Case 16-10 Spare the Rod Stellar Bright Solar (SBS or the “Company”) is a busine

Question

Case 16-10

Spare the Rod

Stellar Bright Solar (SBS or the “Company”) is a business that contracts to develop, construct, and operate solar power plants.

SBS entered into a contract to support the Big Desert solar power plant. According to the contract terms, SBS is responsible for the day-to-day operations of Big Desert as well as for general maintenance and repairs. Big Desert expects SBS to provide routine maintenance for continued operation of the plant and respond to equipment breakdowns and failures by providing immediate repairs. In addition, the terms of the contract require SBS to procure necessary materials to operate, maintain, and repair the plant. To comply with this requirement, the Company must maintain a certain level of materials and supplies (the “spare parts”) at all times.

On a regular basis, SBS reviews a listing provided by Big Desert of recommended spare
parts for various components of the solar power plant and procures the necessary parts.
Vendors deliver the parts to SBS along with a complete listing that describes the quantity
and cost of the parts provided. SBS maintains this listing and uses it to (1) track expected
usage of the spare parts and (2) determine their expected useful lives.

The spare parts consist of customized and generic parts that vary in cost, procurement
time, expected usage (i.e., emergency replacement, standard replacement), and expected
useful life. Big Desert uses the composite depreciation method for substantially all of the
plant, and it expenses all major plant maintenance.
Required:
1. How should SBS classify the spare parts that it expects to use within one year — as a prepaid/other current assets? ?

Explanation / Answer

Accounting for Spare Parts:

As per IAS 2 - Inventories,

If the Spare parts are

a) used to produce goods, (or)

b) used to render services, (or)

c) held as merchandise for resale

and are expected to be used within one year, then they should be recognised as ' Inventory'.

In our Case, SBS uses the spare parts for servicing Big Dessert Solar power Plant and expects the item will be used within one year.

So,

Spare Parts should be classified Under Current Assets as 'Inventory'

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