Question

A company imports heavy machinery from abroad and receives some free parts with the machine.
What would be the treatment of free parts received?

Treatment of spare parts as PPE or inventory

The standard IAS 16, paragraph 8 specifically says that

When major spare parts and stand-by equipment are expected to be used during more than 1
period, then they are accounted for as PPE; and

If spare parts and servicing equipment can be used only in connection with an item of PPE, then
they are accounted for as PPE.

The standard IAS 16 says that it’s up to an entity to determine how it will apply the recognition and
measurement criteria – whether to an individual asset, or to a group of assets on an aggregate
basis (IAS 16.9).

In such a case, it’s practical and totally acceptable to apply paragraph 9 of IAS 16 and measure
these small assets as 1 item of PPE – a set of assets.

IAS 16 in paragraph 55 only says that the depreciation should begin when an asset is available for
use.

However, if you keep the spare part to be used as a replacement part at some future time and you
are sure that this part will be installed and put into use at a later date, then the depreciation should
start when the part is installed. The reason is that such a critical spare part is available for use
immediately when an original part in the machine stops working.

Fair value of spare parts

IFRS 13 applies when another IFRS requires or permits fair value measurements or disclosures
about fair value measurements (and measurements, such as fair value less costs to sell, based on
fair value or disclosures about those measurements), except for: [IFRS 13:5-7]

 share-based payment transactions within the scope of IFRS 2 Share-based Payment

 leasing transactions within the scope of IAS 17 Leases
 Measurements that have some similarities to fair value but that are not fair value, such as
net realisable value in IAS 2 Inventories or value in use in IAS 36 Impairment of Assets.
Accounting treatment of free parts received

We could use IFRS 13 to determine value of the free parts received and then use any of the
following method:

Heavy machinery invoice value 100, fair value of free spare parts 20 then as per IAS 18 and IFRS
15

Heavy machinery (PPE) Dr 83

Free parts (PPE) Dr 17
Accounts payable Cr 100

Otherwise:

Heavy machinery Dr 100

Free parts Dr 20
Account payable Cr 100
Other income Cr 20