ACCA FR Syllabus B. Accounting For Transactions In Financial Statements - Componentisation - Notes ^{6 / 7}

If a significant component is expected to wear out quicker than the overall asset, it is depreciated over a shorter period.

Then any restoring or replacing is capitalised.

This approach means different depreciation periods for different components.

Examples are land, roof, walls, boilers and lifts.

So the depreciation reflects the effect of a future restoration or replacement.

A challenging process

due to..

• Difficulties valuing components

  because it is unusual for the various component parts to be valued, so..

  1. Involve company personnel in the analysis

  2. Applying component accounting to all assets

  3. How far the asset should be broken down into components

  4. Any measure used to determine components is subjective

  5. Asset registers may need to be rewritten

  6. Breaking down assets needs ‘materiality', setting a de minimis limit

• When a component is replaced or restored

  The old component is de-recognised to avoid double-counting and the new component recognised.

• Where it is not possible to determine the carrying amount of the replaced part of an item of PPE

  Best estimates are required.

  A possibility is:

  • Use the replacement cost of the component, adjusted for any subsequent depreciation and impairment

• A revaluation

  Apportion over the significant components.

• When a component is replaced

  1. The carrying value of the component replaced should be charged to the income statement

  2. The cost of the new component recognised in the statement of financial position

Transition to IFRS

Use the ‘fair value as deemed cost’ for the asset:

• The fair value is then allocated to the different significant parts of the asset

Componentisation adds to subjectivity.

The additional depreciation charge can be significant.

Accountants and other professionals must use their professional judgment when establishing significance levels, assessing the useful lives of components and apportioning asset values over recognised components.

Discussions with external auditors will be key one during this process.