Guide on Accounting for Spare Parts under IFRS in UAE

Accounting for spare parts and servicing equipment is one of the more genuinely ambiguous areas of IFRS. No standard addresses spare parts directly, which means every business holding them has to work through a judgment call: are these items inventory under IAS 2, or property, plant and equipment under IAS 16? Getting this wrong has real consequences, incorrect measurement, wrong depreciation treatment, and misclassification between current and non-current assets on the balance sheet.

This guide covers how to classify spare parts correctly, when depreciation should start, how the classification affects UAE Corporate Tax, and the disclosure this kind of judgment call requires.

Spare Parts: Inventory or PPE?

Under IAS 16, paragraph 8, spare parts qualify as property, plant and equipment if they meet the standard’s general recognition criteria, and this classification carries real weight, since choosing incorrectly between IAS 2 and IAS 16 can lead to two distinct problems: incorrect measurement (whether the item should be depreciated at all) and incorrect presentation (whether it belongs in current or non-current assets). Most spare parts default to being treated as inventory. Getting the classification right, however, is harder than the rule sounds, and depends on several practical factors.

Also check: External Audit Services

Factors That Determine the Right Classification

Nature of Use

Are the spare parts used in production or held as merchandise for resale? If so, that points toward inventory treatment. If they’re not used in production and not held for resale, they’re more likely to qualify as PPE.

Time Aspect

Are the parts intended to support another asset over an extended period, or are they consumed relatively quickly? Items expected to be used over more than one period point toward PPE; items expected to be used up in the near term point toward inventory. A high-cost backup engine kept on hand to support critical machinery is a straightforward example of major spare parts properly classified as PPE. Many other cases are far less clear-cut, and the criteria below need to be weighed alongside this one.

Materiality

A business might hold an asset in production for more than one period while its individual acquisition cost remains minimal, small tools, molds, pallets, and containers used repeatedly are common examples. Individually, tracking and depreciating each one isn’t practical. Internal auditors need to assess both the materiality of similar spare parts as a group and the relevance of the group as a whole to the financial statements, not just each item in isolation.

Unit of Account

IAS 16 allows an entity to decide how to apply recognition and measurement criteria to an asset or a group of assets. Consider a business holding 5,000 identical screwdrivers at AED 5 each, a total value of AED 25,000. Tracking and depreciating 5,000 individual AED 5 items isn’t economically practical. Applying paragraph 9 of IAS 16, the business can treat the entire group as a single unit of account for PPE purposes, provided the combined value is material, which is both acceptable and far more workable in practice.

Minimum Stock Levels

Some businesses maintain a minimum inventory level required to keep an asset operational, a base level of oil or lubricant that must always be on hand for a piece of machinery, for example. Where this minimum stock is essential to keeping the asset operational and remains in place until the asset itself is retired, rather than being consumed and replenished as part of normal operations, it functions as part of the asset itself and should be treated as PPE, not inventory.

Must check: Inventory Audit Services

When Should Depreciation of Spare Parts Start?

IFRS doesn’t directly address depreciation timing for spare parts classified as PPE, and this is where judgment matters most. IAS 16 states depreciation should begin when an asset is ready for use, but spare parts are often held in a warehouse, not actively in use, which raises the practical question of when “ready for use” actually applies to them.

The answer depends on the nature and purpose of the spare part. For a critical spare part kept specifically to ensure uninterrupted operation of essential machinery, meaning it could be put into service the moment the original part fails, depreciation should generally begin as soon as the part is acquired and available for that purpose, not only once it’s physically installed. A spare part with no such immediate operational role can reasonably be depreciated on a different basis, closer to when it’s actually brought into use. There’s no single answer that fits every spare part; the depreciation policy needs to reflect the item’s actual function.

How This Classification Affects UAE Corporate Tax

The PPE-versus-inventory question isn’t purely an accounting exercise, it flows directly into a company’s Corporate Tax position. Under UAE Corporate Tax law, taxable income is derived from accounting net profit calculated under IFRS, so spare parts classified as PPE are depreciated over time, spreading the tax deduction across multiple periods, while spare parts classified as inventory are expensed as cost of goods sold when consumed or sold, affecting taxable profit differently and in a different period. A business that misclassifies a significant pool of spare parts doesn’t just risk an accounting misstatement, it risks getting the timing of its tax deductions wrong, which can surface as an issue during a Corporate Tax audit rather than at the time the classification decision was originally made.

Disclosure Requirements for the Classification Judgment

Because no IFRS standard addresses spare parts directly, the judgment applied under IAS 8 in choosing between IAS 2 and IAS 16 treatment should be disclosed in the financial statements: which standard was applied and why, the criteria used (nature of use, time aspect, materiality, unit of account, minimum stock levels), and the depreciation policy adopted for any spare parts treated as PPE. This disclosure matters more here than in many other judgment areas, since a reader of the financial statements has no single standard to check the treatment against, the disclosure itself is what lets them assess whether the judgment was reasonable and consistently applied.

Common Mistakes in Spare Parts Classification

• Defaulting every spare part to inventory without assessing the criteria. Major, long-life spare parts genuinely used to support another asset over time should be tested against the PPE criteria, not classified by habit.
• Trying to track and depreciate every small, low-cost item individually. Where a group of similar low-cost items is material in aggregate, the unit-of-account approach under paragraph 9 is both permitted and far more practical.
• Applying a single depreciation start date to all spare parts regardless of function. A critical standby part and a routine replacement part don’t necessarily share the same appropriate depreciation timing.
• Treating essential minimum stock levels as ordinary inventory. Where a minimum stock genuinely functions as part of keeping an asset operational, it belongs with PPE.
• Omitting the classification judgment from financial statement disclosures. Since no standard directly governs this area, the disclosure is what gives the treatment credibility.

Frequently Asked Questions (FAQs)

How Farahat & Co. Can Help

Farahat & Co. supports UAE businesses with spare parts classification under IFRS, depreciation policy development, and audits that account correctly for Corporate Tax implications.

Contact Farahat & Co. today to discuss your spare parts accounting and audit requirements.