Quick question that's in dispute: Are spare parts capitalizable?
My position is that unless they meet the definition of "extending the life or capabilities" of an asset (ie capitalizable in the first place), they are a prepaid expense until the time the spare is installed.
Capitalizing Spare Parts
Answers
Yes, I would call it "parts inventory" or "prepaid parts" until used. When used, if the parts only maintain the current useful life of the asset, then they are maintenance expenses. Of course if they extend the life of the asset or add value to the asset, then they have future economic benefit and should be capitalized. Key words: future economic benefit.
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This is a great question and usually either side can be successfully argued and substantiated with your external auditors.
It depends on what it's a spare part of, but my rule of thumb is to expense with the basis being that most "spare parts" are needed to maintain the ongoing functionality of the larger item, thus implying Repairs and Maintenance. A side issue is that if you depreciate such items, I believe that you will find that once some departments within the organization believe that such expenses can be strung out over several years, they begin to get sloppy in their expense control.
It is essential to be consistent in the application and your procedure should be documented to ensure continuity in the organization.
I agree with David on the above, you have to consider the value and useful life, there is a huge difference between a spare aircraft engine and small parts with low value that cannot be reused.
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Two quick adds to the above comments.
First, since FASBs and GAAP leave it up to the organization to decide to capitalize or expense (based upon whether it should be part of inventory and held for sale, or whether the value is immaterial, or the cost of tracking is prohibitive, etc.) you just need to take a position and stick with it.
Second, whichever decision you make, add it to your "Capitalization" or "Inventory" Policy
i.e.,
"DEFINITIONS FOR NON-CAPITAL EXPENDITURES
Expenditures for repairs, maintenance or replacement of component parts which do not extend the unit's original life or significantly enhance its net value."
Then the auditors find it more supportable.
If you do capitalize spare parts, when do you start depreciating? When purchased, or when used? I cannot find a definitive answer to this.
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Capitalizing something does not necessarily imply it is a depreciable asset. Spare parts could be used for repairs and maintenance or to extend the lives of fixed assets. Under the matching principle, I believe once the part is placed in service, it should be either expensed if deemed for repairs and maintenance or depreciated if deemed to extend the asset’s original life or enhance its value.
Although we seem to be addressing the GAAP treatment,
What ever the
As others have said, it's up to the company.
May I ask for clarification? I am presuming if the position is that it extends the useful life, we would have to extend the asset's life on the books, correct? This would also imply that when you extend the useful life, it also satisfies the future economic benefit requirement. Any additional help is appreciated.
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Accounting