Small companies in particular often do not have the necessary experience when it comes to provisions for deferred maintenance. What are the different conditions for the creation of maintenance provisions? Practical tips and practical examples make the subject clear.
In addition to sufficient knowledge of the facts and reasonable preparation, a systematic approach to the formation of the provision for deferred maintenance is also necessary. The legal basis for the provision for deferred maintenance is § 249 HGB para. 1 S. 2 No. 1. The content of the provision must be interpreted, the amount of the provision must be calculated correctly. For this purpose, it is necessary to know the effects of the formation and to deal with the operations in the audit, to the extent that the correctness of the calculations from the accounting is doubted.
Practice note: Obligation to create provisions
The creation of the provision for deferred maintenance is not an option. The accountant must form this liability item in the balance sheet. However, there is room for interpretation in terms of content and amount, which must be documented accordingly.
§ Section 249 of the Commercial Code stipulates that provisions must be made for uncertain liabilities and for anticipated losses from pending transactions. In addition, explicit reference is made to the formation of provisions for “expenses for maintenance omitted in the fiscal year, which will be made up for in the following fiscal year within three months …”. This obligation to establish the provision for deferred maintenance applies to both commercial and tax balance sheets.
Internal obligation and external obligation
Provisions are only made for maintenance expenses arising from the internal obligation. If the company has an obligation to third parties to carry out maintenance, then this is recognized as a provision for uncertain liabilities. In this case, the provision that the maintenance must be made up in the first three months does not apply.
Examples of such external obligations are
- Obligations towards a tenant, to bring the leased property into a usable condition (z. B. Repair of a defective heating system in rented office premises),
- Obligations to remedy damage, incurred by a third party as a result of activities of the company (e.g. B. Paint damage to vehicles in the neighborhood due to a filter fault in the exhaust system),
- Obligation to the municipality, To compensate a road damage caused by its use as an access road for trucks.
In addition to the provision for deferred maintenance, there is only a second type of expense, which is classified as an internal expense provision in accordance with section 149 (1) of the Austrian Commercial Code. 1 No. 1 must be formed: Expenses for the removal of debris. Further expense provisions are not permitted (§ 149 para. 2 HGB).
Distinction between maintenance expense and servicing and upkeep expense
The provision is formed only for maintenance expenses. To be distinguished from this is the cost of regular maintenance and upkeep work. These may not be booked to the provision.
This means that the postponed inspection of the truck is no longer included in the calculation, nor is the regular overhaul of the production plant. Irregularly occurring maintenance work, which could cause z.B. to be scheduled depending on the load, but they belong to the measures that have to be considered in the provision.
Also not included in the provision are the amounts that need to be capitalized out of maintenance. Extensive maintenance measures and value-enhancing servicing must be capitalized. Therefore, they are not costs, a provision may not be formed for these amounts.
Practical tip: Documentation as prevention for tax audit
Some time after the measure has been completed, it is no longer fully comprehensible why activation has or has not taken place. This makes it all the more difficult to recognize and argue for this limit in the provision. Detailed documentation is necessary in order to be able to argue correctly in the event of a later tax audit.
Condition: maintenance actually necessary in the fiscal year
Another prerequisite for the provision is that maintenance has become necessary in the fiscal year and should have been carried out even then. Postponement occurs for a variety of reasons, most of which are technical or organizational in nature.
Practical examples Maintenance provisions
- The truck in the fleet had an accident in December of the past fiscal year, the damage to which should have been repaired at short notice. However, because the truck was needed for urgent deliveries, the repair will be postponed until January.
- The sudden hole in the company yard’s tar surface could not be removed in December because the weather was too bad. This was made up in February.
- The lathe in the production department could no longer run certain programs. The repair had to be carried out by the manufacturer of the machine. However, the latter had no capacity to do so in December. It was not until the end of January that the fault could be repaired by a fitter from the manufacturer.
- A new control system was needed to repair the roller shutter door. This was ordered immediately, but could only be delivered with a delivery time of 8 weeks. Accordingly, the repair was not carried out until March.
Points of contention: Catch-up option, three-month grace period, and resolution
In dispute is whether maintenance that occurred before the start of the fiscal year may be included in the provision for the fiscal year. According to prevailing opinion, there should be a catch-up ban here. The situation is different if the measure was already started in the fiscal year but not yet completed. Costs already incurred are booked normally. Costs for the portion of the work that has not yet been done belong in the accrual.
In principle, it should not be difficult to find an organizational reason for deferring a repair. There are also hardly any discussions about this with the company auditor.
Three-month deadline for period between emergence of need and end of year
There is no regulation for the period between the occurrence of the need for maintenance and the end of the year. Nevertheless, it is probably difficult to justify if maintenance becomes necessary in January but is not yet done in December. This leads to discussions with the tax auditor.
An important deadline is the time by which the maintenance must be made up in the new year. Here, a three-month period must be adhered to. So if it is foreseeable from the beginning that the repair of the vehicle, building or machine will not be completed by the end of the third month, then the corresponding maintenance may not be taken into account. This deadline is applied very precisely by the tax auditors.
- The maintenance measure must be successfully completed by the end of the three-month period.
- Compliance with the deadline must be probable when the provision for each individual measure is formed.
- Time limit overruns lead to an adjustment of the annual profit during the tax audit.
Dissolution of the provision when the reason ceases to exist
According to HGB, provisions may only be reversed if the reason for the provision no longer exists.
In the case of the provision for deferred maintenance, this is the case if
- the measure has been implemented or
- is no longer necessary, z.B. because the defective machine was sold.
If the maintenance is not completed until after the three-month period, the provision has been calculated incorrectly and must be corrected. If the balance sheet is submitted with the tax return after the deadline, then the tax authorities assume that the balance sheet has already been corrected. In this case, the provision for deferred maintenance is reduced by the measures that, contrary to initial planning, could not be completed on time.