IAS 16 – Property, Plant and Equipment

4 Separate component assets

Assets may consist of more than one part. Usually different parts of assets are either insignificant or have the same amount of useful life therefore whole asset is subjected to uniform depreciation charge each period.

However, each part of the asset can be depreciated separately under any of the following conditions:

1. If part of an asset has a significant cost in relation to total cost of the asset and has a useful life different from rest of the parts
2. If entity intends to depreciate part of the asset separately

 5 Subsequent Expenditures

Subsequent expenditures are usually such costs that were incurred AFTER the asset is brought into useable condition. Previously, we used to have separate criteria for subsequent expenditures but now the recognition criteria have been unified. And the same recognition principle is applied to all the costs at the time they are incurred (as mentioned under heading 2.1). Costs include the costs incurred initially at the time of acquisition and the costs incurred subsequent to recognition of an asset to add to, replace part of, or service it.

Standard has divided subsequent expenditures in three types:

• Costs of day-to-day servicing
• Costs incurred to replace physical part
• Major inspection cost regardless of whether parts are replaced

Under the recognition principle, entity cannot include day-to-day servicing costs in the carrying amount of the asset on their incurrence and will be treated as an expense in the period they are incurred. Such costs include the costs incurred on:

1. Labour which is responsible for repair and maintenance of the asset
2. Consumables which are used in the operation of the asset and its maintenance
3. Small parts of the asset that need replacement after regular intervals are usually recognized as inventory and recognized in profit and loss as consumed.

Sometimes parts of asset require replacement on recurring or non-recurring basis. If this is the case, then under recognition criteria mentioned, entity will recognize the cost of the newly installed part in place of an old one. And the carrying amount of the old part which has been replaced will be derecognized i.e. deducted from the carrying amount of the asset.

If the cost of the replaced part was recognized in the cost of the asset then the carrying amount of replaced part will be derecognized regardless of whether the replaced part was depreciated separately. If it is not practicable for an entity to determine the carrying amount of such part then replacement cost can be used as an indication of what the cost was when such cost was acquired or constructed.

However, such maintenance activities are carried out and costs are incurred even when no physical part is replaced. Even such costs that do not involve replacement of parts will be treated as replacement which in this case will be replacement of previous inspection costs.

Any remaining carrying amount of the previous inspection cost will be derecognized.

In case if the cost of previous inspection was not measured or identified then, if necessary, a future inspection cost of similar nature will be used as a guide to measure the cost of existing inspection “component”. Such inspection costs are later amortized over the period for which they are expected to stand useful and they can have different amortization rate than the depreciation rate of the original asset, usually for lesser period.