Accounting recognition of spare parts under IFRS

Spare parts under IFRS are generally recognized as inventories.

However, if the entity expects these spare parts to be used for more than the accounting period, and the economic benefits of these assets are expected to flow to the entity, a company should be recognized these elements as property, plant, and equipment.

In addition to the above, if a spare part expects to be used together with a significant item of property, plant, and equipment, it must also be recognized based on the parameters established in IAS 16

Let’s look at the following examples:

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Examples of spare parts under IFRS

A hospital has a generator if there is an unexpected power outage.

Each generator has an extra spare, which will start working when the first generator stops working.

Each generator has an average useful life of 6 years.

Every spare part in the example presented above must be recognized as property, plant, and equipment because these are expected to be used for more than one accounting period and generate economic benefits for the entity.

Another critical question that we must refer to regarding spare parts is the moment at which each of these parts should begin to depreciate.

For this, we are going to review paragraph 55 of IAS 16.

There It is established that the depreciation of an asset will begin when it is available for use.

In addition, it is also determined that depreciation will not cease when the asset is unused unless it is fully depreciated.

However, if use-based depreciation methods are used, the depreciation charge could be zero when no production activity occurs.

In this way, analyzing the example presented previously, we can affirm that the second generator will depreciate only when it is used, due to the depreciation method used in this type of asset corresponds to the units produced method.

In contrast, if an entity uses the straight-line method to depreciate spare parts, depreciation will not cease, even if an entity doesn’t use these assets.

Spare parts recognized as inventories.

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Spare parts that are expected to be used for less than an accounting period will be recognized as inventories and recorded in profit or loss when consumed.

An entity shall assess the materiality of these assets.

Let’s remember that an element is material if its omission, or erroneous presentation, can influence stakeholders’ decision-making.

In this way, if a company provides a vehicle repair service, for example, and uses 5,000 spare parts that have a useful life of more than one year, preparers of the financial statements might think that each spare part should be recognized as property, plant, and equipment.

However, it is essential to note that if each spare part individually analyzed doesn’t represent a significant amount, it can conclude that we should recognize these elements in profit and loss.

Besides, it is significant to note that must analyzed the materiality be both individually and comprehensively.

Therefore, if an entity’s management concludes that the 5,000 spare parts globally observed are material, the company should recognize these parts as an asset.

Now, should these 5,000 spare parts be recognized as property, plant, and equipment or as inventories?

In our opinion, they should be recognized as inventories because although these spare parts are expected to be used for more than one accounting period, each spare part observed individually does not have a significant weight, making it impossible to carry out the control of depreciation.

For this reason, the 5,000 spare parts should be recognized as inventory and accounted for in profit and loss as they are consumed.

In summary, if an entity concludes that a replacement part has a significant price and is expected to be used for more than one accounting period, it will be recognized as property, plant, and equipment.

If, on the contrary, the spare parts don’t present a significant price, these parts should be recognized in profit or loss.

If there is a large number of spare parts with similar characteristics analyzed in an integral way and have relative importance or materiality, these spare must be recognized as inventories.

Example of spare parts recognized according to IAS 2

An airline performs preventive maintenance on all its aircraft every six months and carries out the change of specific spare parts of low value to avoid possible failures in the future.

These spare parts must be recognized as inventories and will be recognized in profit and loss as they are consumed.

Finally, it is essential to say that an entity must evaluate whether a specific spare part or auxiliary equipment should be recognized as inventory or as property, plant, and equipment because in the case that an entity recognizes spare elements as inventories, being items of property plant and equipment, we would be in the presence of an error, which must be recognized retroactively according to IAS 8.

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