Building Improvement tends to be a major expense for organizations, as well as for private investors because they require significant amount of finance to be invested in line of the expense.
In this regard, it is also important to properly categorize building, and building improvements so that there is clarity regarding the respective categorization in this regard.
Building can simply be defined as a structure that is attached to the land, has a roof, is completely surrounded by walls, and is not considered to be mobile.
In the same manner, building improvements are categorized as capital expenditures that are targeted towards extending the useful life of the asset, or an expense that potentially increases the value of the building itself.
Therefore, these expenses are capitalized, not only because they are significant in nature, but also because of the fact that they foreseeable benefits resulting from building improvements have a foreseeable life of more than 12 months.
However, there are several different types of building improvement expenses that are incurred, and not all of the types of business expenses are categorized as capital expenditures.
In this regard, they are only categorized as such if they are able to meet the capitalization threshold criteria.
Accounting for Building Improvement
There are two categories of building improvements that are undertaken by companies. In this regard, it can be seen that building improvement can either be categorized as routine repairs and maintenance expense, or it can be classified as major structural changes within the organization.
For both the types of building improvement processes, it can be seen that the treatment is different.
The accounting treatment for building improvement processes can also be categorized into two broad categories: Capitalized Building Improvements, and Expensed Building Improvements.
Firstly, it can be seen that there are certain building improvement processes that are capitalized.
This means that they are treated as fixed assets, and not expensed. In this regard, it can be seen that the expense should ideally meet the capitalization threshold criteria.
Capitalization threshold criteria includes a number of things, including the nature of the expense incurred, the financial outlay of the process, as well as a couple of other things that need to fit in the criteria for building improvement processes.
Therefore, in the case where these criterion are met, the building improvement expense is capitalized.
The journal entry in this case is as follows:
|Building Improvement (PPE)||xxx|
In the same manner, in the case where building improvement expense does not fit the threshold criteria, it can be seen that the charges that are incurred are expensed on the Income Statement. In this regard, the following journal entry is made:
|Income Statement – Building Improvement||xxx|
Are Building Improvements Classified as Fixed Assets?
Classification of building improvement as fixed assets is primarily contingent on the ability of those expenses to be categorized as per the capitalization threshold.
This is because it makes logical sense to add them in fixed assets in the case where there is an absolute certainty that those fixed assets are going to add substantial value to the price of the building, or there is a certainty that the advantages yielded from the building improvement are going to last for a considerable time period.
Therefore, building improvement costing is only classified as fixed asset if these criterion are met, otherwise they are just expensed as regular repairs and maintenance expense in the Income Statement.
Depreciation for Building Improvement – Expenses
The depreciation of building improvement is simply contingent on its classification as fixed assets.
In the case where organizations are able to classify these expenses as fixed assets, then the amount is simply added to the fixed asset value, and it is subsequently depreciated using the depreciation method previously used for depreciating Property, Plant and Equipment.
However, generally it is seen that the depreciation of building or building improvement is carried out either using MACRS (Modified Accelerated Cost Recovery System) or the Alternative Depreciation System.
Building Improvement vs Leasehold Improvement
Building Improvement and Leasehold Improvements are often mixed and confused. However, it can be seen that building improvement is classified as an improvement that is carried out for the purposes of ensuring that the building dynamics, its property, as well its functionality changes to accommodate the user and the owner of the particular building.
On the other hand, leasehold improvement basically incorporates making changes to the structure or the building in order to facilitate the particular tenant, to suit his needs.