How to Account for Office Renovation Costs in Vietnam

In addition to monthly office rental fees, businesses often face additional costs such as workspace repairs or renovations. The distinction between routine maintenance and major renovations significantly impacts how these expenses should be accounted for. Therefore, companies must carefully evaluate and classify these costs in accordance with applicable accounting and legal standards.

1. What do office renovation expenses include?

Office renovation expenses refer to costs incurred during the usage of leased office space to repair, refurbish, maintain, or upgrade the environment. These expenses are aimed at ensuring that the space meets operational requirements and enhances overall business efficiency.

The scope of work may vary depending on the condition of the space and the specific improvement needs of the business. Common categories include:

1.1 Office upgrades and fixed asset improvements

According to Clause 14, Article 2 of Circular 45/2013/TT-BTC, an upgrade to a fixed asset is defined as the process of expanding, modifying, or enhancing the original asset to improve productivity, extend its useful life, or increase its functional value. In addition, upgrades may involve implementing new production technologies to reduce operating costs associated with the asset.

According to Clause 1, Article 7 of Circular 45/2013/TT-BTC, expenses incurred by a business to upgrade a fixed asset (FA) must be capitalized, meaning they are added to the historical cost of the asset. These expenses cannot be recorded as current-period business expenses.

Example: Company X upgraded its office air conditioning system by installing energy-saving components and smart control modules. As a result, the system’s daily energy consumption dropped from 500 kWh to 300 kWh, significantly reducing operational costs and improving cooling efficiency. The cost of purchasing and installing these components will be added to the asset’s book value, as the upgrade has enhanced the system’s performance and extended its usability.

1.2 Repairs and maintenance for leased office space

According to Clause 13, Article 2 of Circular No. 45/2013/TT-BTC, the repair of fixed assets refers to a series of activities such as maintenance, servicing, and the replacement of damaged components that arise during the operation of the fixed asset. The objective of these activities is to restore the asset to its original standard operating condition.

Furthermore, as stipulated in Clause 2, Article 7 of the same Circular, repair expenses related to fixed assets are not capitalized as an increase in the asset’s historical cost. Instead, such costs must be either fully expensed in the accounting period in which they are incurred or amortized gradually as part of operating expenses over a period not exceeding three years, depending on the nature and scope of the repairs.

In cases where a company leases office space and the lease agreement stipulates that the tenant is responsible for the repair and maintenance of the fixed assets during the lease term, the related repair costs shall be recorded as expenses or amortized gradually into operating expenses over a period not exceeding three years, depending on the nature and value of the repair.

Example:

Company C leased an office for business operations. After a period of use, the company identified several areas in need of repair, including the flooring, HVAC system, and entry doors. The total cost for the office repairs amounted to VND 40 million. To ensure transparency and rationality in financial reporting, the company decided to amortize the repair expenses over a two-year period. Accordingly, VND 20 million will be recognized as operating expenses each year, gradually allocating the cost over the lease term in accordance with accounting principles.

2. CIT on office repair costs in leased spaces

According to circular No. 78/2014/TT-BTC and the Law on Corporate Income Tax, businesses may account for fixed asset repair costs for CIT purposes in the following ways:

• Direct expensing in the current accounting period: Applied to regular maintenance costs or major repair expenses that do not meet the criteria for capitalization into the asset’s value.
• Capitalization and depreciation over time: Applied to major or cyclical repair expenses that qualify for capitalization, such as those that significantly improve the asset’s performance, extend its useful life, or enhance its value.

3. VAT on office repair expenses in leased offices

According to the 2019 Law on Value-Added Tax and Circular No. 219/2013/TT-BTC, businesses may claim VAT credits on office repair expenses in the following ways:

• Immediate input VAT credit in the current period: Applicable to routine repair and maintenance expenses or major repairs that do not meet the criteria for capitalization into the asset’s value.
• Deferred VAT credit over time: Applied to periodic or capital improvement repairs that qualify for capitalization, where the VAT can be allocated over the useful life of the upgraded asset.

4. Conditions for accounting office repair expenses

To properly account for repair expenses of leased office space, a business must meet the following conditions:

• Lease agreement: There must be a valid office lease agreement that clearly defines the rights and obligations of both parties—particularly the clauses outlining which party is responsible for repair, maintenance, or upgrades during the lease term.
• Valid supporting documents: The business must retain valid invoices, receipts, or other supporting documents to justify the incurred repair expenses. All documents must be legally issued and comply with current tax regulations.
• Purpose of use:The repair or renovation must serve business operations and not be intended to increase the value of the fixed asset.
• Repair period alignment: The useful life or duration of use of the repaired asset must be consistent with the lease term specified in the contract.

5. Procedure for accounting office repair expenses

The procedure for accounting office repair expenses for leased premises is carried out in the following steps:

Step 1:Identify the nature of the repair work, such as routine maintenance, renovation, or major repairs.

Step 2:Collect valid documents and invoices as evidence for all office repair expenses.

Step 3:Allocate the incurred expenses during the repair process, including: cost of materials, labor costs, outsourced services, and other related costs,…

Step 4: Record the repair expenses in the accounting books under appropriate accounts in accordance with the Accounting Law.

Step 5: Prepare a detailed cost statement for repair expenses to monitor activities and control the budget.

Step 6: Store all relevant documents and evidence of the repair works for future inspection and reconciliation purposes.

6. Detailed guidance on accounting for office repair expenses for leased premises

Depending on the nature and extent of the repair work, office repair expenses for leased premises will be accounted for in one of the following ways:

6.1 Accounting for office repair expenses that do not qualify for capitalization

Repair expenses that do not qualify for capitalization typically apply to minor works such as replacing lights, fixing electrical systems, repainting walls, or reapplying wall coverings. These items generally do not alter the office’s area, function, or usable life. If the office repair costs are already included in the rental fee, the business only needs to recognize the rental expense as part of business operating costs.

If office repair expenses are not included in the lease agreement, the accounting entries should be recorded as follows:

a) Upon incurring office repair costs:

• If input VAT is deductible, record:

–  Dr account 241 – Construction in progress (2413)

–  Dr account 133 – Deductible VAT (1332)

+ Cr accounts 111, 112, 152, 214, 331…

• If input VAT is not deductible, record:

– Dr account 241 – Construction in progress (2413)

+ Cr accounts 111, 112, 152, 214, 334…

b) Upon completion of office repair:

• Record:

– Dr account 623, 627, 641, 642 (for minor repairs)

– Dr account 242 – Prepaid expenses (for major repairs)

– Dr account 352 – Accrued expenses (for provisioned periodic repairs)

+ Cr account 241 – Construction in progress (2413)

c) Upon completion of office repair:

• Record:

– Dr account 627/641/642 (for minor repairs)

– Dr account 242 (for capitalized major repairs to be amortized)

+ Cr account 154 – Manufacturing Overhead (or equivalent cost center)

7. Accounting for periodic office repairs or renovations of fixed assets

For cyclical or scheduled office repairs, enterprises should recognize a provision in advance based on the annual plan. The accounting treatment is as follows:

a) Accrual of periodic repair expenses:

• Record:

– Dr account 627/641/642

+ Cr account 352 – Accrued expenses

b) Upon actual repair execution:

• Record: 

– Dr account 2413 – Major repairs of fixed assets

+ Cr accounts 111/152/153/214/334/338…

c) Upon completion of repair work:

• Record:

– Dr account 352 (3524) – Accrued expenses

+ Cr accounts 2413 – Major repairs of fixed assets

d) In case of a discrepancy between planned and actual repair costs:

• If actual cost exceeds provisioned amount:

– Dr account 627/641/642…

+ Cr accounts 352 (3524) – Accrued expenses

• If actual cost is less than provisioned amount:

– Dr account 352 (3524) – Accrued expenses

+ Cr accounts 627/641…

+ Or Cr account 711 – Other income

Note: The allocation period for office repair costs or fixed asset maintenance with cyclical nature must not exceed 3 years. If the duration extends beyond this, enterprises must consider capitalizing the costs to increase the asset’s carrying amount.

8. Accounting for upgrading office fixed assets

Upgrading office fixed assets refers to improving or replacing significant components of an existing fixed asset (FA) to enhance its performance or extend its useful life. Examples include installing smart control systems, adding new meeting rooms, or upgrading the HVAC system.

In such cases, the company must determine the new carrying value of the fixed asset by capitalizing qualifying upgrade costs into the asset’s book value. The accounting entries are as follows:

a) When the upgrade costs are incurred:

• If input VAT is deductible, record the journal entry:

– Dr account 241 – Construction in progress (Sub-account 2431)

– Dr account 133 – Input VAT deductible (Sub-account 1332)

+ Cr account 111, 112, 152, 214, 331…

• If input VAT is not deductible, record the journal entry:

– Dr account 241 – Construction in progress (Sub-account 2431)

+ Cr account 111, 112, 152, 214, 331…

b) Upon completion of the upgrade:

• Record:

– Dr account 211 – Tangible Fixed Assets

+ Cr account 241 – Construction in progress (2413)

9. Considerations when accounting for office repair expenses

To ensure that the accounting process for office repair expenses is accurate and effective, businesses should keep in mind the following important considerations:

• Distinguish between repairs and upgrades: Repair expenses should be recorded directly as operating expenses, while upgrade costs must be capitalized and added to the fixed asset’s book value.
• Collect valid documentation: Businesses must gather all relevant invoices, receipts, and supporting documents related to the office repair activities. These documents must comply with legal regulations to qualify as legitimate and deductible expenses.
• Allocate expenses appropriately:For major or periodic repairs, businesses may spread the costs across multiple accounting periods instead of recording the entire amount in a single period. This ensures accurate financial reflection and avoids short-term profit distortion.
• Comply with tax regulations:It is crucial that repair expenses meet corporate income tax (CIT) deductibility requirements to be accepted as allowable deductions during tax assessment.

Accurately accounting for office repair expenses in leased spaces requires strict adherence to tax and accounting regulations. By clearly understanding the types of repair expenses, the appropriate accounting methods, and the necessary compliance requirements, businesses can enhance financial management efficiency while minimizing potential legal and regulatory risks.