The different between assets and inventory ?

And similar items:

1. Should we recognize and provide them as property, machinery and equipment ("personal protection equipment") or as stocks?

2. How should we consume the main spare parts that are part of personal protection equipment?

Let's try to analyze them.

Spare parts = personal protection equipment or inventory?

The first major issue of spare parts is to determine whether they are considered "inventories" and are therefore accounted for under IAS 2 or are "property, plant and equipment" and are therefore accounted for under IAS 16 Property, Plant and Equipment.

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You should be very careful in assessing whether you are dealing with IAS 2 or IAS 16, since a wrong choice can have serious implications for your financial statements, for example:

• Incorrect measurement of your spare parts (consumed or not?);

• Incorrect presentation of your spare parts (non current assets or current assets?)

For all the spare parts it is good to remember that in most cases, they are stocks.

But it is not that simple.

Standard 16, paragraph 8 of the International Accounting Standard (IAS) specifically states

• When spare parts and major backup equipment are expected to be used during more than one period, they are calculated as personal protection equipment;

• If spare parts and maintenance equipment can only be used with respect to a series of personal protective equipment, then they will be counted as personal protection equipment.

As a result, consider the following criteria when evaluating your spare parts:

1. Purpose of spare parts

Do spare parts be consumed in a production process (whether to produce goods or provide services) or to retain them as a resale market?

If yes, this may indicate that they are stocks.

If not, then spare parts can be considered PPE.

2. Time side

Do you need spare parts to operate some other assets over a period of time? Are you planning to use these items over a period of time?

If yes, they may have become PPE.

If not, they are stocks.

Some spare parts are easy to classify, for example the backup engine with a large acquisition cost is a key reserve part, and therefore was considered a personal protective equipment.

Some other items may not be that easy. Therefore, regardless of the two criteria mentioned above, there are other issues to consider:

Relativity

Sometimes, you can get an asset that is used in the production process for more than one period, but the purchase cost is very small.

Sometimes, you can get a huge amount of spare parts or similar maintenance equipment.

For example, small tools, templates, pallets or containers used for more than a period.

In this case, these assets are personal protection equipment rather than stocks, but it is not very practical to track these assets and their accounts, right?

It would be very difficult to classify each screwdriver as screws, without mentioning consumption!

In this case, you need to assess the material importance, or the importance of spare parts and maintenance equipment similar to your financial statements.

Not only the physical level of the individual and assets alike, but also the physical of the entire group of these assets.

So, if you have 2 hammers and one screws screwdriver, although it is actually a personal protective equipment, it is reasonable to count these items as in stock and carry them out in profit or loss.

However, if you have 10,000 hammers and 5 thousand screwdrivers, if their cost is material with respect to your financial statements, you should not simply calculate them.

This leads me to the second account - the unit of account.

The unit of account

IAS 16 states that an entity must determine how to apply the criteria for verification and measurement - whether for a single asset or a group of assets on a gross basis (IAS 16.9).

Quite simply: What is our product of personal protection equipment in the case of a large quantity of small materials?

Is it a single screwdriver at a cost of $ 5?

Or is it a set of 5000 screwdrivers priced at $ 25,000 (5 x 5000)?

Both options are possible, but the first option does not benefit much economically, since it will be difficult to keep records of 5,000 small assets.

As a result, when you have many service equipment or spare parts at a small individual cost, it is reasonable to calculate them for personal protective equipment in accordance with IAS 16 if their total value is material.

In such a case, it is practical and quite acceptable to apply paragraph 9 of IAS 16 and to measure these small assets as one item of personal protection equipment - a set of assets.

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Lower levels

In some companies, minimum levels of inventory must be maintained in order to operate assets.

In this case, "stocks" can not be separated from the item of personal protection equipment, these "stocks"