Fuel and spare parts inventory measurement

Fuel stock and consumable spare parts are inventory measured at the lower of cost and net realizable value, while major spare parts expected to be used over more than one period as standby equipment may instead qualify as property, plant and equipment. Misclassification distorts both the balance sheet split between current and non-current assets and the expense recognition pattern (immediate consumption expense vs. depreciation). Because fuel and parts are held for use in providing transport services rather than for sale, a fall in their market price does not by itself require a write-down while those services remain profitable; writing down mechanically understates inventory and profit, while ignoring loss-making services overstates them.

Is each category of held stock properly classified, consumable fuel, tyres, and routine parts as inventory under IAS 2, versus major standby spare parts or servicing equipment expected to be used over more than one period as property, plant and equipment under IAS 16? Are the transport services in which the fuel and parts will be consumed expected to be priced at or above their full cost? Only if they are not (e.g. contract rates fixed below cost, or a collapse in freight rates) is a write-down needed, with current replacement cost often the best available measure of net realizable value. Is a consistent costing formula (e.g., weighted average) applied given the fungible nature of bulk fuel?

1) Classify each category of held stock: consumable fuel, tyres, filters and routine parts as inventory (IAS 2); major standby spare parts and servicing equipment expected to be used over more than one period as PP&E (IAS 16). 2) Apply a consistent, documented threshold (e.g. cost and expected useful life) to distinguish 'major' standby parts from routine consumables. 3) For inventory items, apply a consistent cost formula (weighted average or FIFO) across depots/locations. 4) At each reporting date, assess whether the transport services in which the fuel and parts will be used are expected to be priced at or above cost; if they are, do not write the fuel and parts down below cost even if their market price has fallen. 5) If those services are expected to be loss-making, write the related fuel and parts down to net realizable value, for which current replacement cost is often the best available measure. 6) Reverse previous write-downs (up to the original cost) when the circumstances that caused them no longer exist.

Measure inventory at the lower of cost (using a consistent formula, typically weighted average given fungible bulk fuel) and net realizable value. Fuel and parts held for use in providing services are not written down below cost while the services in which they will be consumed are expected to be priced at or above cost; when those services are expected to be loss-making, write the materials down, using current replacement cost as the best available measure of their net realizable value. Fuel held for resale (e.g. at owned fuel stations) is assessed against its estimated selling price less costs to sell. Measure standby spare parts classified as PP&E at cost less accumulated depreciation (depreciated over their expected useful life or the life of the related main asset if shorter), not lower-of-cost-or-NRV.

Disclose: (1) the inventory costing policy (cost formula used); (2) the classification threshold distinguishing inventory spare parts from PP&E standby parts; (3) the amount of inventories recognized as an expense (fuel and maintenance consumption) during the period; (4) any write-downs to net realizable value and subsequent reversals, with the circumstances; (5) the carrying amount of inventories pledged as security, if any.

• Capitalizing all spare parts as PP&
• E regardless of significance and expected usage pattern, overstating non-current assets
• writing fuel inventory down mechanically to replacement cost whenever market prices fall, even though the transport services that use it remain profitable
• conversely, ignoring a needed write-down when the related services are expected to be loss-making
• using inconsistent costing formulas between depots, distorting comparability and cost of sales
• failing to reverse a prior write-down when the circumstances that caused it no longer exist, permanently understating inventory.