What FASB codification should I refer to regarding the capitalization of improvements to equipment that is also utilized as inventory? I’ve searched extensively but haven’t found any specific guidance—most references seem to relate to real estate or capital projects.
In our case, Company ABC has equipment that is primarily rented out to customers but is also frequently sold, making up a significant portion of our annual revenue (although not necessarily to the same customers, as we don’t have leases in place).
Occasionally, we perform upgrades on this equipment that can meaningfully enhance its functionality, alter its use, and extend its lifespan. Is there any specific codification I can consult that addresses this situation more directly?
Thank you!
EDIT: There are currently no thresholds established. We are considering capitalizing the labor and materials associated with these upgrades, but I’m struggling to find clear support for this due to the equipment’s dual purpose.
One response
In your situation, you should refer to the FASB Accounting Standards Codification (ASC) under Topic 360, Property, Plant, and Equipment. This topic provides guidance on the recognition, measurement, and reporting of property, plant, and equipment, including the treatment of improvements.
When considering whether to capitalize improvements to equipment that is also used for inventory sales, the following points from ASC 360 may be particularly relevant:
Capitalization of Improvement Costs (ASC 360-10-25): Per this section, costs that improve or extend the useful life of the asset can generally be capitalized. Since the upgrades to your equipment functionally change it, improve it, and extend its life, it would typically meet the criteria for capitalization.
Dual Use of Assets: ASC 360-10 does not specifically preclude you from capitalizing improvements based on the dual use of the asset. The key factor will be whether the changes significantly improve the functionality of the equipment. If they do, the costs associated with these upgrades (labor and materials) should be capitalized.
Subsequent Expenditures (ASC 360-10-30): This section discusses the Accounting treatment of expenditures after an asset has been acquired and provides guidance on how to determine whether to capitalize or expense costs. From your description, if the costs incurred enhance the value or utility of the equipment, capitalization is warranted.
Consideration of Inventory Accounting (ASC 330): Since the equipment also generates inventory sales, you might also consider the implications under ASC 330, Inventory, especially regarding how costs are allocated and reported if the equipment is also sold as inventory.
In summary, it seems appropriate for Company ABC to capitalize the labor and materials associated with the upgrades to the equipment, given the improvements enhance the capability and extend the life of the assets. Documenting the rationale based on the criteria in ASC 360 will support this accounting treatment, especially given the dual-use nature of the equipment. Additionally, you may want to consult with your accounting team or a CPA for tailored guidance based on the specifics of your situation.