.e., an improvement?

The classification determines the correct accounting treatment.

### Repairs

Repairs restore the asset to its original operating condition but do not increase its value or useful life. Examples include repainting, replacing worn parts with identical items, or fixing a leaking roof.

- **Accounting treatment:** Repairs are charged as expenses in the statement of profit or loss in the period incurred.

### Improvements

Improvements go beyond repairs. They either extend the life, increase the capacity, or improve the output of an asset. Replacing a manual system with an automated one, or upgrading air conditioning in an office block for higher efficiency, are improvements.

- **Accounting treatment:** Improvements are capitalised—they are added to the carrying amount of the asset in the statement of financial position and depreciated over time.

### Policy for Subsequent Expenditure

The correct treatment of subsequent expenditure is guided by two principles:

1. Expenditure that maintains the asset’s expected performance is expensed as a repair.
2. Expenditure that increases the expected future economic benefits from the asset is capitalised as part of the asset.

> **Key Term: subsequent expenditure**
> Any additional spending on a non-current asset after its initial recognition in the accounts.

### Why the Distinction Matters

Classifying expenditure incorrectly can lead to:

- Overstated profit (if an improvement is expensed rather than capitalised)
- Understated profit (if a repair is capitalised instead of expensed)
- Incorrect asset values
- Errors in depreciation charges

### **Worked Example 1.1**

A company owns a delivery van. During the year, it incurs two costs:

(a) Replaces the van’s brake pads with identical parts – \$400  
(b) Replaces the original engine with a new, more powerful one, resulting in better fuel efficiency and extended van life – \$2,500

**Question:** How should each cost be treated in the accounts?

> **Answer:**
> (a) The brake pads restore the van to its original condition—this is a **repair**. Expense \$400 in the statement of profit or loss.
> (b) The new engine increases the van’s efficiency and useful life—this is an **improvement**. Capitalise \$2,500 as part of the van asset, then depreciate over its revised useful life.

### **Worked Example 1.2**

A machine was purchased three years ago for \$7,000. This year, it is repainted (\$350), and later, its manual control system is upgraded to an electronic automatic system (\$1,800).

**Question:** What is the correct accounting entry for each?

> **Answer:**
> The repainting (\$350) is a **repair**—expense it. The automation upgrade (\$1,800) improves the machine’s function—**capitalise it** as an improvement.

### **Exam Warning**

> Exam questions often present both types of spending together. Check if the expenditure increases performance or merely restores condition. Only improvements should be capitalised. Carefully read if asset life or function is extended.

### Impact of Incorrect Classification

Misclassifying repairs as improvements (or vice versa) affects the accounts as follows:

- Profit for the year will be misstated
- Depreciation charges can be incorrect in future periods
- Asset values in the statement of financial position may be too high or too low

### **Revision Tip**

> When reviewing accounting entries for non-current assets, always ask: "Does this cost simply maintain the current asset, or does it add something new or lasting?" If in doubt, provide justification for your answer.

## **Summary**

Repairs restore or maintain an asset's condition—these are expenses. Improvements increase asset value, life, or capabilities—these are capitalised and depreciated. The classification of subsequent expenditure directly affects the profit for the period and the carrying amount of non-current assets. Careful assessment and application of policy ensure the accuracy of financial statements and compliance with ACCA exam standards.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define and distinguish between 'repair,' 'improvement,' and 'subsequent expenditure'
- Identify whether a cost should be expensed or capitalised
- Understand the impact of misclassification on profit and assets
- Apply ACCA policy to accounting entries for subsequent expenditure
- Demonstrate treatment with original examples of typical asset costs

## **Key Terms and Concepts**

- repair
- improvement
- subsequent expenditure

Repairs vs improvements - Subsequent expenditure policy