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 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.

Qustions:

1. How should SBS classify the spare parts that it expects to use within one year — as inventory or as a prepaid/other current asset?

2. Should Big Desert depreciate the spare parts over their estimated useful lives or expense them as consumed?

Provide sources.

Answer 1

The answer to the following requirements are given as below:

1.Requirement

As per the given problem SBS is in a businss that contracts to develop ,construct and operate solar power plants .The business of SBS is therefore develop function and accumulate together the solar power plants.

As per the GAAP provisions for inventory following are the requirements:

1.There is a procedure for construction of such a sale.

2.It is held in the market within the usual path of enterprise.

3.To be consumed along with the creation of items to be available in the market.

Based on these assumptions given in GAAP we can conclude the following things

a.The product in SBS trade is to develop ,operate and upkeep of the solar plant.

b.SBS is currently utizing its inventory of spare ingredients just for complying with the industry standards to operate ,maintain and repair the plant.

c.The spare elements are consumed in construction of operating and maintaining the solar power plant so it should be labelled as stock.

2.As per IAS 16 depreciation will be charged when an asset is available for use.Now SBS is keeping the spare materials for alternative use after some point in future.So for that reason all those should be designated as consumed.As per the US GAAP SBS can document its spare constituents both as property plant or any other form of PPE.Thus as per US GAAP the spare components can neither be amortized as part of PPE nor can be consumed as expense as a part of inventory.