This is not that uncommon. It's a headache for the accounting, but if the change materially extends the life of the asset or improves the asset, then it has to be capitalized. So the schedule would look like 1,000,000 for the original asset. Then depreciated 200,000 for the next year, taking it to 800,000 net of amortization. 150,000 of work is added and capitalized. The next year there's 200,000 of depreciation expense plus 30,000 from the improvements. The same thing happens to other assets. If you do it long enough, you amortize off the original investment and what you are amortizing/depreciating are the improvements.
If we spent $1M in year one, we are surely going to spend more than $1M in year two because the same teams keep working and hiring, and we are incrementally building a system whose fully delivered cost as of its last day will be over $5M.
The costs are usually capitalized until the asset is put in service and the amortized expense of the asset plus any maintenance can be matched to the revenue in that period. This is not different than a building that takes years to complete, or even completed in stages when you could have construction and occupancy going on at the same time. The accounting treatment as an asset doesn't require it to be completely built in a year, but until there's revenue to which expenses can be matched, you capitalize the construction/acquisition cost.
