Under the IFRS framework, the capitalization of slow moving spares is a common question in practice. A user asked: "Should slow moving spares that have been stored for several years (e.g., two years) be capitalized?" This article provides a professional analysis based on IFRS principles.

Core Judgment: Time Period Is Not the Sole Criterion

IFRS does not stipulate that spare parts must be capitalized or expensed within a certain period. The key to capitalization lies in whether the spare parts meet the definition ofproperty, plant, and equipmentrather than the length of storage time. IAS 16 Property, Plant and Equipment states that property, plant, and equipment are assets held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and are expected to be used during more than one accounting period.

For spare parts, paragraph 8 of IAS 16 clarifies: if spare parts and servicing equipment relate to an item of property, plant, and equipment and are expected to be used during more than one period, they are usually accounted for as property, plant, and equipment. Conversely, if spare parts are for routine maintenance or have a short useful life, they should be treated as inventory under IAS 2.

Does Storage for Two Years Affect Capitalization?

The storage period (e.g., two years) itself does not directly determine capitalization. However, long-term unused spare parts may trigger indicators of impairment. According to IAS 36 Impairment of Assets, an entity should assess at each reporting date whether there are any indicators of impairment. If the recoverable amount of spare parts falls below their carrying amount due to technological obsolescence, decreased demand, or physical damage, an impairment loss should be recognized.

Therefore, even if spare parts have been stored for two years, as long as they still meet the definition of property, plant, and equipment and their recoverable amount is not lower than the carrying amount, they can remain capitalized. Conversely, if the spare parts no longer have use value or the expected inflow of future economic benefits decreases, the carrying amount should be adjusted or they should be expensed.

Practical Judgment Framework

  • Use-relatedness: Whether the spare parts are used for a specific item of property, plant, and equipment, and whether that asset is expected to be used for more than one year? If so, capitalization is favored.
  • Useful life: Whether the spare parts themselves have a useful life exceeding one accounting period? For example, spare engines for large machinery are typically capitalized.
  • Materiality: If the spare parts are material and meet the above conditions, they should be capitalized; if the amount is small, they can be simplified and expensed.
  • Impairment assessment: Even if capitalized, regular assessments for impairment are necessary, especially for spare parts stored for a long time.

Illustrative Example

Suppose a manufacturing enterprise purchases a specialized piece of equipment and simultaneously buys a spare core component for that equipment, which is of high value and expected to be potentially used during the equipment's life. This spare part should be capitalized as property, plant, and equipment and depreciated over the remaining useful life of the equipment. Even if the spare part has been stored for two years without use, as long as its technology remains applicable and there is no impairment, the capitalization treatment remains unchanged.

Conversely, if an enterprise purchases a batch of general maintenance parts (such as screws and washers), even if stored for two years, they should be accounted for as inventory and recognized in profit or loss when consumed.

Conclusion and Recommendations

The capitalization of slow moving spares should be based on the principles of IAS 16 and IAS 2, rather than solely on the storage period. It is recommended that enterprises establish a spare parts classification policy, regularly review the usage status and recoverable amounts of spare parts, and retain relevant assessment records.

For spare parts stored for more than two years, if they still meet the definition of property, plant, and equipment and show no indicators of impairment, they can continue to be capitalized; otherwise, they should be expensed or impaired. Specific treatment should be based on the enterprise's actual circumstances and professional judgment.