In oil industry there are no big raw material cost but mostly overheads. Hence these spare should be capitalized along with mother asset for which these spare part has been purchased and hence should be depreciated along with mother asset, even it is lying in the warehouse. The usefull life and cost meet the asset criteria. Thanks for this useful article. While these two systems are different in many ways, they have some similarities for inventory costing. Am i right. Your website is the go-to place for all kinds of accounting queries. Your treatment is not correct, accounting for first engine under repair & maintenance. If not, then spare parts might be considered PPE. This article is authored by the Intuit Firm of the Future team. Should I consider capital threshold when assessing whether they are an item of PPE? Could you please explain the different between, For consumption in production process and for operation in connection with an item of ppe? Hi If within my inventory of spare parts, I have items such as safety shoes, helmets , uniforms for workers in production , these materials may be condiserados to as parts of spare parts, considering what is said within IFRS ?? I am interest of your IFRS course .could you please feed me if this course enough to Pass ACCA IFRS exam? Considering the facts above, especially the last one. The GAAP version of net realizable value is equal to the estimated selling price less any reasonable costs associated with a sale. S. Dear Silvia, it is interesting how to allocate cost on such volume if it is internally produced. hyphenated at the specified hyphenation points.
hmmm, that depends on where you put the cost of spare parts in P/L when you treated them as inventories. 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). This brings me to the second consideration – unit of account. if yes then how? 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!). Dear Bales,
Please advise what to do with the many spare parts that constantly need replacement at the oil project. So no, you should not determine the NRV of your raw materials. You should carefully assess the nature of your spare parts, their function and future use and only then decide. Both methods allow inventories to be written down to market value. the revaluation surplus, including changes during the period and any restrictions on the distribution of the balance to shareholders. Note that all spare parts in this situation are stored in one and the same ware house . 1. Semi-detached house in Toh Tuck Road sold for $3.4 million in 8 minutes in virtual auction, Bed Bath & Beyond posts same-store sales gain for the first time since 2016 thanks to e-commerce gains, SNP scandal: Disgraced ex-minister still claims expenses for 2nd home – despite not voting, Nicola Sturgeon humiliated as Gove warns Brexit to devastate SNP plot to ‘smash UK apart’, Oil falls as surging virus cases cloud demand outlook, Coronavirus pandemic-hit tour operators seek relief, SEBI mulls stress tests, swing pricing for MFs. An additional question to the above, what if these screw drives are different models and not exactly the same product. You said should be depreciated right away in the stores that mean could be deprecisted before being installed Thanks for your regular update and transfer of knowledge.
If we should account for it the FV of the parts, then which account to credit and what would be the implications of taxation? Many thanks for pretty silvia and God bless you and guide you in jesus name amen.
you gave an option either to depreciate immediately ( if critical) or to depreciate when installed ( capital spare). So we are pretty sure its to be treated as PPE. In a sense, this means the inventory is “underwater.”. You can view which cookies are used by viewing the details in our privacy policy. If we register them all, how can we do a physical inventory in the future? If you keep the spare part to ensure smooth operation of some machinery without interruptions, then the depreciation period should start immediately. We keep the spare parts for replacement if old part is damaged. Where Can we use the same item as inventory as well as CAPEX item? Inventory Valuation and Depreciation Inventory Valuation. Editor’s note: This article was updated with new content on Jan. 21, 2020.
IAS 16 applies to the accounting for property, plant and equipment, except where another standard requires or permits differing accounting treatments, for example: The standard does apply to property, plant, and equipment used to develop or maintain the last three categories of assets.
Dear Amr, How would you treat commissioning spare parts that are procured at the same time with the original equipment? Individually, the book’s cost is immaterial, but for library, all books are material in total.
Dear Silvia, So Can’t treat as Inventory is it ? this is a bit too long to reply, but I’ll try within some days (BTW, you can write me an e-mail in Slovak – I’m Slovak ) S. I am sorry but can you please explain in more detail the last part of your answer to this question? An inventory valuation is important process which assists company to provide a monetary value for items that comprise their inventory.
Whenever any worker required or new worker comes then they will issue to him. Thanks, Thanks a lot for the article. I really liked it. We need to control and recognise the inventory as it in our possession but we did not pay anything for it so how to account for it? Because my opinion is different (how I have said above) but I need change it and has some good argument for that. The IFRS approach is more theoretically correct, but also requires substantially more accounting effort. Then my question is what shall be the debit entry at the time of the purchase of that asset?
With reference to unit of account, I had a query. should the costs capitalized as asset or expensed as part of maintenance? Financial statements are used by analysts, investors and bankers to learn more about the financial status of a company.
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?
According to the Financial Accounting Standards Board, or FASB, the organization responsible for interpreting and modifying GAAP, market value is defined as the current replacement cost as limited by net realizable value.
IAS 19 Employee Benefits. Spare part under PPE? This is a subtle distinction since both entities use the phrase “net realizable value” to mean slightly different things. Take oil refinery, for example.
Hi Silvia Hello Silvia, They have display stands which is provided to supermarket to display their product. Previously we held all spare parts in the Inventories box on the BS and consumed them to the P+L on use. I estimate that 2/3 of our inventory has not been used in the last 24-months. There are three common methods for inventory accountability costs: weighted-average cost method; first in, first out, or FIFO; and last in, first out, or LIFO. The Inventory guide addresses the accounting for inventory under US GAAP. Hey Alade, [IAS 16.23], If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature), the cost will be measured at the fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. Depreciation should be charged to profit or loss, unless it is included in the carrying amount of another asset [IAS 16.48]. it is probable that the future economic benefits associated with the asset will flow to the entity, and. Should the refurbishment cost be booked to P&L as an expense? By using our website, you agree to the use of our cookies. (2) We use the Unit of production, when depreciation Oil producing assets. report “Top 7 IFRS Mistakes” Appreciate your effort to clarify How to account spare parts as per IFRS. Free spares received alongwith main machine can be assumed to be part of the main machine whose record can be maintained as memoranda record. According to Accounting Standards Code 330-10-30-9 under GAAP, a company should focus on the accounting method that best and most clearly reflects “periodic income.” This provides considerable leeway for companies to maximize their after-tax revenues based on inventory costs. GAAP, on the other hand, is only used in the United States. However, we have exclusive right to use it over the license period. If the spare parts (computer) related to warranty, the how its recorded. Do you have any thoughts about what can be considered as “Major” (relatively speaking)? I want to know that if we use spare parts as consumption when issue for machine. – the first group – spare parts have character of stand-by equipment, they are usually bought with item of PPE and they are usually unique for this item of PPE, there is no assumption that they will use Now, I’m not sure I understood the part with “license period” correctly. 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.e. Do we write off the depreciation and start depreciating the new item or is it a straight swap for which we continue depreciating as if the item was not replaced? Because in this situation we follow national accounting rules: I would treat them as a set (please see the above example with screwdrivers and hammers). But, our auditors are telling that rule does apply 2 RM also. Accounting journal for the depreciation expense. Spares unavailability on market puts reliability of critical equipment under high risk. Hello, Thank you!
And, obviously, something has to be written in the Accounting Policies?
Unless specifically exempted as “not ordinarily interchangeable for goods and services produced,” all inventory must be accounted for using the FIFO or weighted-average cost method. Simply speaking: what is our item of PPE in the case of large amount of small items? But, the same kind of an asset. For software that will be used externally, costs are capitalized once technological feasibility has been demonstrated. It does not matter that you sell minority of replacement cars before 1 year. This items Company can use more than for one or two year. Hi Sylvia, I was wondering what happens when an item leaves the pool and is replaced by the repaired item. 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?. S. Hi Silvia. i have still some doubt and an opinion to share. I also want to purchase your IFRS book and other materials you have been releasing to me.I also love the training simplicity of each topic rolled out. The IFRS Foundation's logo and the IFRS for SMEs® logo, the IASB® logo, the ‘Hexagon Device’, eIFRS®, IAS®, IASB®, IFRIC®, IFRS®, IFRS for SMEs®, IFRS Foundation®, International Accounting Standards®, International Financial Reporting Standards®, NIIF® and SIC® are registered trade marks of the IFRS Foundation, further details of which are available from the IFRS Foundation on request.
Consider the scenario of a Whole sale Dealer.