Why should an accountant learn to distinguish between different types of repairs and how to do it

Repairs in rented premises

According to the general rule, stated in Article 616 of the Civil Code, when renting property, responsibilities for its repair are distributed as follows: current repairs are the responsibility of the tenant, and major repairs remain with the lessor.
Usually, when leasing office real estate, these rules remain unchanged, since the lease terms are most often short, and it is inappropriate to shift major repairs to the tenant (and the Civil Code of the Russian Federation allows this). In such a situation, the accountant of the organization renting the premises, when carrying out repairs, needs to clearly understand what kind of work relates to the current repair. After all, if an organization “accidentally” carries out major repairs, there may be problems with taking into account expenses for tax purposes, since the tenant had no obligation to carry out such repairs. Consequently, the expenses may be considered unjustified (Article 252 of the Tax Code of the Russian Federation).

The situation is similar for the landlord. Here it is important to understand which of the tenant’s requirements for repairs must be met, because these requirements relate to major repairs, and which requirements are not justified. Accordingly, for the landlord, the tax accounting of repair costs will depend on the correct answer to this question.

Draw up and print a lease agreement for free using a ready-made template

Cost accounting

Important! When the management of an organization makes an informed decision about the need to perform a major overhaul of the operating system, it is necessary to choose the appropriate method for carrying it out.

Typically, this activity can be carried out according to one of the following two approaches:

• restoration of a technical object using our own resources, that is, the internal resources of the enterprise itself;
• attracting resources from external (third-party) organizations through the conclusion of contract agreements.

Correct registration of all processes and procedures associated with the overhaul of fixed assets at an enterprise is of great importance for the correct accounting of relevant costs.

You should be aware that documentary evidence of the repairs carried out often becomes the object of close attention from tax officials.

At different stages of OS overhaul, the following documents must be drawn up:

• Justification of the need for this repair. For an OS object, an act of recording identified faults or, as an option, a defective statement is drawn up.
• If an object is transferred to the enterprise’s own division for repairs, an invoice is issued certifying the fact of internal movement.
• If the repair of a fixed asset is entrusted to an external organization, a corresponding contract and a certifying acceptance certificate are drawn up.
• The fact of completion of major repairs and return of the object to its intended place is also documented in the acceptance certificate.
• All paid expenses and incurred expenses must be confirmed by payment documents, estimate and technical documentation.

Read about documentation of repairs here.

Accounting entries

OS repair costs are taken into account as part of production costs or, alternatively, sales costs.

This position is reflected in the methodological recommendations regulating the accounting of fixed assets and approved by the administrative act of the Ministry of Finance of the Russian Federation. The tables below highlight typical transactions.

The first situation is that the enterprise has its own division authorized to carry out repair work. In this case, it is appropriate to use account 23:

The second situation is when the organization independently repairs fixed assets, but does not have its own repair unit:

The third situation is when repair work is carried out entirely by a third-party contractor:

Creating a reserve

Tax accounting regulations require the inclusion of repair costs as part of other costs.

Such expenses are recognized precisely in the reporting period in which they were actually incurred.

In addition, the legislation allows the formation of target reserves intended to finance future repairs.

If such a reserve is nevertheless created by the enterprise, this makes it possible to evenly distribute (show) repair costs in the tax accounting system over a number of reporting periods.

The method of reflecting (fixing) repair costs is fixed in the accounting policy of the organization.

It should be clarified that such reservation and distribution of repair costs is allowed exclusively for tax accounting. This practice is not provided for in accounting.

Repair or modernization

Another point when an accountant has to operate in construction terms is related to the peculiarities of accounting for modernization (completion, retrofitting, reconstruction). Indeed, in contrast to repairs, the costs of which are taken into account at a time (Article 260 of the Tax Code of the Russian Federation), expenses for such activities are written off through depreciation (clause 2 of Article 257 of the Tax Code of the Russian Federation).

At the same time, the legislator made an attempt to remove possible questions and gave definitions of completion, reconstruction and modernization in the Tax Code (see box).

Definitions from the Tax Code of the Russian Federation

According to Article 257 of the Tax Code of the Russian Federation: Work on completion, additional equipment, and modernization includes work caused by a change in the technological or service purpose of equipment, a building, structure or other object of depreciable fixed assets, increased loads and (or) other new qualities. For the purposes of this chapter, reconstruction includes the reconstruction of existing fixed assets associated with the improvement of production and the increase of its technical and economic indicators and carried out under the project for the reconstruction of fixed assets in order to increase production capacity, improve quality and change the range of products. Technical re-equipment includes a set of measures to improve the technical and economic indicators of fixed assets or their individual parts based on the introduction of advanced equipment and technology, mechanization and automation of production, modernization and replacement of obsolete and physically worn-out equipment with new, more productive ones.

But, it should be admitted with regret that these definitions turned out to be of a rather general nature; Based on them, it is often difficult to attribute specific work to modernization. Considering the cost of repair (modernization) work, the cost of an error here is quite high. And in both directions: if the modernization is incorrectly classified as a repair, the organization will face additional charges, penalties and fines. And in the opposite situation - losses due to overpaid income tax.

So in this case, it would be a good idea for the accountant to refer to the repair criteria and once again make sure that the work performed is (or is not) a modernization.

Keep records of depreciable property for free according to the new rules

Documents and definitions

So where can an accountant get information about which specific construction works are considered current repairs, which are major repairs, and which are considered modernization? The list of relevant sources is given in the letter of the Ministry of Finance of Russia dated November 23, 2006 No. 03-03-04/1/794. When resolving the issue of classifying work as construction, the financial department recommends relying on the following documents:

• Regulations on carrying out scheduled preventative repairs of industrial buildings and structures MDS 13-14.2000, approved by Decree of the USSR State Construction Committee dated December 29, 1973 No. 279;
• Departmental Construction Standards (VSN) No. 58-88 (R) “Regulations on the organization and implementation of reconstruction, repair and maintenance of buildings, municipal and socio-cultural facilities” (approved by Order of the State Committee for Architecture under the USSR State Construction Committee dated November 23, 1988 No. 312) ;
• Letter of the USSR Ministry of Finance dated May 29, 1984 No. 80 “On the definition of the concepts of new construction, expansion, reconstruction and technical re-equipment of existing enterprises.”

On our own behalf, we would add that the general document on this topic is the Town Planning Code, and in controversial situations you can seek advice from the relevant ministry - the Ministry of Construction of Russia. Specialists from this department, just like specialists from the Ministry of Finance, are required to respond in writing to requests from organizations.

Cheat sheets

It is clear that studying all the above documents requires a huge amount of time. Therefore, we have prepared special cheat sheets, using which you can quickly understand what kind of work has been done in your case. There are three such cheat sheets. One cheat sheet contains lists of works with their breakdown by type. The other is based on definitions given in various regulations. It contains general concepts that make it possible to understand the type of work “at the top level.” The third cheat sheet, dedicated to modernization, stands apart in this series. It contains signs of modernization and explanations for them.

When working with our cheat sheets, we suggest using the following algorithm.

First, based on the “modernization” cheat sheet, we decide whether our work relates to repair or whether it is a modernization.

Then, having made sure that we are talking about repairs, we must try to find the types of work being performed in the first table and, based on this, determine which repairs - current or major - they relate to.

If the necessary work is not in the first cheat sheet, then we turn to the second and try to apply the deductive method, extending the general definition to our private work.

Find out about the taxes paid by the counterparty and the violations committed by him Start an audit

Results

OS overhaul is a step-by-step production process, each stage of which requires proper documentation.
When carrying out repair activities, it is important to justify the need for repairs, properly hand over and accept the object from repair and timely reflect the operations in accounting. You can find more complete information on the topic in ConsultantPlus. Free trial access to the system for 2 days.

"Modernization" cheat sheet

The main and fundamental difference between modernization, addition, reconstruction and repair is that it changes the operational performance of the building. For example, the capacity of engineering communications increases, corridors are expanded, and the like. That is, the building receives new properties, and its characteristics are qualitatively improved.

But it must be taken into account that the operational performance of a building may change during major (and even sometimes during current!) repairs. Therefore, it is important to take into account two more indicators: the scale of change and the goal. Thus, during repairs, improved performance is always a side effect associated with the use of modern materials and (or) technologies. This effect is not the purpose of the work being carried out and is optional. And in scale, such improvements are not comparable with the scale of all the work being carried out; in the estimate and schedule they do not occupy a leading role.

During reconstruction and modernization, on the contrary, improving performance is the main goal of the work carried out. They determine not only the choice of materials and technologies for carrying out work, but also the very need for this work. Accordingly, if the estimate and schedule for reconstruction and modernization contain some work related to repairs, then they are only secondary, caused by the need and type of modernization.

Thus, modernization (reconstruction, addition) can be distinguished from repair by the documents that are drawn up in connection with the work: technical specifications, justification, estimates, schedules, contracts. During modernization, the red thread in all these documents will be quality indicators. And during repairs - quantitative.

Cheat sheet by type of work

* The most common types of work are given. For a complete list of works, see Appendix 7 of VSN No. 58-88(r) and Appendix 3 to Regulation No. 279 (approved by Resolution of the USSR State Construction Committee dated December 29, 1973 No. 279). ** The most common types of work are given. For a complete list of works, see Appendix 9 of the VSN No. 58-88(r), as well as Appendix 8 to Regulation No. 279 (approved by Resolution of the USSR State Construction Committee dated December 29, 1973 No. 279).

List of requirements for materials and calculation of the cost of materials for the object and sections of the estimate