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.

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

Answer 1

Answer to question whether Big Desert depreciate spare parts over their estimated useful lives or expenses them as consumed.

Depreciation is an accounting method of allocating the cost of a tangible or physical asset over its useful life or life expectancy

As per Revised Accounting Standard-10 Property, Plant & Equipment, Any spare part to be covered under the scope of property, plant & equipment must satisfy the below mentioned definition criteria of PPE which states that:

Assets which are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and,Assets which are expected to be used during more than a period of twelve months. On fulfilment of both the conditions an asset is considered as PPE.

Recognition Criteria:  The cost of an item of property, plant and equipment should be recognized as an asset if, and only if:

It is probable that future economic benefits associated with the item will flow to the enterprise; and The cost of the item can be measured reliably.

If following Ind AS then need to follow Accounting Standard-16 Property, Plant & Equipment However, the treatment in Ind AS for accounting of spare parts is same as in Revised AS 10.

In the given case Stellar Bright Solar (SBS or the “Company”) entered into contract with Big Desert and its requirement of 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.

So, Based on above provision its required to depreciate over useful life of Assets