Fixed Assets' Componentization
IFRS
(IAS 16) requires companies to separate fixed assets into their component
parts, if the cost of an individual part is significant in relation to the cost
of the total asset. Once fixed assets get disaggregated, companies can
more easily account for the reality that different components have unique
physical and economic lives. Assets with shorter lives can then be
depreciated at rates faster than those applied to assets possessing longer lives.
India has
also introduced the new Companies Act 2013, replacing the old Companies Act
1956. The new Companies Act has introduced a new concept for measurement of
depreciation and useful life of assets that is similar to the concept of
component accounting under IFRS (IAS 16). This may have a significant impact on
the financial statements of asset intensive industries.
Objectives of component accounting:
- To improve and make depreciation accounting more reflective of reality and to facilitate accounting for the replacement of components
- To ensure that the financial position is fairly reflected in the balance sheet and that the income statement appropriately reflects the consumption of economic benefits inherent in those assets
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