PPE Components and parts

PPE Components and parts is about what to include in cost of letting a constructor build a certain technological type of asset/machinery. A complex asset is comprising of many major and small parts. Its cost excluding directly attributable costs is CU 1,000,000. One of its part costs CU 120,000 and another CU 180,000. All other parts cost less than CU 100,000.

Estimated useful life of the main asset and two parts are as follows: – Main Asset 30 years; Part1 10 years; Part 2 30 years. PPE – Components and parts

In this case, the company shall classify these parts in the following manner: PPE Components and partsPPE Components and parts

  • Complex asset: cost CU 1,000,000 – Useful life 30 Years, residual value 5%

    • Main asset: cost CU 1,000,000 (including another part of CU 180,000) – Useful life 30 years, residual value 5%

        • Major part 1: cost CU 120,000 – Useful life 10 Years, residual value 5% PPE Components and parts

        • Major part 2: cost CU 180,000 – Useful life 30 Years, residual value 5%

    • Component cost under CU 100,000 – directly expense. PPE Components and parts

As displayed in the decision bullets above, the first level classification is the identification of separate items in one piece of PPE as per IAS 16 44. The main asset and its components are depreciated separately. A major part is not depreciated separately but a sub-account is maintained for replacement purposes. PPE Components and parts

Something differentThese are difficult machines to account for

What is the difference in accounting for spare parts and stand-by equipment? PPE Components and parts

Type of spares parts

Accounting Treatment

1. Major spares and stand by equipments which are expected to used for period over more than one accounting periods PPE Components and parts

To be recognised as property, plant and equipment and depreciated over their useful lives.

2. Spares parts and servicing equipment which can be used only in connection with a particular item of property, plant and equipment (i.e. non-inter changeable items)

To be recognised as property, plant and equipment and depreciated over the periods not exceeding the remaining useful life of the related asset.

3. Other items of spare parts and servicing equipment

Expense on use and as a result unused items form part of inventory.

The general recognition requirements of IAS 16

Items of property, plant, and equipment should be recognised as assets when it is probable that: [IAS 16 7] PPE Components and parts

  • it is probable that the future economic benefits associated with the asset will flow to the entity, and PPE Components and parts
  • the cost of the asset can be measured reliably. PPE Components and parts

This recognition principle is applied to all property, plant, and equipment costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it. PPE Components and parts

IAS 16 does not prescribe the unit of measure for recognition – what constitutes an item of property, plant, and equipment. [IAS 16 9] Note, however, that if the cost model is used each part of an item of property, plant, and equipment with a cost that is significant in relation to the total cost of the item must be depreciated separately. [IAS 16 43]

IAS 16 recognises that parts of some items of property, plant, and equipment may require replacement at regular intervals. The carrying amount of an item of property, plant, and equipment will include the cost of replacing the part of such an item when that cost is incurred if the recognition criteria (future benefits and measurement reliability) are met. The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of IAS 16 67-72. [IAS 16 13] PPE Components and parts

Also, continued operation of an item of property, plant, and equipment (for example, an aircraft) may require regular major inspections for faults regardless of whether parts of the item are replaced. When each major inspection is performed, its cost is recognised in the carrying amount of the item of property, plant, and equipment as a replacement if the recognition criteria are satisfied. If necessary, the estimated cost of a future similar inspection may be used as an indication of what the cost of the existing inspection component was when the item was acquired or constructed. [IAS 16 14]

PPE Components and parts

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