What are Betterments?
A betterment is an improvement to a plant asset that makes the asset more efficient or more productive. Betterments are usually expensive in nature and are not expensed like general repairs and maintenance expenses.
In real estate terms, betterments are improvements to a property or to surrounding infrastructure, such as roads or sewers, that boost the value of a property. In business, a betterment is a capital expenditure that improves the value of an asset or extends its useful lifespan.
In real estate, betterment (making better) is the increased value given to real property by causes for which a tenant or the public, but not the owner, is responsible; it is thus of the nature of unearned increment. When, for instance, some public improvement results in raising the value of a piece of private land, and the owner is thereby bettered through no merit of his own, he gains by the betterment, and many economists and politicians have sought to arrange, by taxation or otherwise, that the increased value shall come into the pocket of the public rather than into the owner’s. A betterment tax would be assessed in order to divert from the owner of the property the profit thus accruing unearned to him. The whole problem is one of the incidence of taxation and the question of land values, and various applications of the principle of betterment have been tried in the United States and in England, raising considerable controversy from time to time.
What Does Betterment Mean?
Instead, betterments are capitalized because they actually improve the performance or life of the asset significantly. The cost of the improvement is added to the original purchase price of the asset and listed on the balance sheet as either a stand-alone asset or combined with the original asset.
It is important to understand the difference between normal repair and maintenance on the one hand, and betterments on the other. Refinishing floors or fixing a plumbing problem is not considered betterments because they simply sustain the value of a home. Betterments add something new to a property that materially increases its value: building a new sunroom or expanding the size of the kitchen.
Infrastructure projects undertaken by a city or a state are called public betterments. Once again, repairing sidewalks or repaving roads are not public betterments but only normal maintenance. Building a new park or installing streetlights where there were none before would count as public betterments.
Manufacturers and restaurants typically improve their assets from time to time because the original cost of the assets. Manufacturers, for instance, often buy CNC machines for more than $100,000. These machines are worth fixing and upgrading because of the initial investment. A manufacturer might have a new job that requires tool changers and spindles that aren’t already installed on their CNC machines. In order to take the new job, the manufacturer has to improve its machines. It adds $25,000 of new parts to its $100,000 CNC machine.
This is considered a betterment because it improves the functionality and efficiency of the machine. The $25,000 of improvements would be added to the $100,000 of historical cost and the new asset could be reported on the balance sheet as a $125,000 asset.