Stellar Bright Solar (“SBS” or “the Company”) is a business that contracts to de
ID: 2576269 • Letter: S
Question
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 describing the quantity and cost of the parts provided. SBS maintains this listing, uses it to track expected usage of the spare parts, and to 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. The Company uses the composite depreciation method for substantially all of the plant, and it expenses all major plant maintenance.
Required:
How should SBS classify the spare parts that it expects to use within one year: as inventory or as a prepaid/other current asset?
When answering the questions, please cite the appropriate literature to support your analysis. The
FASB’s professional literature is now organized by topic. It is referred to as the “Accounting Standards
Codification (ASC).” FASB statements are no longer authoritative GAAP, and therefore, you should not
cite them (unless you are making a point regarding the history of the standards.)
Explanation / Answer
Disclosure procedure:
Spare parts held by a division which will be used to replace broken parts on its production equipment should be classified as Other Current Assets, if it is probable that the parts will be used within the division’s operating cycle. If the parts will not be used within the division’s operating cycle, the parts should be classified as Other Non-Current Assets and amortized over their estimated useful life.
IFRS versus US GAAP: ASC 330-10-20 states “This definition of inventories excludes long-term assets subject to depreciation accounting, or goods which, when put into use, will be so classified.” This implies that disclosing long-term spare parts inventory as a subset of inventory in current assets is a violation of explicit US GAAP guidance and an error.
As IFRS is moot on the subject, while it can never be considered proper accounting, aggregating all spare parts is not a violation of explicit IFRS guidance.
Conclusion:
Taking a note from the above mentioned provisions, SBS should classify the spare parts expected to be used within one year under the head "Other Current Asset"
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