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Spare parts used to repair fixed assets leased to customers

We purchase spare parts that are used to repair equipment that is fixed assets on our books, and that we then lease to customers. Currently we book the purchased parts in inventory and then expense the parts to COGS - leases. However wondering if this is in line with GAAP. Upon purchase before use, should we be including these as a prepaid asset? Do we capitalize in CIP? It seems including these parts in inventory may not be correct as we technically do not sell the equipment to customers. However since we lease the asset to customers is this in essence the same thing as selling to customers? I can't find any specific guidance on this.

Answers

(Agent, JKS Solutions, Inc.) |

This is as much a tax treatment question as an accounting question. So first you need to be able to report the costs of purchased spares for your tax department. You have to ask them what format they prefer.

Since you are leasing assets to your customers, I'm going to assume the equipment will transfer to your customer at the end of the lease term for purposes of this answer, and your company has a separate maintenance program. If this is the case, then you would be billing your customer by some method, either monthly as embedded in the lease payment, or separately and the maintenance contract component should be recognized as revenue. Generally the revenue component is set up early in the lease, and any maintenance performed really cannot be tracked easily against that revenue.

I'm going to venture a guess that your accounting department has established a spares reserve so that monthly, an amortization cost is pushed to your COGs line and new spares purchases are deducted from the reserve.

It's best to discuss with your accounting team.

General Treatment of Spares for Owned Equipment:

For Accounting purposes (non-tax), spares are always depreciable immediately because they cannot be inventoried. A materiality judgment will need to be made. GAAP is only applicable to material transactions.

If you are purchasing box cars of spares upwards of millions of dollars as they do in the telecom industry, these will be capitalizable and depreciable over the life of the equipment category the spares are related to. Normal treatment is to capitalize in lump sums as purchased using the month of purchase as the in service date. You will need to document an accounting policy for these because your auditors will be interested to understand your treatment of spares as compared to others in your industry.

If you are purchasing immaterial values of spares, these will be expensed immediately, generally.

With the new tangible repair regulations, the expense decision may need some tax advice before making that expense decision.

This should give you enough of an informed picture of issues when you discuss with your accounting team.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Valerie, an extremely clear answer; very informative.

Anonymous
(Senior Manager of External Reporting) |

Valerie,

Thanks for the response it is very helpful. For parts (material enough to not expense) that are expected to be used within 12 months, would prepaids be where they should go?

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