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About This FAM

Responsible Agency: Office of the Comptroller General
Issued: Nov 2006
Last Updated: Aug 2009

1. Introduction

To ensure existing and/or changing program delivery objectives are met, departments will, from time to time, incur costs that enhance the service potential of a Tangible Capital Asset (TCA). These costs, if more than the TCA threshold, are treated as a betterment to the existing asset.

Betterments versus Repairs: Any cost incurred to ensure the existing service potential of a TCA is maintained is considered repairs and maintenance. The cost incurred to enhance the service potential of a capital asset is a betterment.

Service potential may be enhanced when there is an increase in the previously assessed physical output or service capacity, associated operating costs are lowered, the useful life is extended, or the quality of output is improved.

The definition of a betterment (see FAM 2201 Appendix B - Definitions) is more difficult to apply to tangible capital assets that are complex network systems and are very long-lived, such as highway and water systems, because identifying expenditures that would extend their lives may not be practicable. For example, expenditures on road systems to widen the roads or add to the number of lanes expand the capacity of the road system to provide services and are clearly betterments. On the other hand, expenditures incurred to maintain the originally anticipated service potential of a road, or its estimated useful life, are more in the nature of maintenance (PS 3150.19).

For complex network systems, therefore, the following basic distinctions can be used to identify maintenance and betterments:

  1. Maintenance and repairs maintain the predetermined service potential of a tangible capital asset for a given useful life. Such expenditures are charged in the accounting period in which they are made.
  2. Betterments increase service potential (and may or may not increase the remaining useful life of the tangible capital asset). Such expenditures would be included in the cost of the related asset. (Bolded for emphasis - PS 3150.20)
 

2. Policy

Costs of betterments are to be considered part of the cost of a TCA and added to the recorded cost of the related TCA.
 

3. Directives

3.1

Departments shall capitalize expenditures exceeding the TCA threshold as betterments if:

  1. they generate future benefits beyond those originally estimated at the time the TCA was acquired; or,
  2. the expenditures are beyond repairs and maintenance required to restore the TCA to its condition before damage by fire, flood or similar event.
3.2 The cost of a betterment must be added to the asset cost and the resulting cost is amortized over the estimated useful life unless a betterment increases the useful life of a TCA, the revised net book value is amortized over the balance of the projected useful life remaining.
3.3 If the cost has the attributes of both a repair and a betterment, the portion considered to be a betterment, if reliably determined, is to be added to the recorded cost of the original TCA.
3.4 If a cost cannot easily be determined as a repairs and maintenance or betterment cost Public Works and Services (PW&S) and Accounting Services, Department of Finance must be consulted.
 

4. Guidelines

4.1 An addition that is not an integral part of an existing TCA should be treated as a new TCA, and is separate from the older existing TCA and amortized over its own useful life.
4.2 A major renovation to an existing Government owned TCA should consider FAM 2201 Appendix B – Definitions, in determining if the costs are to be more appropriately categorized as a “stand-alone” TCA, or a betterment to an existing TCA if they are not considered and maintenance.
4.3

Examples of betterments:

  1. A betterment can be the replacement of a major component of a TCA with a significantly improved component such as the replacement of an old shingle roof with a modern fireproof tile roof or the installation of a more powerful engine in a ship.
  2. A betterment can be a renewal, which is normally a large, non-recurring expenditure that increases the utility or service life of an asset beyond the original estimate e.g. major overhauls to equipment and strengthening of a building foundation.
  3. A betterment can be an addition that is an integral part of an existing TCA, e.g. an extra wing or room added to a building or the addition of a production unit to an existing machine or a software module addition or upgrade.
 

5 . Authorities and References

  • FAM 2201
  • PSAB (PS 3150.18 , 3150.19, 3150.20)
 

6 . Consequences from Failure to Comply

Failure to comply with policies and directives of the Financial Administration Manual may result in actions under Part X of the Financial Administration Act. The Government of the Northwest Territories may seek legal remedy in the Territorial Courts.

 

Appendix A

For guidance on determining betterments refer to:

CICA HANDBOOK
EMERGING ISSUES COMMITTEE (EIC)
Abstract of Issue Discussed:

EIC-86 ACCOUNTING FOR THE COSTS OF A BUSINESS PROCESSREENGINEERING PROJECT
EIC-118 ACCOUNTING FOR COSTS INCURRED TO DEVELOP A WEBSITE