Accounting for fixed asset repair and upgrade costs

Learn the concept of fixed asset repair and upgrade, how to account for major/minor repairs of fixed assets, and the difference between repair and upgrade of fixed assets.

I. Legal basis

• Circular 45/2013/TT-BTC;
• Circular 133/2016/TT-BTC;
• Circular 200/2014/TT-BTC.

II. Accounting for repair and upgrade of fixed assets (TSCĐ)

1. What is fixed asset repair and upgrade?

1.1. Repair of fixed assets

Fixed asset repair activities are maintenance, repair and replacement activities when assets are damaged during operation, with the aim of returning the fixed assets to their normal operating state according to the original design.
After repair and maintenance, the fixed assets do not have significant changes in capacity, productivity; fuel consumption; operating features; usage time.
For example:
During production activities, Hao Hao Joint Stock Company’s chalk mill was damaged by the DXLA 3300 drive motor with a capacity of 3,000W – manufacturer: Dongxiang Huawei. The company replaced the damaged motor with a new motor with the same parameters as above. After replacement, the chalk mill was operating normally according to the original design capacity of the manufacturer.
– On March 31, 2022, Phuc Hai Company Limited performed a periodic oil change according to the maintenance schedule for the car with license plate 20F1-590.68.
– At the beginning of the rainy season in 2022, the MiLite Joint Stock Company building had water seepage on the ceiling and mold on the walls. The company carried out maintenance to waterproof the ceiling and walls of the building. After maintenance, the depreciation period of the building was not changed.

1.2. Upgrading fixed assets

➤ For tangible fixed assets, costs recorded to increase the original cost to help improve the current state of the asset compared to the original standard state must meet the following criteria:

• Changing parts increases usage time and increases usage capacity;
• Improved components significantly increase product quality;
• Applying new production technology processes reduces operating costs.

➤ For intangible fixed assets, costs recorded as an increase in the original cost of the asset must satisfy the following two conditions:

• Expenditure that is likely to increase the future economic benefits to be generated from the asset;
• Costs that are specific to a particular intangible asset and can be measured reliably.

For example:
– In September 2020, Tan Cuong One Member Co., Ltd. installed a material cleaning part using sea sand combined with Custa 300 polishing solution for the LEKA metal polishing machine – Model X0209. After installing the above part, the operating cost of the machine was reduced from 500,000 VND/hour to 200,000 VND/hour, the quality of the finished product increased.
=> Thus, the cost of purchasing and installing the new part is recorded as an increase in the original price of the above metal polishing machine.
– On February 14, 2022, Pu Er Joint Stock Company purchased additional production subsystems and cost calculation subsystems for Mifa 3000 accounting software. After purchasing the additional subsystems, the accounting department can enter and track the company’s production activities on the software instead of recording and tracking on physical books, reducing the number of internal accountants from 30 people to 3 people.
– On June 1, 2020, O Long Company Limited purchased a Tesal generator – Model T020997, original price: 2,000,000,000 VND, usage time: 5 years, monthly depreciation amount: 33,333,333 VND. After 2 years of use, on May 31, 2022, O Long Company Limited completed replacing the battery for the Tesal generator – Model T020997, the total replacement value was 300,000,000 VND. After replacing the battery, the usage time of the Tesal generator – Model T020997 was re-evaluated to 7 years, an increase of 2 years compared to the initial usage time. The change after upgrading fixed assets is shown as follows:

1.3. Difference between fixed asset repair and fixed asset upgrade

➤ Regular repair costs of fixed assets. Including major repairs, after completion, if the assessment does not help increase productivity, usage time… (according to the requirements of the fixed asset upgrade case), they will be directly included or gradually allocated to business expenses for no more than 3 years.

➤ The cost of repairing and upgrading fixed assets is added to the original price of the fixed assets.

➤ Repair costs of leased fixed assets, if the lease contract contains a provision that the lessee is responsible for repairing the asset during the lease period, the unit will account for it similarly to the repair costs of the company’s fixed assets.

>> See more: How to calculate depreciation of fixed assets.

2. Accounting for fixed asset repair costs

2.1. Regular repair costs
➤ Regular repair costs of fixed assets and major repair costs that do not meet the conditions for increasing original cost are recorded as expenses in the period:

Debit account 627, 641, 642…;
Debit account 1331 – Deductible VAT;
Credit account 111, 112, 334, 154…

2.2. Major repair and upgrade costs eligible for recording an increase in original cost
➤ At the time of incurring costs for upgrading and renovating fixed assets, based on invoices and documents serving the repair work, accountants collect costs on account 241 – Construction in progress:

Debit account 2413 – Repair and upgrade costs excluding VAT;
Debit account 1331 – Deductible VAT;
Credit account 111, 112, 152, 331…

➤ After acceptance of completed work:

– If major repairs are eligible to increase the original cost, the accountant records an increase in fixed assets:
  Debit account 211 – Original cost increased from upgrading activities;
  Credit account 2413 – Repair costs collected for assets eligible to increase the original cost.
– If major repairs are not eligible to increase the original cost:
  Record at the time of completion of upgrading and renovating fixed assets:
  Debit account 242, 627, 641, 642…
  Credit account 2413

2.3. Periodic repair costs with advance provision according to plan
Article 7 of Circular 45/2013/TT-BTC stipulates: Units are allowed to advance provision for repair costs in case fixed assets incur regular periodic repair costs during use. In case the actual cost of repairing fixed assets is less than the provisioned amount, the unit shall reduce the business expenses of the period by the difference between the actual cost and the provisioned amount. If the actual cost of repairing fixed assets is greater than the provisioned amount, the unit shall calculate this additional difference into the reasonable expenses of the period.
➤Accounting at the time of advance provision according to the estimate, the accountant shall account into the expenses of the period:

Debit account 627, 641, 642… – Estimated maintenance costs;
Credit account 352 – Provision costs payable.

➤ Accounting at the time of periodic repairs:

Debit account 352;
Debit account 627, 641, 642… (Difference due to actual expenditure being higher than advance provision);
Debit account 1331;
Credit account 111, 112, 334, 154…;
Credit account 627, 641, 642 (Difference due to actual expenditure being lower than advance provision).

For example: On September 10, 2020, Comat Company Limited purchased and put into use the ASML 3000 UV lithography machine. The technical requirements of the machine require replacing the optical lens and UV emitter maintenance supplies every 6 months of operation with an estimated cost according to the company’s quote of VND 90,000,000/time.
– On December 31, 2020, the company made a provision for maintenance costs of VND 45,000,000 for maintenance costs in 2020;
– On March 15, 2021, the company performed the first maintenance, the total actual cost incurred was VND 92,000,000. VAT 10%;
– On December 31, 2020, the company made a provision for repair costs:

Debit account 154: 45,000,000;
Credit account 352: 45,000,000.

– March 15, 2021:

Debit account 352: 45,000,000;
Debit account 154: 47,000,000;
Debit account 1331: 9,200,000;
Credit account 331: 101,200,000I.

III. Frequently Asked Questions