One way in which MGMT can classify the spart parts that are expected to be used within one year is as a prepaid/other current asset. According to ASC 908-330-25-1, “expendable parts shall be recorded at cost in a current asset account for spare parts and supplies like a prepaid expense” (FASB, ASC 908-330-25-1). In the case of MGMT, when they are in the process of purchasing small quantities of needed supplies or materials, they must be charged to expense. Although this specific explanation refers to recording of inventory in the airline industry, MGMT’s contract about solar power plants is very comparable to one in the airline industry in regards to their day-to-day aspects of responding to breakdowns and having to conduct immediate repairs.
According to the Annual Improvements 2009–2011 Cycle, issued by the IASB in May 2012, modified IAS 16 Property, Plant and Equipment, suggests that items used for spare or standby equipment are …show more content…
This method still takes into account the ASC 32-720-30 because the straight-line amortization is a way of estimating a standardized cost per year. By using the assumptions above, MGMT can use past financial statements to estimate the spare parts balance. Paragraph 55 of IAS 16 suggests that, “depreciation of an asset begins when it is available for use, or in other words, when the part is in the necessary position to perform its duties and for it to be capable of operating in its intended manner” (IFRS). When a spare part is finally put into use, that is when the depreciation is to begin. For example, if the spare part is expected to be used as a replacement part at any given time, the depreciation of the useful life of the part begins when the part is placed in its given role in place of the original part. From there, this part is then amortized through straight line over its useful