One of the biggest issues related to property, plant and equipment is accounting for spare parts, servicing equipment, stand-by equipment and similar items. IFRS standards are pretty silent about this topic, the guidance is very limited and as a result, companies need to rely on careful assessment of the situation and their judgment. You should be very careful in assessing whether you deal with IAS 2 or IAS 16, because the wrong selection can have serious implications on your financial statements, for example:.

The standard IAS 16paragraph 8 specifically says that. If not, then spare parts might be considered PPE. Time aspect Do you need spare parts to operate some other asset during more than one period? Do you plan to use these items during more than 1 period? If not, then they are inventories. Some spare parts are easy to classify, for example back-up engine with significant acquisition cost is a major spare part and thus accounted for as PPE.

Some other items might not be that easy. Therefore, apart from the 2 criteria above, there are even more issues to consider: Sometimes, you can have an asset that is used in the production process for more than 1 period, but its acquisition cost is very small. And sometimes, you can have a huge amount of similar spare parts or servicing equipment. In this case, you need to assess materiality, or significance of similar spare parts and servicing equipment for your financial statements.

And not only materiality on an individual, asset-by-asset level, but also materiality of the whole group of these assets. Both options are possible, but the first one does not make much economical sense, as it would be difficult to keep records for 5 small assets. Take oil refinery, for example. My limited knowledge about refineries tells me that refineries must contain some minimum quantity of oil to operate.

This oil must stay there until the plant ceases operations. And as strange as it might be, you need to account for a minimum level of oil as for PPE, and for the remaining oil as for inventories. After we learned how to classify an item as PPE or as inventories, the question is when and how to depreciate major spare parts that are classified as PPE. Depreciation of spare parts is not specifically addressed by the standards and therefore, we must apply our judgment.

IAS 16 in paragraph 55 only says that the depreciation should begin when an asset is available for use. Should you depreciate spare parts only when they actually replaced a defective part and are in operation? Or, should you depreciate spare parts once they are in the warehouseregardless their actual usage?

In such a case, what is their useful life? If you keep the spare part to ensure smooth operation of some machinery without interruptions, then the depreciation period should start immediately. The reason is that such a critical spare part is available for use immediately when an original part in the machine stops working. However, if you keep the spare part to be used as a replacement part at some future time and you are sure that this part will be installed and put into use at a later date, then the depreciation should start when the part is installed.

You should carefully assess the nature of your spare parts, their function and future use and only then decide. Here, judgment is necessary. Learn top 7 IFRS mistakes that companies make in their reporting and how to avoid them easily!

That is a wonderful article on the very important topic! I really liked it. And what about the depreciation methods for spare parts mentioned? I suspect they are to be the same as it was chosen for the related PPE. And, obviously, something has to be written in the Accounting Policies?

Sure sure sure You are right about the depreciation methods — in most cases, they are the same as for the related asset. Also, the useful lives are the same or at least, they end at the same time. And of course, appropriate disclosures are needed. Thank you and have a nice day! Thanks for this useful article. I just have a concern about minimum stock that you referred in your oil example that has to be kept for a longer period.

I would assume it refers to buffer stock but that will always be treated under IAS 2. It is not so clear how to deal with low-acquisition-price-long-live items depreciate, control, valuate.

I really enjoyed the example with screwdrivers! There are some problems with such items, however. If we account a big amount of screwdrivers as a PPE item, so how to depreciate it? And how we should revalue it? Hi Sergey, sure, I got your point. As usual, there is some common sense and judgment to apply.

For example — how about performing the count of screwdrivers at the year-end, hm? This is exactly the area in which good IFRS consultant comes to play and is supposed to set up reasonable and manageable system All the best, S. I was always confused on this topic but atleast after reading this article I can handle It now.

Appreciate your effort to clarify How to account spare parts as per IFRS. Consider the scenario of a Whole sale Dealer. Say this Whole sale dealer is a distributor of Chip and food stuff to Supermarkets. They have display stands which is provided to supermarket to display their product. Value of individual stand is low and collectively have medium material value. This items Company can use more than for one or two year.

But these stands not under the control of Company. Kept with supermarket and can be damage at any time. But company can take back stand at any time. So how to treat this kind of asset. I strongly consider this item should not be consider as PPE neither as Invedntorey. Dear Srinath, indeed, this depends on the careful assessment of the situation.

Auditors seemed to accept both treatments. Dear Silva, thanks for taking your time to educate and enlighten this generation in the area of your expertise. With regards to spare parts measurement and presentation in the financial statement, lets consider the aviation industry or better still aircraft industry where planes are used for charter per transportation and other logistics.

How do you measure and present spare parts use to service the aircraft own by the company and the spare parts use to service other aircraft own by third party. Note that all spare parts in this situation are stored in one and the same ware house. Dear Joseph, I repeat myself again: Hi Silvia I am interest of your IFRS course. Thanks sylvia for helping everyone to learn ifrs. I have two question 1.

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Intially i held a particular spare parts to use in production process but later due to need i used in ppe, so i charge depn only when installed,so will it be a change in accounting policy but it was wholly unitentional?. Thank you once again. J Hi sivya My concern about spare parts which is for replacement You said should be depreciated right away in the stores that mean could be deprecisted before being installed Am i right. Jumaa, it depends on what kind of spare part it is. Sylvia, Thank you so much.

You have really made this simple for even a layman. After recognize the minimal quantity of Oil as PPE, will you depreciate it later on or how to deal with itafter? Dear Amr, sorry for my poor industry knowledge, but let me ask maybe stupid questions: Of course it can have some residual value for which you would sell itso you need to take this into account.

Thanks a lot, Silvia! Hi Silvia, Thank you for this article. For me it is so timely as I am currently dealing with a similar issue. Can you maybe share an example, of when the spares are held for the smooth running of the equipment and when it is held for a future date. Thanks again your articles have been very helpful in areas where the standards are not clear. Thanks for your regular update and transfer of knowledge. I will like you to write on partnership deferred tax when the tax rates are graduated rates.

Could you please explain the different between, For consumption in production process and for operation in connection with an item of ppe? Hi Sylvia, Big thanks for the detailed information. This gives me better tools in exercising judgement. Great Job you are doing. Please my question is if you will depreciate the assets at future date, would have to classify them as PPE or what pending the time they will be due for depreciation?

Thanks a lot for the article. Thanks a lot for. This is a very important issue that have not been given serious thought. The article has given me a better understanding. I gone through your article about the new concept for treatment of spare parts. Really it is very thoughtful and interesting to know more about. I an working in a big construction co have a lot of spare parts ,tools and tackles related to vehicle,machinery etc.

Presently we are treating as inventory. How can I work about it as PPE as you explained in your article. Can you please illustrate. I work in an Automobile company with various cost centres which is subdivided into vehicle sale, spare parts dept and after sale service. How do we harmonise the inventory of vehicles and that of spare part into 1 financial statement?

Should we treat it like when the company is consolidating. Urgent response would b highly appreciated. Hey Alade, as you know, under IAS 1, you should draft your own format of the financial statements, while meeting the necessary requirements. In this case, you should check whether you need to do the segment reporting under IFRS 8 Operating segments Book binary options fb2 8 tells you when you need to apply it and in this case, you would need to present these segments separately.

This para8 has been amended in and now they require meeting definition of PPE to capitalize any spare parts, see below:. Para 8, IAS16 — Spare parts and servicing equipment are recognized in accordance with IFRS when they meet the definition of PPE. As for Capital Spare Parts, the depreciation will be started when the asset is installed.

Then my question is what shall be the debit entry at the time of the purchase of that asset? Shall we account it as PPE and not apply depreciation till it is installed or there is something else? If within my inventory of spare parts, I have items such as safety shoes, helmetsuniforms for workers in productionthese how to trade options ex lease cars direct may be condiserados to as parts of spare parts, considering what is said within IFRS??

Hi Shohug, yes, sure, it is depreciated over the useful life. Useful life will be the period over which you will maintain the capacity in the refinery. Very useful Silvia, My query is related to transition from then until now.

Am I correct in my understanding? I guess to cost of sales. So yes, if you start treating spare parts as PPE rather than inventories, it will impact your EBITDA, because cost of inventories enters to EBITDA, while depreciation does not. Hi SilviaTQ for the good write up for IFRS The amendment to this standard to treat spares as PPE affecting not only our financial reporting but operationally.

In additionfor spareswe have set minimum stock reordering level for auto PR generation in SAP. Considering its capital spare part is connected to to a equipment not critical. So we are pretty sure its how to make money betting on soccer be treated as PPE. Here my question goes related to when to depreciate. Does it mean in case of capital spare treat it as PPE only when its installed and start depreciate upon installation.

In other words if we capitalise spare capital spare at the time of aquisition, can we choose to depreciate when installed? Capitalizing something does not necessarily imply it is a depreciable asset. Spare parts could be used for repairs and maintenance or to extend the lives of fixed assets. But my opions is that only those spare parts could be capitalized they will use as a replacement of existing parts.

I mean replacement according to RMAU, do you think that it makes sense to accout for spare parts as PPE without depreciation and to recognize it in profit and loss when it is placed in servise?

Dear RMAU and gabika, I think I described my position above — i. I agree with gabika that all spare parts will eventually be depreciated. Instead, there is an accrual principle stating that you should recognize an expense when you actually consumed the benefits of an asset not when you produce revenues out of the asset. Dear Silvia, Our company has stated this policy for spare parts: Subsequently we divide these spare parts into two groups: These two groups differ in commencement of depreciation or whether they are at how much money does ashley cole earn depreciated.

Depreciation of the first group spare parts starts when they are acquired and ready for usetogether with specific PPE item, and is calculated for the same period as PPE item. Depreciation of the second group spare parts depends on the way how spare parts is used. Because in this situation we follow national accounting rules: The reason is we prepare statements in accordance with our standards and we do only elimination of differences.

In balance sheet we add PPE spare parts to PPE and reduce inventory. In both cases we do not derecognise remaining amount of replaced part. Silvia, what do you think is our policy for spare parts totally incorrect or it is acceptable?

Because to prepare it correctly it would take a lot of effort and maybe this is imposible… thank you. If a spare part is to be used for repairs and maintenance it should not be capitalized to the fixed asset register, but should be included in Working Capital i.

Held in Inventory and be expenses when consumed. Something similar happens to me with uniforms to employees, these last me less than a year, when results would send, at one time removal from storage or throughout the months using the uniform.? Hollo sylvia, good explanation.

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But, i want to ask, if the spare parts is obsolete and left untouched in the store room? So we need to consider it as PPE or inventories? If you classify your spare parts as inventories, then you need to show them at lower of cost or net realizable value. This is Waseem from KSA. I work in a manufacturing company where we sell Ait Conditioner. I have a concern regarding our RM inventory.

Dear Waseem, I guess that RM inventory means raw materials, is that right? In this case, I would notify your auditors about the paragraph 32 in IAS 2. It says that materials and other supplies used in the production process of inventories are not written down below cost IF FINISHED PRODUCTS ARE EXPECTED TO BE SOLD AT OR ABOVE COST.

So no, you should not determine the NRV of your raw materials. If you expect to sell finished products below cost, then you can write down raw materials and in this case, you should use the replacement cost as a good estimate of NRV.

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Hope this helps S. Is there any option to go for several users with one subcription or does each one want to buy separately. Dear Waseem, please, for questions regarding the IFRS Kit, e-mail me Thank you, S. Sometimes we use car for more than 1 year and sometimes we sell it before. Can we clasify these cars as inventory, even though these are not bought primarily with a view to resale?

Can we have it in inventory for more than 1 year? Can we have some cars as inventory and some as PPE, even though the purpose is the same, just different period of usage? Dear Bales, you need to classify the replacement cars based on what you do with them in average. It does not matter that you sell minority of replacement cars before 1 year.

Do we recognize such item of inventory as PPE. Hi Eke, it depends on their useful life and purpose. Thank you so very much for the informative education. I just have a quick question hopefully you could help me out. How would calculating stock market equilibrium pdf treat commissioning spare parts that are procured at the same time with the original equipment?

Should I consider capital threshold when assessing whether they are an item of PPE? Also, if they are components of fixed assets, how do you depreciate them? All other questions — how to depreciate spare parts… described ifrs share option expense. I would just repeat myself here. Stock futures premarket so much, once again, Silvia. You are very helpful as always and I really appreciated your expertise.

What if an airline training institute for pilot use some small tools, equipments etc which are consumed in the process of providing training to the pilots.

I think it would be right to treat them as inventories rather as PPE. Am I right in my understand? Dear Sara, it depends. Are they consumed in less than 1 year? Then yes, treat them as inventories. Are they consumed in more than 1 period? Then it would be appropriate to look at their aggregate value and recognize them in PPE as a SET rather than on individual basis.

I have a question on how to identify spare parts are used for smooth operation vs. I see there is no difference.

We keep the spare parts for replacement if old part is damaged. I am not able to clearly understand the difference. As per this article your spare parts will be critical spare parts as you are keeping them as a back to ensure smooth uninterrupted machine operation and hence it should be depreciated immediately.

However, if you know that your existing original part will expiry in 6 months time or must be replaced after a specific use time then it is capital spare part and in this case it should be depreciated only when it is installed in the machine. Dear Silvia, I would really appreciate your thought in this.

Spare parts include for example drilling bits, casing equipment etc, and they are of high value. When the inventory is cost recovered we get it back through oil in kind through our agreement with the government, the inventory belongs to the government.

However, we have exclusive right to use it over the license period. Considering the facts above, especially the last one. Do you think we should use this method also for spareparts? Dear Sir, I would consider these spare parts as PPE, because they can be used only in connection with PPE e.

I would treat them as a set please see the above example with screwdrivers and hammers. Does it mean that when the license period expires, you need to give these drilling bits and other equipment back to government? So, you buy an equipment at your own cost, use it or store it as spare parts during the license period and then give it to the government? Thank you so much for your reply Silvia!

Yes, correct — when the license expires, the government owns the inventory it does not belong to us. You may say, we only have the right to use these assets. I was thinking two methods for depreciation; Straight line over the license period makes senseor UoP method together with the other assets.

OK, so in my opinion, the most reasonable method would be to depreciate over the license period, because whether these spare parts are used or not, they will go to the government after the license period expires. I have a question. We have a huge fleet of trucks in the company for logistics and we experience a lot of accidents because of which we write off the whole truck and use the remaining spare parts from that truck to fix others.

Now these used spares are not taken as inventory up til now but if we want to take such used spares in inventory, what is your opinion about valuation and whether it will be applicable in IFRS. At what price should we take it in inventory? First of all, if you are using some parts of the damaged cars, then I would NOT write them off fully — just the part that you cannot use.

Secondly, in the ideal situation, you should be able to estimate the carrying amount of parts that can be used and thus not written off with the damaged car. Can it be sit on CWIP till installation? Hi Silvia, I like your article, its very useful. I have one more question. Normally inventory includes consumables that is consumed in the production process. I have a situation tell me how to deal with this. Suppose there is a manufacturing co. In the factory for the workers company buy safety shoes.

They put it as stock. Whenever any worker required or new worker comes then they will issue to him. Now how to deal with this stock of shoes.

Is it record as inventory or expense. In my opinion it should not be inventory. Because it is not consumable. Also Such shoes has life more than a year than we should have to book as PPE. Home Articles About IFRS IFRS videos Financial Statements Consolidation and Groups Revenue recognition Financial Instruments Income Tax Foreign currency Leases PPE IAS 16 and related Impairment of assets Intangible assets Inventories Provisions and Contingencies Accounting estimates IAS 8 Employees US GAAP Not just IFRS IFRS Courses IFRS Kit FAQ Contact About Us FREE UPDATES My Account.

How to Account for Spare Parts under IFRS. IFRS AccountingInventoriesPPE IAS 16 and related. There are 2 main issues related to spare parts and similar items: How should we depreciate major spare parts that are a part of PPE?

Have you already checked out the IFRS Kit? Click here to check it out! IAS 16 IAS 2. You will also receive a valuable IFRS mini-course. Fill out the form below to get your Free Report: Hi Silvia Thanks for this useful article.

Would you please explain it bit more. Hi Silvia, Appreciate your effort to clarify How to account spare parts as per IFRS. Thanks and regards, Srinath.

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Await your good response. Hi Silvia After recognize the minimal quantity of Oil as PPE, will you depreciate it later on or how to deal with itafter? Hi Silvia, Thanks for your regular update and transfer of knowledge. Many thanks for pretty silvia and God bless you and guide you in jesus name amen. Thank you so much for your easy to understand IFRSs lessons.

They really do come in handy. Kindest Regards, NELSON NCUBE. Hi Slyvia Could you please explain the different between, For consumption in production process and for operation in connection with an item of ppe?

Silvia Thanks a lot for the article. Thank you madam for bringing up this article.

Hi Silvia Happy New Year to you. Can you please illustrate Thanks and regards. Hello Silvia, You have explained it well. Hello Silva, I work in an Automobile company with various cost centres which is subdivided into vehicle sale, spare parts dept and after sale service.

This para8 has been amended in and now they require meeting definition of PPE to capitalize any spare parts, see below: Farrukh, the whole article turns around that paragraph,so please revise. Sheikh Jawad Ahmed Raza. Glad if you can remove my doubts. What do you think, Silvia? Hello Silvia thanks for the article, Greetings from Colombia, I have a question, what happens to assets that normally qualify as fixed assets for a sector as it can last more than a period eg 15 monthsbut what happens if that asset mime is used in a sector where the use and lasts less frequency of a period example 9 monthsin this case if it had acquired the asset in September x1 it will last me until June x2, as you would treat it as inventory and send results for 9 months deferred expense or send it as an expense from the date that withdrawal from warehouse, as presented at December x1, Something similar happens to me with uniforms to employees, these last me less than a year, when results would send, at one time removal from storage or throughout the months using the uniform.?

First of all thanks for Clarification of IFRS If the spare parts computer related to warranty, the how its recorded. HI Silvia, This is Waseem from KSA. But, our auditors are telling that rule does apply 2 RM also. Another thing is NRV is entity specific one.

Not like fair value. Advise in this regard. Who is right auditor or us. Thank you silvia for your reply. Is this general rule for all manufacturing company. I have another concern regarding your IFRS KIT. Hi Silvia, we are selling cars and also own some cars as replacement cars in the event that customers need replacement cars. Hi Silvia, Thank you so very much for the informative education.

I will greatly appreciate your response on this. Hi Silvia, Thanks for the wonderful article.

You are really helpful. Thanks a ton, Silvia. You replied much more than I expected. You are way too helpful. Very good article Slivia. Kindly share any examples to identify? Hope it will help. Spare parts in Oil and Gas. Spare parts in oil and gas. Hi Silvia, I have a question. Which cost should the re-furbed cost be booked back in at?

The Refurb cost or original cost? Post a Reply Name: How to Account for Debt Factoring or Selling of Receivables When I was auditing the financial statements of How to Make Consolidated Statement of Cash Flows with Foreign Currencies Did you know that many groups prepare their cons How to Make Hedging Documentation If your company enters into some derivatives or Troubles with IFRS 16 Leases The new lease standard IFRS 16 can initially cau This website uses cookies to improve your experience.

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