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 parts
Complex asset: cost CU 1,000,000 – Useful life 30 Years, residual value 5% PPE – Components and parts
Main asset: cost CU 1,000,000 (including another part of CU 180,000) – Useful life 30 years, residual value 5% PPE – Components and parts
Major part 1: cost CU 120,000 – Useful life 10 Years, residual value 5%
Major part 2: cost CU 180,000 – Useful life 30 Years, residual value 5%
Component cost under CU 100,000 – directly expense.
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.
What is the difference in accounting for spare parts and stand-by equipment?
Type of spares parts
1. Major spares and stand by equipments which are expected to used for period over more than one accounting periods
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.