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11.5 Materials and supplies
Publication date: 20 Jul 2016
us Utilities guide
Materials and supplies generally consist of high volumes of low value parts that are held for the purpose of replacing parts within or performing repairs of utility plant. Often, materials and supplies are held for long periods of time and for the purpose of maintaining sufficient quantities of essential parts that may not be easily or quickly replaced from the market.
Industry practice is to account for materials and supplies following the guidance in ASC 330.
Partial definition from ASC 330-10-20
Inventory: . . . By trade practice, operating materials and supplies of certain types of entities such as oil producers are usually treated as inventory.
In accounting for materials and supplies, reporting entities should apply a consistent costing method and follow the guidance for LOCOM in ASC 330. Adjustments to reflect LOCOM of materials and supplies may arise due to changes in price levels or due to obsolescence.
Excerpt from ASC 330-10-35-2
Thus, in accounting for inventories, a loss shall be recognized whenever the utility of goods is impaired by damage, deterioration, obsolescence, changes in price levels, or other causes. The measurement of such losses shall be accomplished by applying the rule of pricing inventories at the lower of cost or market.
Consistent with this guidance, reporting entities should perform LOCOM assessments based on changes in factors that impact the market price of parts, in addition to considering obsolescence. Because materials and supplies may be used as replacement parts of utility plant over a long period of time, reporting entities should regularly evaluate slow moving parts to determine whether a write-down or reserve for obsolescence is necessary. The analysis should consider:
- The nature of the part
- The length of time it has been in inventory
- Typical turnover
- Technological advances (if any)
- Any market information about the part
Certain materials and supplies may be accounted for as “capital spares” and classified as part of property, plant, and equipment. These parts should be capitalized or expensed when used and are generally evaluated for impairment in accordance with the guidance in ASC 360. See UP 12.2.4 for further information on capital spares.
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