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Tag Archive | Financial Reporting

Accounting for spare parts

download The question of accounting for spare parts for assets (i.e. plant and equipment) is one which needs some judgement on the part of an accountant. Before outlining some options, let me describe one experience I had. I worked for a global paper company in the past and the policy to deal with such spares was as follows:

  • spares bought with machinery were capitalised as items of plant/equipment and depreciated with the asset
  • all spares bought at other times were treated as inventory.

Then, the company merged with another and they had a different policy in that only spares valued over $1000 per unit were inventory, all others were expense. I can recall the month this policy changed, the accounts had a few hundred thousand dollars extra expenses as the lower value inventory items were written off to the income statement.

In IFRS terms, there may be two standards at play, IAS 2 on inventories and IAS 16 on Plant, Property & Equipment. So how is it decided whether a spare part is inventory or treated as an item of PPE?  The general consensus, although not specifically stated in any IFRS, is to treat higher value items as an asset and lower value items as inventories. If an asset, then the question arises if the spare should be depreciated. There is a good logical argument that a spare should not be depreciated until it is put in use, so it remains on the books at cost value with adjustment for any impairment. Whatever is chosen, the accounting policy probably should disclosed if the value of spares is material – and in large manufacturing concerns it can be.

Just to complicate things further, from my experience, maintenance staff may still want to have an inventory of some low value, but critical spares even if expensed. I have seen SAP being used to track the quantity of spares held, but with no value attached (as they have been expensed).  A good example might be a control panel for a machine. It may be for example a small touch screen worth $300, and expensed in the accounts. But the machine cannot work without it, so it is good to know if a spare is in stock and where it is – the latter being important when perhaps another plant in the group has a spare on hand.

Finally, here is a nice tutorial on accounting for spares.

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More accounting tricks – Hollywood accounting

My last post noted some “tricks” used to make a budget balance. Here’s another story on how accounting tricks can be used to make something with huge revenues into a loss maker – it’s Hollywood accounting.

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Reporting financial information on the Internet and social media

Image representing Netflix as depicted in Crun...

Image via CrunchBase

As you may know, public companies publish a lot of financial information. As accountants, the first of such information that comes to mind is the annual report and accounts – which is a legal requirement. Other such information includes regular notifications and reports to stock exchanges. Normally, the format, content and timing of any financial information releases by public companies is well-regulated and usually a mass communications medium is used. Of course, like all other aspects of business life the pace of technological change – in particular the use of Internet and social media – is causing some issues for the reporting of financial and similar information by companies.

Take for example the recent Netflix issue. In July 2012, the CEO of Netflix commented on Facebook

“Netflix monthly viewing exceeded 1 billion hours for the first time ever in June.”

The Facebook page had close on 250,000 followers at that time. The result of this post was an approximate 30% increase in stock price the following day. Later in July, a quarterly earnings release showed a substantial fall in revenues and the stock price fell. The US Securities and Exchange Commission (SEC) were not overly impressed with the initial release via Facebook, arguing that the information was material and should have been disclosed by means of a regulatory filing or press release.  So, in essence, the argument of the SEC is that Facebook (or other social media) are not necessarily the correct communications medium.  The counter argument would of course be that social media may actually be a communication medium with a much broader spread.

Perhaps what this example shows is the need for a policy for how and when to use the internet/social media as a means to reporting key financial and business information using social media?

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