USA Accounting for used spare parts

[ScorpTraveler]

Please help me shed some light.

The primary focus of the company is the sales of used medical equipment. Revenue is below 7 million annually (below 25 million thresholds/3 years/ (TCJA) ).

Scenario 1. During most instrument repairs two or more instruments of the same model are utilized to make one complete. Each one of these (multiple) instruments has its own inventory entry prior to being combined. Once combined total original cost of both items becomes inventory costs for that item.

Question 1: If some of the instruments are procured to be used as parts only(eventually), can such instruments be immediately expensed? De Minimis policy is in place with a threshold of $2500.00. Also are they subject to sales tax? *Often such single instrument may supply repair parts used in the repairing of 2-3 other instruments over a period of few years.

Question2: If a used repair part that may eventually assist in the repair of an instrument is procured, can it be expensed right away?

Question3: If an instrument arrives defective to the point where future repair is not possible, can such instruments be written off and kept as spare parts. If not, then what inventory value shall be assigned?

Thank you!

 

[Dave In Capital]

A company this size will usually have audited financial statements even if it isn't a public company. It might be a closely held corporation not subject to public company disclosure provisions. Or other investors / creditors might be interested in audited financials. In which case the auditors would have audited the inventory valuation methodology. I'm curious as to what they determined was appropriate. Also, to efficiently remain in operation there must be some method that you use to derive an accurate keeping of cost of inputs for each item sold ie cost of goods sold.

Businesses are allowed some discretion over how they allocate costs as long as the methodology is rational, consistent, and appropriate. Gaap states somewhere that accounting assumptions must remain consistent regardless of tax implications. That is of course absent any legislation which otherwise supersedes.

As far as the immediate expensing of used parts purchases, it doesn't sound like what you're describing would be consistent with gaap or ifrs. That's because under the matching principle of accounting, revenues must match expenses. Unless it can be demonstrated that these purchases directly relate to current period revenues, immediate expensing would run afoul of the tax oversight since it would be reducing taxable gains.

These miscellaneous items that perhaps have no directly traceable role in the finished product are reminiscent of scrap, which is still part of the cost of goods sold calculation. That's because cogs includes the cost of purchases whether or not 100% of the purchase survived the entire production process. This of course means said items should not be expensed immediately, but rather as cogs when sales are made.

It's possible there are extenuating reasons for immediate expensing that I have overlooked. Please feel free to point that out and I will do my best to offer an interpretation.

 

[Praz Finpoint]

The answer to all your 3 questions is that the procured materials must be recorded as Inventories at cost. While I understand that you may want to expense these items due to their value, it should be capitalized as inventories which will also allow the Company to track and monitor their inventories of spare parts available for controls around misappropriation and losses of inventories, and also management of their procurement planning to avoid purchasing spare parts that the company already have adequate stocks for.