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.

At some of Desert Island's solar power plants, mirrors concentrate sunlight on pipes filled with oil, which can reach temperatures up to 735 °F. The hot oil is pumped to a generating station, where it is routed through a heat exchanger to produce steam. Electricity is produced in a conventional steam turbine. Desert Island has hired SBS to supply an improved oil blend that will allow the heat collection and exchange to be carried out more efficiently. SBS developed this new blend in-house. The contract is for 5 years. SBS has incurred significant costs to design new, specialized equipment for manufacturing the new oil blend.

FASB Codification website:

ASC 210-10, Balance Sheet: Overall

ASC 330, Inventory

ASC 330-10, Inventory: Overall

ASC 340-10, Other Assets and Deferred Costs: Overall

ASC 360-10-5 and 360-10-30, Property, Plant and Equipment

REQUIRED: NEED CITATION FROM ABOVE.

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

Should SBS capitalize the design costs of the new oil blend equipment or expense the costs immediately?

Answer 1

The given problem related to IAS 16 "Property Plant and Equipment" which provides that certain plant or equipment might require regular replacement of spare parts. Therefore, it provides that the carrying amount include the number of such spares.

However, where such spares are to be used within one year - then it should be classified as inventory for the period.

Yes, the SBS should follow the IAS 16 and capitalize the costs of the design of new oil blend equipment. It doesn't matter that costs are incurred at the design phase of the plant.