FINANCE STANDARD

02-061
Capital versus Expense

Issued: 22 March 2012

Effective: 05 December 2011
Supersedes: 05 Dec. 2007
Rev. 3
Page 1 of 4

OWNER:
Donna Foley
APPROVERS: M. Scott Crocco, Jordi Cruells, Sharon Leskowsky, Jared J. Markowitz, Kristina
A. Schuster, Tony Wang
CONTACT:
Joan Alich, Manuel Miralles
Denotes Revision
1.

PURPOSE

1.1

The Company expends funds to maintain and prolong an asset's usefulness. This standard
establishes the guidelines for the classification of this support spending as capital or expense.
It discusses spending for modification of an operating facility and for the replacement in kind
of a portion of a facility. It provides definitions and a process to facilitate the appropriate
capital or expense accounting classification for the spending. This standard does not supersede
Finance Standard 02-095, Capital Spare Parts. The definitions also apply to the related Finance
Standards 02-015, Capitalization of Plant and Equipment, and 02-060, Maintenance Expense.

2.

SCOPE

2.1

Air ProductsWorldwide, except where local laws or regulations require alternative treatment.

3.

DEFINITIONS

3.1

Capital AssetItem that provides future economic benefits for a period greater than one
year and that has an original unit cost of $5,000 or more.

3.2

Expenditure Authorization Request (EAR)Document signed by the appropriate levels of

management that authorizes the specific expenditure amount required for the project.
Appropriate approvals are based on the Delegations of Authority.

3.3

CapacityLevel of designed or best achieved production under current operating conditions

excluding degradation.

3.4

EfficiencyRatio of effective or useful output to the total input in a system.

3.5

Economic Useful LifePeriod over which an asset's future financial benefits are expected to
be available and over which the asset is expected to be productively employed. Useful life is
the period over which an asset is depreciated (Depreciable Life).

3.6

Physical LifePeriod over which an asset will fulfill its intended function. Physical life may be
more than economic useful life. For example, a well-maintained air separation plant may be
capable of producing oxygen and nitrogen for fifty years (that is, fulfills its intended function),
but factors such as commercial or technical obsolescence may limit it economic useful life to a
period of fifteen years.

3.7

ModificationChange to an existing operating facility that increases its capacity, increases its
efficiency, or extends its economic useful life.

All information herein is the property of Air Products and Chemicals, Inc., unless another source is shown. This document is
classified as Air Products internal use only, is subject to return on demand and must not be disclosed or reproduced without
prior written consent. This information may be subject to export controls. Disclosure contrary to U.S. law is prohibited.

Air Products and Chemicals, Inc., 2012

Capital versus Expense

02-061, Issued: 22 March 2012, Effective: 05 December 2011, Rev. 3, Page 2 of 4
3.8

Environmental, Health and SafetyProtection from, or not being exposed to, the risk of
harm or injury.

4.

STANDARD

4.1

Environmental, Health, and Safety Expenditures

4.1.1

An expenditure that meets the definition of an asset and is initiated because of a safety,
health, or environmental requirement (Operating Plant Hazard Review (OPHR), Incident
Investigation, Environmental) or regulatory agency requirement (for example, Occupational,
Safety and Health Administration (OSHA), Process Safety Management (PSM,) will be classified
as capital.

4.2

Spending for Modifications

4.2.1

Expenditures for the modification of a facility, that is, those expenditures which increase the
facility's efficiency, extend its economic useful life, or increase its capacity, will be classified as
capital. An Expenditure Authorization Request (EAR) is required to authorize the expenditure.

4.2.2

An efficiency increase expenditure must result in reduced conversion cost as a result of either
a reduction in the quantity of an input (energy, raw materials, resources) needed to obtain the
same level of throughput, or an increase in the quantity of output for the same conversion of
energy, raw material, or resources.

4.2.3

An economic useful life extension expenditure must enable the facility to deliver economic
benefits for a period beyond its currently defined economic useful life.

4.2.4

A capacity expansion expenditure must result in measurable production output greater than
designed or best achieved levels under current business (that is, product mix) demand. For
purposes of this standard, an expenditure to increase the on-stream availability of the
operating facility by eliminating a scheduled maintenance shut-down will be considered a
capacity increase expenditure.

4.3

Spending for Replacements in Kind

4.3.1

Expenditures for the replacement of a portion of an operating facility are classified as capital if
the portion being replaced meets the definition of an asset. The replacement is required
because the portion of the facility has degraded due to mechanisms like:

ObsolescenceWhen it is no longer practically or economically possible to obtain a

replacement portion of an operating facility, or procure the necessary support and
servicing by the required specialists or specialist companies.

CreepTo become deformed, as under continuous loads at high temperatures.

CorrosionDeterioration in metal caused by oxidation or chemical action.

Stress corrosion crackingThe formation of brittle cracks in a normally sound material

through the simultaneous action of tension and a corrosive environment.

Cyclic stressAn internal distribution of forces (a stress) that changes over time in a
repetitive fashion.

Electrical insulation breakdownThe loss of insulating properties caused by electrical

activity, atmospheric attack, arcing, or rubbing.

Expected normal wear to a point where it is not practical or economical to make repairs.

4.3.2

The replaced portion can have an economic useful life that differs from the remaining
economic useful life of the operating facility that it supports. In this case, the cost of the
replacement will be depreciated over a separate economic useful life. However, the economic
useful life of the replacement cannot exceed the useful life of the operating facility of which it
is a portion.

All information herein is the property of Air Products and Chemicals, Inc., unless another source is shown. This document is
classified as Air Products internal use only, is subject to return on demand and must not be disclosed or reproduced without
prior written consent. This information may be subject to export controls. Disclosure contrary to U.S. law is prohibited.

Capital versus Expense

02-061, Issued: 22 March 2012, Effective: 05 December 2011, Rev. 3, Page 3 of 4
4.3.3

An Expenditure Authorization Request (EAR) is required to authorize a replacement in kind

expenditure. In conjunction with the replacement, a Capital Asset Disposal Request (CADR) is
required to authorize the removal of the replaced asset from the asset records. Any cost or
remaining net book value related to the asset being replaced will be written off.

4.3.4

Replacements of portions of an operating facility that are normal and recurring throughout the
facility's useful life are considered maintenance and are classified as expense. Examples
include the replacement of insulation on piping and vessels, and the replacement of rock wool
and perlite. The cost of these replacements are captured in a maintenance order and expensed
as operating costs of the facility.

4.3.5

A list of end of life scenarios is maintained on the Global Operations website. This list provides
further guidance in the form of examples of the classification of replacement in kind
support spending as capital or expense. It describes the degradation mechanism, example of
the portion of facility replacement, and a basis for the capital or expense classification. The list
is maintained and is reviewed annually by a Capital versus Expense Steering Committee that
includes the Global PPO Manager and representatives from Regional Maintenance Management
(North America, Europe, and Asia), and Corporate Decision Support.

4.4

Decision Tree for Capital Vs Expense

4.5

Process to Determine Capital or Expense Classification

4.5.1

This standard is intended to provide the guidance necessary to classify support spending on
initiatives to be undertaken. However, when situations are unique and questions arise as to
proper classification, the Capital versus Expense Steering Committee member is contacted.
The steering committee member evaluates the spending against this standard and provides a
decision. Other steering committee members are consulted on the classification decisions. All
replacement in kind capital expenditures require the approval of the Regional Maintenance
Manager on the EAR. If appropriate, the list of end of life scenarios/illustrations is updated
accordingly by the Capital versus Expense Steering Committee.

All information herein is the property of Air Products and Chemicals, Inc., unless another source is shown. This document is
classified as Air Products internal use only, is subject to return on demand and must not be disclosed or reproduced without
prior written consent. This information may be subject to export controls. Disclosure contrary to U.S. law is prohibited.

Capital versus Expense

02-061, Issued: 22 March 2012, Effective: 05 December 2011, Rev. 3, Page 4 of 4
5.

RESPONSIBILITIES

5.1

Segment and Division Controllers and other Controllership individuals with delegated
authority to approve expenditure authorization requests (EARs) are responsible for:
Reviewing the overall content and authorization levels of expenditure authorization
requests for capital vs. expense decisions of various cost items contained therein.

Maintaining effective controls to ensure compliance with the provisions of this standard.
Reviewing all applicable expenditure authorization requests for compliance with this
standard.

5.2

Capital versus Expense Steering Committee Members are responsible for:

Evaluation of spending efforts to determine if the effort meets the guidelines in this
Finance Standard.

Review and update of the list of end of life scenarios/examples at least on an annual basis.

5.3

Regional Maintenance Managers are responsible for approval of all replacement in kind
expenditures via signature on the applicable Expenditure Authorization Request EAR.

5.4

The Global PPO Manager is responsible for:

Serving on the regional steering committee

Publishing the list of end of life scenarios on the Global Operations website

5.5

Project Support/Asset Accounting is responsible for:

Reviewing and auditing project cost information at the time of capitalization.

Reviewing the appropriate account classification for items prior to capitalization. Refer to
Finance Standard 02-078, "Property Classifications."

6.

RELATED INFORMATION

6.1

Finance Standards
02-015
02-028
02-060
02-078
02-095

6.2

Capitalization of Plant and Equipment

Depreciation
Maintenance Expense
Fixed Asset and Intangible Asset Property Classifications
Capital Spare Parts

Other References
Global Operations Capital versus Expense Decision Webpage
Replacement in Kind, Capital Expenditure End of Physical Life Examples
(Includes list of Capital versus Expense Steering Committee Members)

All information herein is the property of Air Products and Chemicals, Inc., unless another source is shown. This document is
classified as Air Products internal use only, is subject to return on demand and must not be disclosed or reproduced without
prior written consent. This information may be subject to export controls. Disclosure contrary to U.S. law is prohibited.