As Per sub section (1) of Section 128 of Companies Act, 2013, Every Company shall keep at its registered office, the books of accounts and book or papers including Financial Statements with respect to every financial year including that of its branch office or offices and explain the transactions effected both at the registered office and branches. The Books of Accounts shall be kept on accrual basis and double entry system of accounting.

 Further, section 129(1) provides as to the requirement of the Financial Statement:

(i) It shall provide the true and fair view of the state of the affairs of the company.

(ii) It shall comply with the requirement of accounting standards.

(iii) It shall be in the form or forms as defined in the schedule III.

In joint reading of both of the section provides that the Financial Statement shall be prepared keeping in view of the requirement of Accounting Standard.

Hence, accounting standard should be followed with respect to every transaction.

One of the transactions, which require consideration, is the Capitalization of Stores, Spares and Servicing Equipment.

Often, many of the accountant have view that the stores, spares and servicing equipment should not be dealt as per IND AS 16 as it is not going to increase the life of the equipment or not going to increase the economic benefit, flowing, which is going to flow from that equipment to the entity.

However, As Per Para 8 of the IND AS 16, the items such as spares or servicing equipment shall be treated as per the IND AS 16, if the they meet the conditions of Property, Plant and Equipment:

Further, As per Para 6 of the IND AS 16, Property, Plant and Equipment are tangible items which satisfy both of the following conditions:

(i) Items that are held for use in the production or for services or for rental to others.

(ii) Expected period of life is more than one year.

If, all the above said conditions are satisfied, then spares or servicing equipment shall be treated as per IND AS 16

Recognition Principles for Stores, Spares and Servicing Equipment:

(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.

Hence, In view of the above stated principles, if the stores,spares or servicing equipment satisfies the condition as stated in the para 6 of the IND AS 16, then it should be capitalised and organization should correctly make the treatment of stores and spares so that the violation of provision of section 129(1) can be avoided.

(Author- CA Sanjay Kumar Chaudhary, Mail Id:

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December 2020