Accounting of Rotables Under Ind AS – Inventory or PPE?

1. Question

Phoenix Aviation Services Limited (hereinafter referred to as “the company”), a company managing a diverse fleet of specialised aircraft, maintains a significant stock of critical spare components known as ‘rotables.’ These components, such as turbine blades and avionic control units, are essential for aircraft operation and are interchangeable among similar aircraft models within the company’s fleet. Each rotable has a defined operational lifespan, measured in flight hours or operational cycles, after which it must be replaced. Given their recurring replacement, their role in ensuring airworthiness, and the substantial investment in these components, the company’s finance department is deliberating their appropriate accounting classification under Indian Accounting Standards.

The central issue is whether the company should classify these rotables as inventory, subject to Ind AS 2, Inventories, or as items of Property, Plant, and Equipment (PPE) in accordance with Ind AS 16, Property, Plant and Equipment. What is the correct accounting classification for the company’s rotables under the applicable Ind AS?

2. Relevant Provisions

Ind AS 16, Property, Plant and Equipment

Para 6 – “Property, plant and equipment are tangible items that:

(a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and

(b) are expected to be used during more than one period.”

Para 7 – “The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:

(a) it is probable that future economic benefits associated with the item will flow to the entity; and

(b) the cost of the item can be measured reliably.”

Para 8 – “Items such as spare parts, stand-by equipment and servicing equipment are recognised in accordance with this Ind AS when they meet the definition of property, plant and equipment. Otherwise, such items are classified as inventory.”

Para 9 – “This Standard does not prescribe the unit of measure for recognition, i.e. what constitutes an item of property, plant and equipment. Thus, judgment is required in applying the recognition criteria to an entity’s specific circumstances. It may be appropriate to aggregate individually insignificant items, such as moulds, tools and dies, and to apply the criteria to the aggregate value.”

Ind AS 2, Inventories

Para 6 – “Inventories are assets:

(a) held for sale in the ordinary course of business;

(b) in the process of production for such sale; or

(c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.”

3. Analysis

The primary issue is to determine whether the company’s rotables should be classified as Property, Plant and Equipment (PPE) under Ind AS 16 or as Inventory under Ind AS 2. To determine if the rotables qualify as PPE, we examine the following aspects of the definition:

(a) Tangible items – Rotables (turbine blades, avionic control units) are tangible items.

(b) Held for use – They are held for use in the supply of services (operation of aircraft). They are not held for sale in the ordinary course of business, nor are they raw materials for producing an item for sale.

(c) Expected to be used during more than one period – The requirement for an asset to be “expected to be used during more than one period,” the ITFG clarifies in one of its bulletins that the term ‘more than one period’ is not defined in Ind AS. Ordinarily, the accounting policies are determined for preparing and presenting financial statements on an annual basis. Accordingly, the term ‘period’ should ordinarily be construed to be the annual period, i.e., usually 12 months. For a company’s rotables, although their lifespan is measured by usage (like flight hours), they are generally expected to be in service for more than twelve months. Therefore, they are expected to be used during more than one period.

Based on these points, the rotables meet the core definition of PPE under Ind AS 16. Further, Para 8 of Ind AS 16 explicitly states that spare parts, stand-by equipment, and servicing equipment are recognised in accordance with Ind AS 16 when they meet the definition of property, plant and equipment. Otherwise, such items are classified as inventory. Since the rotables meet the definition of PPE they cannot be classified as inventory.

Where individual rotables are insignificant on a standalone basis, Para 9 of Ind AS 16 permits aggregation of such items into a pool. If the aggregate value of this pool is material and the pool, as a whole, satisfies the recognition criteria for PPE, namely, the probable inflow of future economic benefits and reliable measurement of cost then the entire pool can be capitalised and recognised as a single item or class of PPE.

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