Componentizing your fixed assets into IFRS recognizable assets

Dec 06 2012

The International Accounting Standards section 16 (IAS 16) within IFRS outlines the requirements and concepts related to the accounting of fixed assets. Componentization requires each part of a fixed asset with a cost that is significant in relation to the total cost of the item to be depreciated separately.  It’s very similar to a cost segregation study performed for tax purposes, where different bits of a building are separated into different ‘tax lives’ to take advantage of accelerated depreciation.

Componentization requires a company to allocate the amount initially recognized as an asset to be split (i.e: componentized) into parts and then separately depreciate each part. For example most US companies would account for a new building on a composite basis, with one asset entry on the fixed asset register with a typical life of 40 years, however the theory behind componentization is that a major asset such as a building, or some manufacturing equipment, will have significant parts; and these significant parts may or may not have different useful lives.

 

Let’s take this example one step further; the building’s roof & the HVAC system might be considered major components and both would have lives shorter than 40 years.  The values and lives of these assets (or ‘components’) would be identified and depreciated separately under the IFRS rules.  The depreciation expense for the shorter lived components (roofing and HVAC system) would be accelerated and the useful life of the building structure would increase to something greater than 40 years and as a result the depreciation expense of this larger component would be decelerated.

 

It may be helpful to have a parent-child feature in your fixed asset management software because it allows the child assets to be linked to the parent asset, yet depreciates the child assets individually according to their respective useful lives and booked costs. This feature also allows for additions and retirements of child assets.