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DISCUSSIONS > IIA GENERAL DISCUSSION AREA [ REFRESH ]
Thread Title: Spare parts inventory accounting treatment
Created On Thursday October 25, 2007 6:48 PM
  Spare parts inventory accounting treatment
  Spare parts inventory accounting treatment
  Spare parts inventory accounting treatment


TXGOLFER45


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Thursday October 25, 2007 6:48 PM

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In a manufacturing company, the manufacturing unit carries a significant amount of spare parts to fix a production machine. The spare parts by their nature are only placed in service when a production machine breaks down and the bad part is swapped out with a part from the spare parts inventory. If possible, the bad part is sent out to be refurbished. In that case, the costs to refurbish are expensed (as a cost of mfg, I believe). If it cannot be repaired, then the carrying cost of the part is charged to expense.

We are reviewing the spare parts inventory for usage. Any items not moving in 2 yrs are charged to expense. But, our EA thinks we should be amortizing/depreciating the cost just like machinery and equipment as these are parts needed to keep the machinery up and running. But, the cost to mfg could be higher than actual due to premature amortization, if the machines did not need parts replaced.

We are trying to develop a corporate policy for spare parts. Thoughts???


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planoisdaudit


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Friday October 26, 2007 9:34 AM

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The EA recomendation sounds similar to spare parts treatment in the transportation segment. In the airline industry, there are two tiers of spares: Rotable, or parts that can be rotated off an airframe, repaired, and placed back in service; and Non-rotable, sometimes referred to as expendable parts.

Rotabable parts are carried as assets and depreciated over the life of the part. Reapairs are charged to the cost basis of the part just like any other long-lived asset. Rotables were treated just like any other capital asset. They were depreciated and if disposed of early, due to inability to repair, the entire amount was treated like any other fixed asset disposal.

Non-rotable parts were carried as a normal inventory at average purchase price and expensed when issued. We didn't expense either inventory after a set time frame, because the parts were valuable as assets that could be sold to other airlines operating similar airframes. Thus, non-rotables were only expensed when issued and installed or otherwise disposed of.

To me this scheme made sense. But then again, the cost of some of our spares (such as a jet engine) ran into the millions of dollars. I would suggest segregating your machine spares into repairable and non-repairable inventory and applying some sort of capitalization threshold to the repairable spares. Those parts above the threshold would be carried as capital assets and repairs treated like repairs/improvements to any like fixed asset. Non-repairable inventory would be treated like any other inventory. In either case, I wouldn't expense inventory until issued or disposed of.

-------------------------
Dan
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Edited: Friday October 26, 2007 at 9:35 AM by planoisdaudit

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Cubsfan


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Friday October 26, 2007 11:48 AM

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I would recommend reviewing the usability of items that haven't been used in 2 years. Does the company still use the equipment the part pertains to? If the parts are usable, there would be no need to expense them (although they may need to be evaluated for impairment).

The real risk with spare parts is that management is avoiding taking the expense hit for writing off obsolete supplies inventory. Unfortunately this isn't an easy area to asses. Sometimes machine parts can go years without breaking down, and other times a location may have several of the same part wear out or break down in the same week.

Here are a few other questions I would consider: How often does management review the supplies inventory? Historically, do write-offs of unusable items get booked regularly or only when the company is having a really good or really bad year?

Edited: Friday October 26, 2007 at 11:49 AM by Cubsfan

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DISCUSSIONS > IIA GENERAL DISCUSSION AREA [ REFRESH ]
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