1 best way Q Inventory or Equipment?

Inventory or Equipment – This distinction is important because inventory is current and equipment is non-current property plant and equipment. Inventory is cash flow from operating activities, equipment is cash flow used in investing activities. Inventory is cost of sales and equipment is depreciation. Inventory or Equipment

Equipment is recognised component-wise. This means each significant part is treated just like a non-current asset. When that part is replaced, it is derecognised (or scrapped) and the new part is purchased and capitalised. Inventory or Equipment

Therefore, the stocks of such significant parts are not classified as inventories. They are just like capital ‘work in progress’. The stock of significant parts awaiting utilisation may be classified as for example equipment in stock as part of non-current property plant and equipment, just explain it!

Spare parts, stand-by equipment and servicing equipment

IAS 16 8 explains that items such as spare parts, stand-by equipment and servicing equipment are recognised as property plant and equipment when they meet the definition of property plant and equipment. Otherwise, such items are classified as inventory. Specifically, an item of property plant and equipment must be expected to be used for more than one period (i.e. one year, though it is not stated explicitly).

Minimum level of inventory

There are cases where a minimum level of inventory must be maintained due to technical reasons. These instances can be split into two main categories: Inventory or Equipment

  1. Such inventory cannot be sold or otherwise consumed, it stays within the property plant and equipment until the end of the useful life and after that its value is significantly lower due to pollution etc. Inventory or Equipment
  2. Such inventory is in circulation and is exchanged with new inventory. Inventory or Equipment

Inventory described in 1 can be treated as a part of property plant and equipment as it usually does not meet the definition of inventory. Inventory described in 2 should not be treated as a part of property plant and equipment because it meets the criteria set out in IAS 2.

Something else -   Property plant and equipment Example

Repairs and maintenance

Normally spare parts and servicing equipment are accounted for as an item of inventory and expensed when used. Day to day maintenance expenses are expensed as repairs and maintenance. ThisInventory or Equipment type of costs include labour, consumables and small parts. Inventory or Equipment

In case spares parts and servicing equipment can be used only in connection with a particular item of property plant and equipment (i.e. non-interchangeable), they are accounted for as property, plant and equipment but should not be depreciated over a period which extends beyond the remaining useful life of the main asset to which the part relates.

Inspection costs

Certain assets require regular inspection as preventive measures whether any parts to be replaced or not. An example is aircraft inspection or dry–docking of a ship. IAS 16 14 sets out that when each major inspection is performed, its cost is recognised in the carrying amount of the item of property, plant and equipment if the recognition criteria are satisfied. Any remaining carrying amount of the previous inspection (distinct from the physical asset) is expensed. Inventory or Equipment

In other words, such (specific) inspection cost shall be accounted for as a separate component and depreciated over its useful life. The useful life of inspection cost is the time between two inspections.

  • Non-current assets are property your business owns and uses to produce income, like machinery, for example. In your accounting, non-current assets are reported in the long-term section of your balance sheet, typically under headings like ‘property, plant and equipment’. You record non-current assets at their net book value, that is, the original cost, minus accumulated depreciation and impairment charges.
  • Inventory is your product and goods used to create it. There are generally four types: raw materials for manufacturing, work in process, finished goods and merchandise purchased from suppliers. You record inventory as a current asset on your balance sheet, at the amount paid to purchase it.
Something else -   Financing activities

Inventory or Equipment

See also: Inventory or Equipment

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Something else -   Inventories the highlights

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