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Accounting For Spare Parts

Sheila Klopp's Profile

What are best practices for Accounting for spare parts and what is the difference between spare parts and capitals spares?

We are setting up a store room (physically and in SAP) to track supplies and spare parts. Accounting for supplies is easy; expense when used. However, I am a bit confused about the accounting for spare parts that will be used on our machinery (assets). Some spare parts are not very expensive, but some are large motors that could be $50,000 or more. Should there be different accounting methods for the larger items such as depreciating them versus expensing them when used? If a depreciation method is used, when would depreciation begin - at time of purchase or time of use?

Answers

Eranola Adelani Joseph
Title: Finance Manager
Company: Lagos Tolling Company (LTC)
(Finance Manager, Lagos Tolling Company (LTC)) |

The spares should be separated using the 80/20 principle for their value classification. Those that have a life span of more than 1 year should be capitalized and depreciated accordingly, whilst those with one-off uses and little value, and with life span less than a year should be expensed.
Depreciation, according to IAS 16, should start immediately they are available for use in the company, may be, in this case, as they are purchased.

Stephen Turk
Title: Principal
Company: Stephen Turk, CPA
(Principal, Stephen Turk, CPA) |

Initial accounting: spare parts should be capitalized. However, similar to accounting for other property and equipment, you will probably want to set a capitalization threshold such that you are not capitalizing small items like belts, hoses, etc. Either that, or just treat these small spare parts as supplies.
Subsequent accounting: Expenditures for maintenance and repairs that do not materially extend the lives of the assets are charged to expense as incurred. That is, you would expense the spare parts when actually used for maintenance or repair.
However, if the large motors (for example) do extend the life of the related machinery, then the cost of the motor would be depreciated, starting on the date that it is placed in service (i.e., installed), over the remainder of the extended life.
You would not depreciate spares prior to them being placed in service, but would need to evaluate them under the impairment guidance - for example, there could be circumstances where your company has excess spare parts that it does not forecast using.

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