How do you classify Insurance Spares and Capitalized Spares? Explain brief..

Insurance Spares:An insurance items is a spare part that will be used to replace a failed identical part in an operating equipment whose penalty cost for downtime is very high. Hence, by definition, it is an insurance against such failures for which the down time costs are very high. They do not become obsolete until the parent equipment is retired from service no matter if they do not move for many years

Capital Spares:These are vital spares for critical equipment. The stock-out cost for such spares is very high and the unit cost also is very high. The number of items consumed during the life time of the equipment may be very limited in number. Hence, the decision has to be made as to the number of items to be stored.

Agree with VENKITARAMAN KRISHNA MOORTHY VRINDAVAN 

VENKITARAMAN KRISHNA MOORTHY VRINDAVAN Project Execution Manager & Accounts Manager at ALI INTERNATIONAL TRADING EST.

Follow

• Accounting
• Business development
• Management
• Marketing
• Financial Managemen

An Insurance Spare is a spare part that you hold in your spare parts inventory, that you would not expect to use in the normal life of plant and equipment but if not available when needed would result in significant losses.

This definition as several important aspects:

1.      Held as part of your spare parts inventory: this differentiates the item from capital spares because capital spares are, by definition, not inventory because they are capitalized as plant and equipment.

2.      Would not expect to use in the normal life: this therefore excludes any ‘wear out’ components or those you expect to replace as part of normal wear and tear or a preventive maintenance program.

3.      If not available when needed would result in significant losses: one key aspect of insurance spares is that they often have long lead times so are not available on short notice and of course if the losses are not significant there would be little sense in purchasing the spare.

Think of insurance spares as being like the insurance you may buy to cover your house or car. You don’t want to claim on the insurance but you don’t want to be without it. Insurance spares are the ultimate ‘just in case’ inventory.

Capitalized Spare it depends on what it's a spare part of, but my rule of thumb is to expense with the basis being that most "spare parts" are needed to maintain the ongoing functionality of the larger item, thus implying Repairs and Maintenance. A side issue is that if you depreciate such items, I believe that you will find that once some departments within the organization believe that such expenses can be strung out over several years, they begin to get sloppy in their expense control.

It is essential to be consistent in the application and your procedure should be documented to ensure continuity in the organization.

Thanks for invitation 

Very good and informative Question

Agree with the senior

Insured spare parts is the spares which is replaced from the distributor or OEM itself upon mutual agreement before or at the time of purchase of asset or equipment . and the nature of equipment including fixed spares by OEM are insured hence called as insured spspares for capitalizes spares the consumable spares after warranty service period or service contract period lapses and after this scenario if spares are replaced then its called capitalized spares which downy covered under insurance and it affects cost and maintenance cost resp in equipment history and books value resp