June 2023

CAPITAL EXPENSE... from page 16.

fan was showing signs of premature failure and needed to be replaced. Doing so will extend the useful life of the HVAC system by four years. In this scenario, the expense of the blower fan would qualify as a replacement fund expen diture. The reason is because the expense represented a significant repair to the unit, which materially extended the estimated useful life of the component.

an operating line item and should be excluded from the replacement fund expenditures. The amounts included in the engineering study for the HVAC system are only intend ed to cover the replacement of the existing system. As this expense represents maintenance of the current system, it would not qualify as a replacement fund expenditure. That being said, there are always exceptions to these recommendations. There is no “one size fits all” answer. To illustrate an exception, we can utilize the example of annual maintenance for an HVAC system. All components included in the engineering study are assigned a useful life (the amount of time that a component is expected to last). When it comes to the HVAC system, performing the annual maintenance is a required step in allowing the component to achieve its intended useful life. This clearly falls under a “maintenance” item and should be accounted for through the operating fund. However, what if while performing the annual maintenance, the contractor noticed that the blower

“As this expense represents maintenance of the current

system, it would not qualify as a replacement fund expenditure.”

We can also apply this concept to the roof repair exam ple above. The example above cited roof leak repairs which were patched. Patching a leak typically does not materially extend the useful life of the roof. If, for exam ple, the contractor discovered that there was a significant amount of wood rot under the shingles, and that a large CONTINUES ON PAGE 20

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