9/29/15
Case eye of the potato
Small Fries, Inc. has two processing plants which process raw potatoes into various potato and derivative products. OSHA has approached “Top Fifty Pilot Targeting Program” to the company because the poor worker safety statistics for employers in the state of Idaho. Rundown and Decrepit, the two plants of Small Fries, Inc., responded to OSHA with the action plan shortly. Then there will be approximate $20 million cost for the compliance with the action, and Small Fries treated these cost as “repair and maintenance” expenditures in its operating budget. The costs associated with OSHA compliance can be treated as capital expenditures or the repair and maintenance costs. On December 23, 2011, the IRS provided guidance by issuing temporary and proposed regulations, and these regulations help to clarify what is capital as opposed to what would be considered a repair and routine maintenance. Under below situations, the costs can be treated as repair costs: improvements that “keep” property in efficient operating condition, restore the property to its previous condition, protects the underlying property through routine maintenance, and incidental repair to property. In this case, management’s intent is to capitalize the costs as expenditures are made because most of the costs incurred will benefit future periods as worker injury is reduced and morale is improved. And the company treats the compliance as expense, I think Small Fries should recognize the costs when the expense as incurred. Based on the auditor’s viewpoint, management should present a reasonable estimate of these costs for the compliance which would have been performed in order to support the mission of the company, and management should provide the explanatory material. A company expenses an entire repair or maintenance expense at one time, but allocates a capital expenditure