How To Account For Spare Parts Under IFRS - IFRSbox - Making IFRS Easy

2/27/2018 How to Account for Spare Parts under IFRS – IFRSbox – Making IFRS Easy
After 2 months, I landed a new position of IFRS conversion manager with 70% pay rise.
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How to Account for Spare Parts

under IFRS
(http://www.ifrsbox.com/spare-parts-ifrs/)
by Silvia (http://www.ifrsbox.com/author/silvia/)
 IFRS ACCOUNTING (HTTP://WWW.IFRSBOX.COM/CATEGORY/IFRS-

ACCOUNTING/), INVENTORIES
(HTTP://WWW.IFRSBOX.COM/CATEGORY/INVENTORIES/), PPE (IAS 16
AND RELATED) (HTTP://WWW.IFRSBOX.COM/CATEGORY/PPE-IAS-16-
AND-RELATED/)
 96 (http://www.ifrsbox.com/spare-parts-ifrs/#comments)
http://www.ifrsbox.com/spare-parts-ifrs/ 1/65
After 2 months, One of the

I landed biggest
a new issuesofrelated
position to property,manager
IFRS conversion plant andwith 70% pay rise.
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.
There are 2 main issues related to spare parts and similar

items:
1. Should we recognize and present them as property,

plant and equipment (“PPE”) or as inventories?
2. How should we depreciate major spare parts that are a
part of PPE?
Let’s try to analyze them.

Spare parts = PPE or Inventory?

The rst major issue with spare parts is to determine whether
they are considered as “inventories” and thus accounted for
under IAS 2 Inventories, or they are considered as “property,
plant and equipment” and thus accounted for under IAS 16
Property, Plant and Equipment
(http://www.ifrsbox.com/blog/post/summary-of-ias-16-
property-plant-and-equipment/).
Special For You! Have you already checked out the IFRS
Kit ? It’s a full IFRS learning package with more than 40
hours of private video tutorials, more than 140 IFRS case
studies solved in Excel, more than 180 pages of handouts
and many bonuses included. If you take action today and
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to check it out! (/courses/ifrs-kit)

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 nancial statements, for example:
Incorrect measurement of your spare parts (depreciate

or not?);
Incorrect presentation of your spare parts (non-current
assets or current assets?)
For all spare parts it’s good to remember that in most cases,
they are inventories.
But it’s not so simple as that.
The standard IAS 16

(http://www.ifrsbox.com/blog/post/summary-of-ias-16-
property-plant-and-equipment/), paragraph 8 speci cally
says that
When major spare parts and stand-by equipment are

expected to be used during more than 1 period, then
they are accounted for as PPE; and
If spare parts and servicing equipment can be used only
in connection with an item of PPE, then they are
accounted for as PPE.
As a result, you should consider the following criteria when

assessing your spare parts:
1. Purpose of the spare parts

Are spare parts consumed in a production process
(whether to produce goods or render services) or held
as merchandise for resale?
If yes, then it might indicate they are inventories.
If not, then spare parts might be considered PPE.

2. Time aspect

Do you
After 2 months, I landed need
a new spare of
position parts toconversion
IFRS operate some other asset
manager with 70% pay rise.
during more than one period? Do you plan to use these
items during more than 1 period?
If yes, then they might be PPE.
If not, then they are inventories.
Some spare parts are easy to classify, for example back-up

engine with signi cant 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:

Materiality
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.
After 2 months, And sometimes,

I landed you canof
a new position have a huge
IFRS amount
conversion of similar
manager spare
with 70% pay rise.
parts or servicing equipment.
For example, small tools, moulds, pallets or containers used
for more than 1 period.
In this case, these assets are PPE rather than inventories, but
it’s not very practical for keeping track of these assets and
their accounting, is it?
It would be very hard to label each individual screwdriver, not

mentioning depreciation!
In this case, you need to assess materiality, or signi cance of

similar spare parts and servicing equipment for your nancial
statements.
And not only materiality on an individual, asset-by-asset level,

but also materiality of the whole group of these assets.
So, if you have 2 hammers and 1 screwdriver, then although

it’s in fact PPE, it’s reasonable to account for these items as for
inventories and expense them in pro t or loss.
However, if you own 10 000 hammers and 5 000 screwdrivers,

then if their cost is material with respect to your nancial
statements, you shouldn’t simply expense them.
This brings me to the second consideration – unit of account.

Unit of Account
The standard IAS 16 says that it’s up to an entity to determine

how it will apply the recognition and measurement criteria –
whether to an individual asset, or to a group of assets on an
aggregate basis (IAS 16.9).
Simply speaking: what is our item of PPE in the case of large 

amount of small items?
After 2 months, Is it the individual

I landed single screwdriver
a new position with themanager
of IFRS conversion cost of USD
with5?70% pay rise.
Or, is it the set ofClick

5 000here
screwdrivers
to learn more
with the cost of USD 25
000 (5×5 000)?
Both options are possible, but the rst one does not make
much economical sense, as it would be di cult to keep
records for 5 000 small assets.
As a result, when you have a lot of servicing equipment or

spare parts with small individual cost, then it’s reasonable to
account for them as for PPE under IAS 16 if their aggregate
value is material.
In such a case, it’s practical and totally acceptable to apply

paragraph 9 of IAS 16 and measure these small assets as 1
item of PPE – a set of assets.

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Kit ? It’s a full IFRS learning package with more than 40
hours of private video tutorials, more than 140 IFRS case
studies solved in Excel, more than 180 pages of handouts
and many bonuses included. If you take action today and
subscribe to the IFRS Kit, you’ll get it at discount! Click here
to check it out! (/courses/ifrs-kit)
Minimum Levels
In some businesses, minimum levels of inventories must be

maintained in order to operate assets.
In this case, “inventories” are not separable from an item of

PPE and such “inventories” are in fact a PPE.
After 2 months, Take oil rea new

I landed nery,position
for example. Myconversion
of IFRS limited knowledge
managerabout
with 70% pay rise.
re neries tells me that re neries must contain some minimum
quantity of oil to operate. This oil must stay there until the
plant ceases operations.
Is this minimum level of oil classi ed as inventories or an item

of PPE?
As it is not consumed in a production process, but it is

necessary for plant’s operation and it’s going to stay there
until the plant closes (for more than 1 year), it’s PPE.
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.

How to Depreciate Spare Parts

in PPE?
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 classi ed as PPE.
Depreciation of spare parts is not speci cally 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.
What’s the issue here?
Often, the spare parts are in the warehouse and not directly in
use and therefore, it’s questionable when to start depreciation
charges.
Should you depreciate spare parts only when they actually


replaced a defective part and are in operation?
After 2 months, Or, shoulda you

I landed newdepreciate
position ofspare
IFRS parts once they
conversion are in with
manager the 70% pay rise.
warehouse, regardless their actual usage? In such a case,
what is their useful life?
It depends on the nature of the spare part.
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.
This issue was addressed by several IFRS Discussion groups

in the past and I’m pretty sure that this is a great discussion
topic even now, so please go ahead and leave me a comment 
right below this article. Thank you!
Tags In Click here to learn more
IAS 16 (http://www.ifrsbox.com/tag/ias-16/)
IAS 2 (http://www.ifrsbox.com/tag/ias-2/)
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) 66 / 108 2015/)
96 Comments
Sergiy Ivakhnenkov November 19, 2015 at 8:52

am (http://www.ifrsbox.com/spare-parts-
ifrs/#comment-3765)
That is a wonderful article on the very important

topic! I really liked it.
Well, I would rather name the section ‘How to
Depreciate Spare Parts in PPE?’ as ‘When to Start
the Depreciation of Spare Parts’.
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?
 Reply (http://www.ifrsbox.com/spare-parts-
ifrs/?replytocom=3765#respond)
Silvia M. November 19, 2015 at 11:59


am (http://www.ifrsbox.com/spare-
After 2 months, I landed a new position parts-ifrs/#comment-3771)

of IFRS conversion manager with 70% pay rise.
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! S.
 Reply
(http://www.ifrsbox.com/spare-
parts-ifrs/?
replytocom=3771#respond)
Sohail November 19, 2015 at 8:57 am

(http://www.ifrsbox.com/spare-parts-
ifrs/#comment-3766)
Hi Silvia
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 bu er stock but that will
always be treated under IAS 2.
Would you please explain it bit more.
Many Thanks!
Sergiy Ivakhnenkov November 19, 2015 at 9:09 
am position
After 2 months, I landed a new (http://www.ifrsbox.com/spare-parts-
ifrs/#comment-3767)
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..
1. If they are inventories and we provided our
worker with a screwdriver, in a year he/she could
come and ask for another one (we do not have it
in the records already!).
2. If we account a big amount of screwdrivers as a
PPE item, so how to depreciate it? And how we
should revalue it? (Let’s say, we provided our
departments with some of the screwdrivers,
some are still in the warehouse… And in some
time, some of them – around the facilities – are
broken, stolen, lost etc.)…
Thank you!

am (http://www.ifrsbox.com/spare-
parts-ifrs/#comment-3770)
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
After 2 months, I landed a new position supposed to set up reasonable

of IFRS conversion and70% pay rise.
manager with
manageable system All the best,
S.
 Reply
parts-ifrs/?
Alwaleed Farouk Iraqi,CMA,DipIFR November 19,

2015 at 10:33 am (http://www.ifrsbox.com/spare-
Many thanks for pretty Silvia,

it’s a fantastic and simple explanation for critical
case
Best regards
ocassin November 19, 2015 at 11:52 am

ifrs/#comment-3769)
I was always confused on this topic but atleast

after reading this article I can handle It now.
Thank you Sylvia
Srinath.P November 19, 2015 at 12:53 pm

ifrs/#comment-3772) 
Hi Silvia,
Appreciate yourtoe learn

Click here ort to more
clarify How to account
spare parts as per IFRS. Very informative article.
Consider the scenario of a Whole sale Dealer. Say

this Whole sale dealer is a distributor of Chip and
food stu 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. So Can’t treat as Inventory is it ? 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.
Thanks and regards,
Srinath.P

pm (http://www.ifrsbox.com/spare-
Dear Srinath,
indeed, this depends on the careful
assessment of the situation. In my
practice, I saw 2 di erent kinds of
treatment – some companies put the
cost of stands in pro t or loss as they
argue that they don’t control the 
After 2 months, I landed a new position asset at conversion

of IFRS all, but some of them with
manager treated
70% pay rise.
these assets as some PPE as they
argued that although it’s in the
external place, they performed
regular check ups or had a contract
with retailer to do it. Auditors seemed
to accept both treatments. S.
 Reply
parts-ifrs/?
Ewuoso Joseph November 19, 2015 at 12:57 pm

ifrs/#comment-3773)
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 nancial 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 .
Await your good response.
Thank you. 
Joseph
 Reply (http:/to
Click here /www.ifrsbox.com/spare-parts-
learn more

Dear Joseph,
I repeat myself again: assessment
and judgement is needed. If servicing
third party’s aircraft is a revenue
generating activity, then these spare
parts should be recognized as PPE
S.
 Reply
parts-ifrs/?
azakaria November 19, 2015 at 2:57 pm

ifrs/#comment-3774)
Hi Silvia
I am interest of your IFRS course .could you
please feed me if this course enough to Pass
ACCA IFRS exam?
regards,,
saranya kumarasamy November 19, 2015 at 3:24 
pm position
After 2 months, I landed a new (http://www.ifrsbox.com/spare-parts-
ifrs/#comment-3775)
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?.
2.what is small assets as per para9 of ias 16, is it
company decision ?can it be with reference to
percentage on value basis?.
I can see that i am able to grasp & getting a good
command over ifrs , its because of ifrskit.Thank
you once again.
Jumaa November 19, 2015 at 3:25 pm

ifrs/#comment-3776)
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

After 2 months, I landed a new position pm (http:/

of IFRS /www.ifrsbox.com/spare-
conversion manager with 70% pay rise.
Jumaa,
it depends on what kind of spare part
it is. All spare parts are there for
replacement, isn’t it? But if this is so-
called “insurance” spare part, or
critical spare part (meaning that the
item of PPE would be out of
operation and it would signi cantly
a ect some activity without this spare
part), then yes, these spares can be
depreciated immediately. S.
 Reply
parts-ifrs/?
Comet Ojiabor November 19, 2015 at 3:53 pm

ifrs/#comment-3777)
Sylvia,
Thank you so much. your article on how to
account for spare parts under IFRS is quite
explicit and understood. You have really made
this simple for even a layman. Thank you once
again.
Comet
Djelloul
After 2 months, I landed a new November
position of IFRS 19, 2015 at 5:14
conversion pm
ifrs/#comment-3778)
Very usefull indeed.

Many thanks Silvia
Amr November 19, 2015 at 5:22 pm

ifrs/#comment-3779)
Hi Silvia
After recognize the minimal quantity of Oil as

PPE, will you depreciate it later on or how to deal
with itafter ?
Thank you
Amr

Dear Amr,
sorry for my poor industry
knowledge, but let me ask (maybe
stupid) questions: will you keep the
same oil there? or will you eventually
replace it? Let’s say you keep
minimum quantity of oil in pipes, and
you assume the useful life of the 
After 2 months, I landed a new position pipes is conversion

of IFRS 30 years, then you would
depreciate the oil over 30 years. Of
course it can have some residual
value (for which you would sell it), so
you need to take this into account. S.
 Reply
parts-ifrs/?
Rodica November 19, 2015 at 6:19 pm

ifrs/#comment-3780)
Thanks a lot, Silvia!

How should a company accounted for/ recognize
equipment which are bought as part of a system
(set of asset) and then, until the system is ready,
the equipment is held by the supplier in custody?
Sean Ok November 19, 2015 at 7:06 pm

ifrs/#comment-3785)
Hi Silvia, Thank you for this article. For me it is so

timely as I am currently dealing with a similar
issue. But I must confess I’m still a bit unsure of
when to start depreciation if it meets the PPE
criteria. Can you maybe share an example, of
when the spares are held for the smooth running

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How to Account for Spare Parts

 IFRS ACCOUNTING (HTTP://WWW.IFRSBOX.COM/CATEGORY/IFRS-

(HTTP://WWW.IFRSBOX.COM/CATEGORY/INVENTORIES/), PPE (IAS 16

AND RELATED) (HTTP://WWW.IFRSBOX.COM/CATEGORY/PPE-IAS-16-

After 2 months, One of the

There are 2 main issues related to spare parts and similar

1. Should we recognize and present them as property,

Let’s try to analyze them.

Spare parts = PPE or Inventory?

Incorrect measurement of your spare parts (depreciate

But it’s not so simple as that.

The standard IAS 16

When major spare parts and stand-by equipment are

As a result, you should consider the following criteria when

1. Purpose of the spare parts

If yes, then it might indicate they are inventories.

If not, then spare parts might be considered PPE.

If yes, then they might be PPE.

If not, then they are inventories.

Some spare parts are easy to classify, for example back-up

Some other items might not be that easy. Therefore, apart

Sometimes, you can have an asset that is used in the

After 2 months, And sometimes,

It would be very hard to label each individual screwdriver, not

In this case, you need to assess materiality, or signi cance of

And not only materiality on an individual, asset-by-asset level,

So, if you have 2 hammers and 1 screwdriver, then although

However, if you own 10 000 hammers and 5 000 screwdrivers,

This brings me to the second consideration – unit of account.

The standard IAS 16 says that it’s up to an entity to determine

Simply speaking: what is our item of PPE in the case of large 

After 2 months, Is it the individual

Or, is it the set ofClick

As a result, when you have a lot of servicing equipment or

In such a case, it’s practical and totally acceptable to apply

In some businesses, minimum levels of inventories must be

In this case, “inventories” are not separable from an item of

After 2 months, Take oil rea new

Is this minimum level of oil classi ed as inventories or an item

As it is not consumed in a production process, but it is

And as strange as it might be, you need to account for a

How to Depreciate Spare Parts

Depreciation of spare parts is not speci cally addressed by

IAS 16 in paragraph 55 only says that the depreciation should

What’s the issue here?

Should you depreciate spare parts only when they actually

After 2 months, Or, shoulda you

It depends on the nature of the spare part.

If you keep the spare part to ensure smooth operation of

However, if you keep the spare part to be used as a

This issue was addressed by several IFRS Discussion groups

Tags In Click here to learn more

JOIN OUR FREE NEWSLETTER

report "Top 7 IFRS Mistakes" +

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Sergiy Ivakhnenkov November 19, 2015 at 8:52

That is a wonderful article on the very important

Silvia M. November 19, 2015 at 11:59

After 2 months, I landed a new position parts-ifrs/#comment-3771)

Sohail November 19, 2015 at 8:57 am