Capitalization of engineering spare-parts to a machine or equipment is somewhat argumentive and can have different opinions. How to identify which items are to capitalize, items’ value upto how much, how much longivity should be, etc may have different opinions. Company to company may have different policies and practices of capitalization of spares.
There are thousands of items in an engineering stock. One item may have multiple aspects to consider before doing capitalization. Let us have a look on the aspects which may come while doing capitalization.
Longivity of the item: Will the part provide service for at least one year from the date of addition to a machine? If yes, then you might want to capitalize the part even if it is low valued item. So here we empasized the Life of Parts. Actually to capitalize an item, there may be more than one criteria to consider.
Value of an item: Generally costly items are subject to be capitalized. But what will we do when the item is costly but may give benefit for less than a year? Then it is aparent that neither the cost alone nor the longivity of the item may give us the single criteria to capitalize a spare-part item. In this case we can consider the both points. That means, a spare-part item which can give the service more than one year and is valued at greater than or equal to some specific rate decided by the management of the company is subject to be capitalized. There might be any other criteria in addition to this.
It is assumed that the statutory auditor may or may not agree the procedure you have adopted for capitalization. However, it is better to discuss the matter with some financial and accounting experts to provide their expert opinions with regard to this delicate inventory issue.
