Definition of Spare Parts Inventory
The International Accounting Standards define inventory as follows.
‘Inventories’ are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.
Spare Parts Inventory Definition
The spare parts inventory definition falls into the last of these categories. While this definition of spare parts inventory is quite simple the complication of the rest of the accounting standards can make the concepts difficult to apply to spare parts inventory.
So when someone asks me, ‘What is inventory?’ my reply is:
Any item that you purchase that you either don’t use in the same accounting period and/or don’t know when it might be used (such as with slow moving inventory).
Or put another way, if you use it, it is not inventory; if you store it, it is inventory.
Junk is Not Part of the Spare Parts Inventory Definition
Having said that, be aware that the junk pile that some companies keep ‘just in case’ should not be considered to be inventory. Only spare parts that you catalogue and keep in a controlled manner should be consider to be inventory.
Left over machine parts, second hand components, scavenged items and worn out pumps and gearboxes, motors held onto without any specific purpose should all not be treated as inventory – even though you may be able to say that they won’t be used in the current accounting period.
The rule of thumb here is: if you keep the item as part of your inventory management system, and it is suitable for use, and you know how and where it might be used, and of course it won’t be used in the current accounting period then it should be treated as inventory.
Let that be your spare parts inventory definition.
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Posted by: Phillip Slater