We lease a piece of equipment (heavy machinery) under an operating lease. Under the lease we must maintain the asset. We need to replace the engine for approx 40k. Can I capitalise this repair? It will prolong the life of the equipment and will have a useful life greater then 1 year. We capitalise this sort of cost on other equipment we own, but I'm unsure of the accounting treatment of this repair to a leased asset. Apprecaite any help. thank you.
USA Can I capitalise repairs to an asset leased under an operating lease?
- Thread starter jhk
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smallbushelp
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Yep, sure can. But remember you amortize it over the lesser of the improvements useful life or the remaining term of the lease taking into consideration any residual value. You may realize a loss when the lease ends. Are you sure it qualifies as an operating lease? It surprises me that you would be responsible for replacing the engine. But then anything is possible.
Thank you! This issue had me flip flopping between expensing or capitalizing these repairs. We structure our lease contracts so they don't qualify as capital leases under FAS 13. So all leased equipment are classified As operating leases.