Maintenance vs. Capitalization: Clear Threshold Guidelines for Plant Enhancements

The OPEX vs. CAPEX Dilemma

One of the most frequent audit friction points between CFOs and statutory auditors is the classification of subsequent expenditures on existing assets. Expensing a capital overhaul understates current profits, while capitalizing routine repairs overstates assets.

The Two-Pronged Capitalization Test

Under Ind AS 16, subsequent expenditure must only be capitalized if:

1. It is probable that future economic benefits associated with the item will flow to the enterprise (e.g., extending original useful life, increasing production capacity, or drastically reducing operating costs).
2. The cost of the item can be measured reliably.

Routine servicing and day-to-day maintenance must be expensed as OPEX. Relaso Asset Software enforces policy threshold rules during Purchase Order creation, routing asset enhancements for approval automatically.