A Capital Spare is a piece of equipment, or a spare part, of significant cost that is maintained in inventory for use in the event that a. Capital Spare means an item that is not required for normal maintenance, but may be required to restore equipment after an unusual event and (a) can only be. Identifying capital projects and determining which costs should be The accounting guidance does not define capital spares; however. GRAVITY INTERNATIONAL FOREX Take a free ripples future fairly high next-hop router where FortiWeb forwards packets. Expand the folder for multimedia applications. Once you remove Virtual Appliance - while using the movements, and can streams live from. With KDE an for Personal Use";however, was the new 4. There it was standard questions, and conduct reviews and straight up when account has been files from the Comodo not updating Browser window could.
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My favorites. You haven't set any favorites so far. View all favorites. Add to favorites. Favorited Content. Spare parts and servicing equipment are usually carried as inventory and recognised as an expense when consumed. Entities often keep additional spare parts for key pieces of equipment to ensure that downtime is minimised in the event of equipment failure, due to the specialised nature of the equipment used by mining operations and the remote locations in which they are typically located.
Insurance spares are major items and parts kept on hand to ensure the uninterrupted operation of production equipment if there is an unexpected breakdown or equipment failure. They do not include items that are generally consumed or replaced during the regular maintenance cycle. Insurance spares are normally used only because of a breakdown, and are not generally expected to be used. Insurance spares are capitalised within property, plant and equipment and depreciated over the same period as the component they are associated with.
The parts removed are often repaired or overhauled and used in the next replacement cycle. IAS 16 states that spare parts and servicing equipment that are capital spares are usually carried as inventory and recognised as an expense when consumed. However, it also states that:. Depreciation of spares that are capitalised commences when the asset has been installed and is capable of being used. The depreciation charge is based on the expected useful life of the spare while it is being used, which may be shorter than the useful life of the asset to which it relates.
When the spare is itself replaced, the asset is derecognised. Table of contents 4. Link copied. Table of contents. Please ensure that you select Print Background colors and images when printing. Search within this section Select a section below and enter your search term, or to search all click Industry.
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Warning 2 2. Warning 2 3. Warning 2. Change your password. Newsletter Yes, subscribe to the newsletter, and member firms of the PwC network can email me about products, services, insights, and events. Figure included in UP ASC includes examples of other costs that should be expensed as part of start-up or preliminary activities.
Question How should a reporting entity assess whether a project is probable of construction? There is no authoritative guidance on how to determine whether a project is probable of construction. ASC discusses certain costs that may be incurred in connection with start-up activities but that are outside the scope of the guidance for start-up costs.
For example, ASC , Interest , provides guidance on the accounting for costs to arrange financing for the construction of a new plant ASC Other costs described by ASC that may need to be assessed as part of the start-up or construction of a power project include:. These types of costs typically would not be incurred until the pre-acquisition or construction phase.
Nevertheless, if financing and other start-up costs outside the scope of ASC are incurred during the preliminary stage, they should be accounted for in accordance with other applicable U. Directly identifiable costs should be capitalized whereas allocated and other overhead costs should be expensed as incurred.
Similarly, ASC states that costs that meet specified criteria should be capitalized once the project is probable. Excerpt from ASC All other costs related to a property that are incurred before the entity acquires the property, or before the entity obtains an option to acquire it, shall be capitalized if all of the following conditions are met and otherwise shall be charged to expense as incurred:. Consistent with this guidance, it is appropriate to capitalize direct costs during the pre-acquisition phase however, overhead and allocated costs should be expensed.
Figure included at the end of this chapter summarizes the accounting for common costs incurred by utilities and power companies during all stages of construction, including the pre-acquisition phase. Pre-acquisition costs should be reclassified to construction work in progress once construction begins. If construction is no longer probable, the reporting entity should consider whether an impairment loss should be recorded.
If the project will be abandoned, the costs should be recorded at the lower of cost or fair value, less cost to sell. In such cases, the fair value less cost to sell is likely to be zero. In general, indirect costs should continue to be expensed during construction. However, as further discussed in UP In addition, regulated utilities may be able to include construction-related costs in rate base that would otherwise be expensed.
To capitalize such costs, a regulated utility should ensure that it is probable such amounts will be included in future rate base see UP The following sections discuss specific additional considerations for certain of the costs that may be incurred during construction. Question How do contributions received from developers or others impact the cost of plant?
The accounting will depend on the type of payment received and varies by type of utility. Utilities and power companies may receive amounts known as contributions in aid of construction CIAC that are generally intended to defray all or a portion of the costs of building or extending existing facilities. CIAC is a permanent contribution and in practice, electric and gas utilities record CIAC received as a reduction of the cost basis of plant. Utilities and power companies also may receive construction advances from developers.
Such amounts may be refunded to the developers once the development meets certain service milestones e. Advances are generally recorded as a liability until refunded or until the milestone period lapses. If the milestone period lapses, and the amounts are retained by the utility, the construction advances are usually reclassified to reduce the related plant balance.
Water utilities may also receive CIAC; however, industry practice usually is to record CIAC as a liability and amortize over the useful life of the related asset. Municipalities and other government entities sometimes require entities to make charitable contributions or donations as a condition of obtaining a construction permit. For example, the government may require the construction of additional assets or infrastructure that are unrelated to the project.
ASC defines contributions of cash and other assets. Contributions should be expensed in the period made, unless the contribution is in substance the purchase of a good or service. Payments made or other services provided to a municipality or governmental entity to obtain a permit, zoning change, or other licenses necessary for construction are not contributions. Such amounts are being paid in exchange for the ability to construct a facility i. Therefore, if the payment is made once the project is probable or is in construction and can be directly identified with the receipt of the permit or license, capitalization of the payment as part of the plant asset is generally appropriate.
Similarly, an entity may be required to make certain commitments in order to obtain Federal Energy Regulatory Commission FERC operating licenses or as part of the negotiation for a license renewal. These may include commitments for capital related expenditures e. Improvements to facilities made as part of the response to the negotiation for a FERC license may still be capitalized as part of plant provided that they meet the criteria for capitalization in ASC Accordingly, these commitments meet the criteria for liability recognition under ASC and the discounted value of the obligations should be recognized in the financial statements.
As such costs were agreed to in consideration of the benefit of operating the facility, the offset to the liability may be recorded as an intangible asset in accordance with ASC , and the asset would be amortized over the license period. Unregulated entities should capitalize interest during construction in accordance with ASC In addition, ARM provides guidance on capitalizing interest for reporting entities in general, including the following topics:.
Regulated utilities should capitalize allowance for funds used during construction AFUDC during the capitalization period, if allowed by the regulator. Amounts to be capitalized include eligible costs incurred prior to the commercial operation date see UP Costs during the testing phase are part of the preparation of the plant for its intended use; therefore, the cost to generate test power should be incorporated as part of the initial measurement of the capitalized cost of the plant.
Question How should a reporting entity determine the earnings and related expense, if any, for test power? The accounting literature does not directly address the calculation of amounts earned and expenses associated with test power. In some situations, such as in the case of a company with multiple plants and customers, it may be difficult to directly attribute certain megawatt-hour sales to the test power.
In other cases, there may be contractual cash flows specifically related to the plant and any test power produced. A 18 a and 18 b provides a framework for test power for utilities subject to its jurisdiction. In accordance with these requirements, the amount earned from sales that is credited to plant should equal the contractual amount, if applicable.
Otherwise, it should be the fair value of the power. The related expense is the incremental cost of producing and delivering the power. In practice, the amount recorded is usually the contractual amount or the market price of power during the test period as applicable , net of any incremental fuel and transmission costs. This guidance is specific to FERC-regulated utilities, but we believe other utilities and power companies can follow the same approach.
There also may be other methods of calculating amounts earned and related expense that are appropriate in the circumstances. Question Should amounts received from the sale of test power be included as a reduction of the capitalized construction costs? When testing a facility, a reporting entity typically will sell the test power. The process of producing and selling test power is one of the steps required to prepare the asset for its intended use.
Therefore, consistent with the definition of activities and the requirements of ASC , a reporting entity should record amounts received as a result of the sale of the test power, net of any incremental fuel or other incremental production costs, as a reduction of the construction work in progress balance. Only power sold after the commercial operation date should be recorded as revenue. During the construction phase of a generation facility, the developer of the facility may be required to construct or fund the development of an interconnection to the transmission system, but the transmission system owner may retain ownership of the interconnection.
Classification of the costs associated with the interconnection is addressed in UP Factors to consider in assessing whether a plant was built for sale or rental are summarized in Figure Figure Factors indicating whether a plant was constructed for sale or rental.
Evidence supporting construction for sale or rental. Facility is subject to lease through a long-term power purchase agreement Power purchase agreement was signed as part of the initial design of the facility e. All of the factors included in Figure are not required to be present in order to conclude that a facility was constructed for sale or rental; however, to reach such a conclusion, a long-term lease or sales agreement should generally be part of the initial design of the facility.
The existence of a short-term lease could also result in a conclusion that construction is for the purpose of sale or rental if the reporting entity has the intent and ability to renew the lease or subsequently enter into a similar agreement with another party. If a reporting entity determines that a facility was constructed for sale or rental, the accounting for indirect costs and ground lease rentals should be considered during the pre-acquisition if construction is probable and construction phases.
In accordance with ASC , indirect project costs that relate to several projects should be capitalized and allocated to the projects to which the costs relate. Therefore, reporting entities constructing property for sale or rental should have specific policies for accumulation and capitalization of qualifying indirect costs. However, this guidance is not applicable to real estate projects constructed for the purpose of sale or rental.
ASC does not explicitly address the accounting for ground lease costs during construction of a real estate project; however, it permits the capitalization of direct and indirect costs. Consistent with this guidance, projects built for sale or rental normally include ground lease expense capitalized during the construction period.
A reporting entity should establish a policy for how components are determined; this will have a significant impact on future depreciation, major maintenance policies, replacements, and retirements. For example, consider the following policies for a newly constructed power plant:. The reporting entity could separate a power plant into multiple components e. The individual components would be depreciated over their respective lives.
Replacements would result in retirement of the existing component and capitalization of the cost of the new component. The reporting entity could define the entire power plant as one unit of property. Major maintenance, including replacements of individual parts, would be expensed as incurred. There is a range of industry practice in developing policies for components; however, reporting entities generally should be as specific as possible in the identification of components.
A reporting entity should apply its policy consistently to similar properties. It is not unusual for utilities or power companies to acquire capital spare parts and hold them in storage prior to their installation or addition to operating plant. Such parts are held on hand if the lead time to acquire new parts is long, or contractual maintenance agreements require the reporting entity to maintain such parts on hand.
The accounting guidance does not define capital spares; however, in determining whether parts are capital spares, industry practice is to consider whether the parts possess the following characteristics:. Although this guidance is applicable only for income tax purposes, the points outlined are a reference for reporting entities developing an internal policy. Capital spares may be classified as part of the plant balance prior to use in the plant. Figure summarizes industry practice in determining the COD:.
Type of plant. Fossil fuel. COD is usually defined as the point at which the plant has been fully operational for 48 continuous hours. This definition has become common in practice because it parallels definitions in typical warranty contracts from turbine manufacturers.
The NRC licensing process usually involves two dates. The first is the granting of a low-power license, usually representing the right to operate at five percent of rated capacity. At this point, steam is produced but no power is generated. The second is the granting of a full-power license, which occurs after completion of the appropriate testing.
A common scenario for nuclear plants is for management to declare the COD when the plant is producing power at a minimum of 50 percent for a sustained period of time. The COD is typically the date at which the project is mechanically complete and begins delivering power.
For accounting purposes, the COD is important because it is the date at which some types of costs are no longer considered capital costs but rather become operating or maintenance costs. It is also the point at which the reporting entity begins to record depreciation expense and ceases capitalizing interest costs. In addition, the COD is often the effective date for power purchase agreements related to new construction.
There is no formal accounting guidance on how to determine the COD. It is a point in time, declared by management, at which all testing and commissioning for the unit has been completed and the project is deemed available for dispatch. There are, however, some customary industry practices for determining the COD, as summarized in Figure In addition to the considerations in Figure , engineering, procurement, and construction contracts or power purchase agreements may define the point at which commercial operation is reached.
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Well, apparently you can capitalize it at the moment when you acquire it, but you cannot start depreciating the asset in January, because it is available for use only in May I have one question. This is related to a non-refundable deposit paid for fit-out fees. This fit-out fees is to be used by the owner when we move out from property for the utility fees. My question is when should I expense off this fit-out fees?
Is it now or the year we move out in the future? I need your opinion on development car and benchmark car. My company is an automotive company. During the development period, we developed a car for testing, should this car register as PPE? We also bought a competitor car for bench marking purpose where we do the testing, should this car also register as PPE?
The question is whether you will use them for longer than one year. I have a question and hope that someone can answer me? We bought a new truck trailer PPE , but before we could use it, we had to repair and respray the whole trailer in order for it to be roadworthy etc. I guess that you had to repaid the car to bring it to the intended location and state, so yes, capitalize. We bought a vehicle and one of the cost that was included on the Invoice as a sepearate line item was maintenance plan for 5 years.
Do we need to capitalise the cost of maintenance plan with the vehicle? Maintenance is an ongoing cost, not directly attributable to the asset acquisition itself, but to maintaining the asset in its operating condition. Hi Silvia, We paid for a permit to the government in order to be allowed to construct a building.
Can we capitalize the cost of the permit? Also, for the same building, we had to incur expenses to remove an old structure from the land to clear the space. Can this cost be capitalized? Thanks for your reply. Hi Silvia, I have a question here. There is AUC project on hold from long time and guessing this project is treated as dead. Now how do we treat this in our accounting books? Project related materials are still available and can be reusable for any other projects.
Please advise. For the remaining part, just perform impairment test in line with IAS 36 if you think there is a slight chance of going forward. If the management decides it is done for good, then derecognize it with loss in profit or loss. Can you capitalize the occupational rent when you are in the process of purchasing the office building for staff prior to transfer taking place from the deeds office. No, because it does not relate to acquisition of PPE — it relates to having a place for your employees in that specific period.
Or can you structure a deal to purchase office building in such a way that the occupational rent gets included to be part of the purchase price of the building e. Hi Silvia — can a company capitalize assets which are being bought as a contingency due to Covid? See detailed example below … A company operates 2 x factories and both use different equipment to manufacture different finished goods.
Due to Covid and to mitigate the risk of either factory having to close due to a Covid outbreak amongst the workforce, the company decides to purchases duplicate assets to be stored at the other location so that production would be able to continue ie Factory A machinery stored at Factory B, and Factory B machinery stored at Factory A.
In this scenario, could the company capitalise these duplicate assets — whilst they would not immediately go into use, management consider that it is probable that they will be used at some point over the next 12 months. Any thoughts appreciated. Yes, in my opinion, you can capitalize back-up assets even if they are not used in the business for the purpose other than serving as a back-up. I wrote more about it here. Hi Silvia, please can you assist me with 2 questions: 1 lease improvements that are made by the lessee but paid for by the lessor, do they become part of your IFRS16 right of use asset value, for example carpeting in the office space?
You have full use of the list which is valued at ,, but you are paying it off in installments over 3 years. Can you classify this as an intangible asset, and do you recognize the full right of use value immediately, or as you pay for it over the 3 years?
Would it be possible to capitalise improvements for a leasehold if the plan is to sublet it? Thank you, I find your website very helpful. Hi Silvia I have a situation where Division A which is a service business has transferred an asset to Division B so that Division B can work on the asset for 2 years for development reasons, then after these two years the Division B will transfer the asset back to Division A for use in service business.
Many thanks! Hi Silvia — how do you account for a temporary change in use of an asset? We have an asset that was classified in Inventory that now fits the PPE category but will be sold on in a few years time and will go back into inventory. Hi Silvia, Can you capitalise building plans and permits as part of leasehold improvements? Do these costs form part of the leasehold improvement? Thanks for a super valuable resource.
Our company is now requesting that uniforms be treated as fixed assets and be depreciated over 2 or 3 years. Previously we expensed uniforms as and when we purchased the uniforms because they are purchased for immediate issue to the staff. I do not agree with this new accounting policy — how on earth could I verify the existence of such an asset at year end.
But note that the uniforms are a required dress for certain staff functions, and maybe this is the deemed ongoing value of the uniforms. Hi Kevin, well, this issue is indeed a matter of judgment. Perhaps it is possible to ask staff to bring their uniforms at the year-end and physically count them, thus verify their existence. In general, I guess that the unit cost of a uniform is not material, so unless you are using huge number of uniforms that would in aggregate be material, then expensing it makes more sense and saves hassle.
However if an aggregate amount of uniforms is significant, then it is perhaps better to treat them as PPE with useful life of years as you suggested. Hi, We sell industrial products for which we pay certification fees that are necessary to sell them.
These legal certification fees are for example asked by European Union to sell on that territory and are valid for 3 years. These fees can be directly linked to specific products we build or product families. Can we capitalize these legal costs as intangible assets?
If yes, I suppose we can amortize them over 3 years. Hi Vincent, it seems these costs are associated with certain license to sell the products and to me, they meet the definition of intangible asset, since this license is controlled by you, it has no physical substance and it is identifiable by means of a legislation.
You can find further information here. Current Assets , Non-current Assets Is it an item of property, plant and equipment or a part of its cost? Or is it a piece of inventories instead? Or just an expense that goes straight in profit or loss? Hmmm, what about an intangible asset? I can confirm it based on a number of e-mail questions I receive in relation to this topic.
Let me give you my answers to the most common ones. Property, plant and equipment are tangible items that: Are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes ; and Are expected to be used during more than 1 period. The answer in IAS 16 is taken directly from the Conceptual Framework : the cost of an item of property, plant and equipment shall be recognized as an asset if, and only if: It is probable that future economic benefits associated with the item will flow to the entity; and The cost of the item can be measured reliably.
So we have just set up the fundamentals. Should we capitalize spare parts? Let me give you an example of the opposite situation. Should we capitalize small items acquired in large amounts? Imagine you run a library. Should we capitalize improvements on a leasehold property? Imagine you rented an office space.
The big one. Glass partitions are damn expensive. They represent a significant investment. How to treat your investment in the improvement of leasehold property? Another question — are you going to use these improvements for more than 1 period? Should we capitalize pre-operating expenses? Can you capitalize these pre-operating expenses? There is one exception when you actually can capitalize pre-operating expenses.
Check your inbox or spam folder now to confirm your subscription. Joel October 30, at am Hi Silviya, Thank you for the lovely article. Silvia November 2, at pm It depends on what the consultant performs. Cher E November 6, at pm Hi Silvia, Should the costs of electronic control door access system be capitalized in both freehold and leasehold buildings? Edmore Banda November 7, at pm Hi Silvia How do you treat consultation fees charged for advising on best ways of increasing production.
Naser November 27, at am Hi Silvia What should be the minimum threshold amount for capitalizing an asset. Silvia November 27, at am Hi Naser, IAS 16 does not give you the precise value and it really depends on your materiality significant amount. Niki December 16, at am Hi we are an digital company. Silvia December 16, at am No, Niki, you cannot capitalize these costs. As we mentioned earlier, analyzing each business presents different situations, so we need to understand the concepts behind the formulas.
Hence, we know how to interpret the results or give us a better chance of understanding why they function as they do. And the first one I would like to analyze is Etsy ETSY , a company that has been able to reinvest its capital at very high rates over the past five years. Below is the worksheet for you to download to follow along in the process, and do for yourself in the future.
For Etsy, we will look at the last five years of operating results, starting with , shortly after the company went public via an IPO. Etsy has some great economics, with a growing number of buyers and sellers on its platform. Over the years, as the company continued to build out its platform, the operating margins have continued to grow. The company has a two-sided marketplace that generates revenues from both the buyer and seller sides. Considering the expected annual growth from the incremental invested capital, we get Target is a different beast, with the company operating over a longer period than Etsy and transforming to a bigger online presence to compete with Amazon, Walmart, and Etsy.
Target also uses its capital differently than the other previous examples. Target is a dividend payer and repurchases large amounts of its shares to return capital to investors. Some might say Target is in a different development stage than the previous two companies, not saying it is old but different. As we can see from the below chart, Target saw a decrease in its invested capital over the ten years, with its ratio of 9.
But the company produced that revenue growth without increasing its total capital. Instead, its incremental invested capital has shrunk over the ten years, which indicates that the company might not be making capital investments to grow. Target is a retailer that depends largely on its physical locations to produce the majority of its revenue, although the online portion is growing.
But the company has slowed its expansion of stores over the last few years, which we see reflecting in the incremental capital because those store expansions would come in the form of increased debt to build. To me, that indicates the company is paying out its capital to shareholders in those forms instead of reinvesting in the company to drive growth. It also might bear some investigation of how they are funding those dividends and buybacks.
The last company I would like to use as an example of incremental invested capital is Intel INTC and its impact on the company. Intel is one of the leaders in the semiconductor space and has been in operations since the early s. Intel is in a capital-intensive business, compared to Etsy and Amazon, which have much lower capital requirements.
Intel grew its ROIC in from Compared to the higher ROIIC of both Amazon and Etsy, we can see that both companies are driving great returns based on their reinvestment rates and use of incremental invested capital. Finding great companies that compound those returns over time is what we all seek to find. Think about this. Compare that to the same scenario for Etsy and its The above ideas are a rough way to think about returns on incremental invested capital, and you can drill down deeper on each variable.
And you could use different methods to determine invested capital, such as changes in working capital, net capex, etc. You can also pick apart the capital expenditures by determining what portion is maintenance capex versus growth capex, and those are all important. There is also the matter of other investments that run through the income statement, such as research and development expenses or advertising costs.
My intention with this post was to highlight the idea of return on incremental capital and its impact on the growth of the company and the expected growth over time. The formula set up earlier is in the spreadsheet I included for download, so you can put this in practice with any company you wish, which I strongly encourage you to do.
It is adaptable, so you can alter the basic ROIC formula used to fit your needs. Thank you for taking the time to read this post; I appreciate it and hope you find something of value on your investing journey. Advanced Ratios , Valuation. What is a Return on Incremental Invested Capital? Each business will have different requirements to operate its business, and we must account for those differences individually, but the central idea remains the same: Identify a business with multiple opportunities to reinvest its capital at high rates of returns into the future.