Accounting of Machine Spares- By CA. Brijesh Thakar

According to Accounting Standard Interpratation-2, there are two types of machine spares. First are those which cannot be used as in connection with a particular item of a fixed asset and whose use is not irregular. This kind of spares are called revenue spares and they should be treated as inventories as per AS-2. The second type of spares are those which can be used only in connection with particular item of fixed asset and whose use is expected to be irregular. Such spares should be accounted for as per AS-10. These spares are called capital spares.

Capital spares should be capitalized separately, whether purchased along with principal fixed asset or purchased subsequently. Depreciation should be charged on these spares on a systematic basis over a period not exceeding the useful life of the asset to which they relate.

Now , here I wish to mention a very specific point raised by recent EAC opinion. In case of accounting for machine spares in addition to para 4 of AS-2 and para 8.2 of AS-10, para- 23 of AS-10 also plays a significant role. According to this para, Subsequent expenditures related to an item of fixed asset should be added to its book value only if they increase the future benefits from the existing asset beyond its previously assessed standard of performance.

Hence, whenever capital spare replaces the worn out part part of particular asset the written down value of the capital spare at the date of replacement should be immediately written off. This is done because replacement of the spare does not increase the future benefits from the existing asset beyond its previously assessed standard of performance.

Let me explain the whole treatment with the help of an example.

X ltd purchased some capital spares on 1st January, 2005 for Rs. 200000. These spares can be used with an item of fixed asset whose outstanding useful life on 1/1/2005 is 10 years. Till 1/1/2008 this spare was not used in the fixed asset. Now suppose on 1/1/2008 this spare was used to replace a worn out part of fixed asset.

In the above mentioned example we can clearly see that annual depreciation on capital spare will be Rs. 20000 (200000/10years). Hence every year X ltd will write off Rs. 20000 to profit and loss account. On 1/1/2008 this spare is used to replace a worn out part in fixed asset. 3 years depreciation on this spare will be Rs 60000 ( 20000*3) On 1/1/2008 WDV of the spare will be Rs. 140000 (200000-60000). This WDV of Rs. 140000 should be written off to profit and loss account on the date on which the capital spare replaces the worn out part i.e. on 1/1/2008. This is done because replacement of the spare does not increase the future benefits from the existing asset beyond its previously assessed standard of performance.