An asset that consistes of different components and each component is significant in relation to the cost of the asset then such assets are called complex assets or separate components asset.
This becomes an important point of discussion when each component is needed to be depreciated separately because:
- each component is of significant value in relation to the cost of the asset and has different useful or depreciation method; or
- management intends to depreciate each of the significant part or component separately
The problem of separate component arises as IAS 16 does not prescribe the unit of measure for recognition i.e. what constitutes an item of property, plant and equipment as it is impossible to define each and every situation in which assets are recognized and how each component should be treated.
Therefore, judgement is required to be applied in different circumstances i.e. it is left on the management of the entity to decide how to recognize an asset. It may be appropriate that different parts of a machine of insignificant nature are aggregated rather then to be treated as separate components and thus making depreciation calculations time consuming.
Such a concept was needed for another reason as well because in some circumstances major overhaul costs are also treated a separate part of the cost of the asset even if no physical part is replaced. For example major inspection costs will be added to the cost of the asset and will be treated separately if they are significant in relation to the cost of the asset and may required to be depreciated separately as most of the time major inspections are carried out more than one time during the life of the asset and thus has different useful life as compared to the useful life of the asset.