Component approach

Learning objectives

• Identify the significant parts of an asset.L1, L2
• Calculate depreciation by component.L2, L3
• Justify a breakdown (or grouping) of components.L3, L4
• Justify grouping components with the same useful life and method, and the treatment of the remainder.L3, L4

Normative references

• IAS 16 §43Each part with a cost that is significant in relation to the total cost of the item is depreciated separately.
• IAS 16 §44The amount initially recognised is allocated to the significant parts (e.g. airframe and engines of an aircraft).
• IAS 16 §45Significant parts with the same useful life and depreciation method may be grouped in determining the depreciation charge.
• IAS 16 §46If some parts are depreciated separately, the remainder is also depreciated separately, if necessary using approximation techniques that faithfully represent the consumption pattern or the useful life.
• IAS 16 §47The entity may choose to depreciate separately parts whose cost is not significant in relation to the total cost.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

2 questions

• A shipping company acquires a ferry. The cost of the hull is {hull_cost}, with a useful life of {hull_life}; the cost of the engines, significant in relation to the total cost, is {engine_cost}, with a useful life of {engine_life}. Residual values are nil; straight-line method. What is the total annual depreciation charge?L2
• An entity acquires an office building for 6,000,000 (excluding land). The technical expert provides the following breakdown: structure 4,200,000 (50 years); roof 600,000 (25 years); heating, ventilation and air-conditioning 700,000 (15 years); two lifts at 150,000 each (20 years, same depreciation method); various small fittings 200,000 with varied lives. Write a judgement memo on the breakdown to use for depreciation.L4