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Units produce equipment and spare parts for the food industry

Units produce equipment and spare parts for the food industry

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. The standard IAS 16 , paragraph 8 specifically says that spare parts are recognised in accordance with this IFRS when they meet the definition of property, plant and equipment thus they need to meet the definition of PPE. 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?

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Making Your Spares Management More Efficient

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.

The standard IAS 16 , paragraph 8 specifically says that spare parts are recognised in accordance with this IFRS when they meet the definition of property, plant and equipment thus they need to meet the definition of PPE. 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.

Special For You! Click here to check it out! 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 warehouse , regardless 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. Thank you! Please leave this field empty. Check your inbox or spam folder now to confirm your subscription. Please check your inbox to confirm your subscription. 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. Or not? And, obviously, something has to be written in the Accounting Policies? 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! Hi Silvia. I have a question. What will be the accounting treatment for the calculator? Is it going to be recognized as PPE or as an inventory? Is it on the basis of the effluxion of time?

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?

I was always confused on this topic but atleast after reading this article I can handle It now. Thank you Sylvia. Very informative article.

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: assessment and judgement is needed. Thanks sylvia for helping everyone to learn ifrs. I have two question 1. 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: will you keep the same oil there? Of course it can have some residual value for which you would sell it , so you need to take this into account.

Dear Silvia, it is interesting how to allocate cost on such volume if it is internally produced. It happens at the beginning of production. In oil industry there are no big raw material cost but mostly overheads.

At the beginning of production due to small production volume, cost per barrel could be significant in comparison to market price. 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.

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How to Account for Spare Parts under IFRS

Life Cycle Engineering provides engineering solutions that deliver lasting results for private industry, public entities, government organizations and the military. Solutions Life Cycle Engineering is committed to helping you implement solutions that improve performance and meet your objectives. We develop our solutions and services to meet the specific challenges and requirements of a wide variety of organizations. Are you looking for an exciting and rewarding career with a stable, team-based and results-oriented organization? You could be introducing premature failure in your equipment assets caused by the inventory management practices for spare parts in your Maintenance, Repair, and Operating supplies MRO storeroom. Every company competing in the fast-changing global market has recognized the need to identify waste and inefficiencies in each business unit and implement best practice processes and business practices to increase their competitive advantage. The overall success of your business and its employees hinges on each block of the foundation performing at the highest level possible. The person responsible for storeroom operation plays a key role in the level of equipment reliability and outcome of operational efficiency for your plant. There are typically several million dollars invested in the MRO inventory and many of the parts are critical to the operation of the business.

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You could be introducing premature failure in your equipment assets caused by unit, it is a sure bet that the situation will be repeated and lost production time.

At the best of times managing a spare parts supply chain is a challenge, at worst it can feel like an impossible task. Spare parts are generally stocked at all stages of the supply chain and in multiple locations by manufacturers, wholesalers, retailers, and end users. The number of items is large. Typically, there are thousands, even tens of thousands of different Stock Keeping Units to manage, and units vary in value, lifecycle, weight, size, and criticality. Predicting demand when demand can be so sporadic is seemingly impossible.

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