The financial accounting term improvements and replacements refers to a category of cost subsequent to acquisition. A replacement occurs when a similar asset is substituted for the original asset, while an improvement involves the substitution for a more advanced asset.
Subsequent to assets being placed into service, they oftentimes require additional investments to either improve or maintain their productivity. Improvements and replacements are one of four categories of these investments; the others include additions, reinstallations and rearrangements, and repairs.
To capitalize costs associated with existing property, plant, and equipment, one of the following three conditions must be met:
As companies strive to increase their operating efficiency, they may look to replace or improve existing assets. As part of that continuous process, accountants need to classify the cost as either an expense or capitalize it to the proper property, plant, and equipment asset. If the cost satisfies one of the above capitalization tests, the company has three options:
property, plant, and equipment, costs subsequent to acquisition, additions, reinstallations and rearrangements, repairs, disposition of property, plant, and equipment, sale of property, plant, and equipment, involuntary conversions, service life