IFRS Dealing with Component Depreciation

At a meeting of the Accounting Standards Board Advisory Committee on IFRS in April the issue of Component Depreciation ( a devil in the details in the eyes of many) was discussed. The identification of costs to different components of an asset has been identified by many as a thorny issue in the application of IFRS.

The Committee suggested the following approach to identifying components.

· Only significant components need to be separately identified. If an entity concludes that it would capitalize the expenditure if it were to replace a part of an asset, then that is a good indicator of a separate component.
· Insignificant components can be grouped together.
· An entity about to replace a major component of an asset can break it out at that point in time.
· Existing large accruals for future repairs to an asset shouldn’t be on the balance sheet and indicate that the asset should be broken into components.
· An entity should consider whether the effect of depreciating a component separately would be significant to financial statement users.

Note that, in many cases, a review of components of depreciation may not result in significant changes for many companies. The following quote from the minutes of the meeting is of note.

Trish O’Malley, IFRIC Coordinator, noted that when the IASB modified IAS 16, Property, Plant and Equipment, requiring the allocation of components when they are significant to the asset, it did not anticipate a large change in practice. The IASB’s motivation for the change was to eliminate the practice of accruing the costs of major future overhauls or inspections before they had been incurred. In such circumstances, no obligation for the expenditures exists as at the date of accrual, and the offsetting debit under this accounting does not represent an existing asset. The IASB understood that corporations were trying to reflect the effect of a pending overhaul and, therefore, required the allocation of the cost of an asset into its components for the purposes of depreciation.

Please go to the minutes of the meeting and read the complete discussion. Note that the guidance is not authoritative (i.e. it is not like the EIC) but is useful given the background of the Committee's members. The Accounting Standards Board site sets out the following information concerning the mandate of the IFRS Advisory Committee (IAC).

The Accounting Standards Board (AcSB) established the IFRS Advisory Committee (IAC) in 2006 to provide support to the AcSB on technical issues arising during the period of incorporation of IFRSs into Canadian GAAP and beyond.

The purpose of the IAC is to assist the AcSB in implementing its Strategic Plan for accounting standards for Canadian public companies — that is, to replace the accounting standards in the CICA Handbook – Accounting with International Financial Reporting Standards (IFRSs) — and to maintain those standards beyond the changeover date to IFRSs.

Membership of the IAC comprises a Chair and 10-15 other members with a range of backgrounds and experience, including preparers and auditors of public company financial reporting. Members are expected to have a working knowledge of IFRSs.

Meetings are open to the public. You will have to register as an observer to attend. The committe meets about ever 2 months and the next meeting is in November.