Spare parts are acquired via logistic workflow. At reception, they are entered in inventory. Accounting department verifies on monthly basis the list of spare parts but has to identify which one has to be capitalized.
How could you send spare parts sitting in inventory to asset register? If the spare part is capitalized but need to be replaced/ repaired, how could we change the value of the asset? How could we track the spare part if they are capitalized? How could we follow the spare part as soon as it is capitalized?
Any recommendation on the capitalization of spare parts?
We've used project systems to capitalise costs say for equipment. Spare parts are not capitalised routinely, because the original part that it woudl replace is already capitalised and therefore would need to be taken out of the asset before the spare part can be capitalised. There is not much gain apart from having the exact value jn the asset when the spare part is used.
However, if it's an expensive spare part item, then it can be capitalised as an excpetion with its description plus "spare part". The problem is that it should normally not be capitalised as that requires it to be "in service" or operational.
The best solution is really to keep it in inventory until it is used and then it should be posted to maintenance expense - and the original asset left untouched.
Hope this helps
Thanks for your answer. In fact, we try to see if we need to capitalize or not spare parts. I know that you suggested to keep them in inventory .
Here, they try to decide at the beginning of the process if they need to capitalize or not the spare part. There are 2 cases:
case 1: spare part bought at the same time as main asset to which there are related to (= critical spare part) and brought into use at the same time as main asset.
case 2: spare part bought for repair or replacement
I guess that we should capitalize the spare part in the first case. But if we capitalize the spare part, we could not do anymore an inventory management and follow the spare part. This is not very convenient.
In the second case, we need to decide if we are dealing with major spare parts and define some criteria to identify what "major" means (e.g. useful life higher than 1 year)... but this is very difficult to identify.
In the last case, it is more complicate because we probably go through the maintenance order but how do we capitalize then? If the costs are in stock then they can't be also in asset. Does this mean that we need to do some financial adjustments?