Fixed Asset Componentization
Fixed Asset Componentization is the practice of separating the asset into component parts.
Fixed assets are the building blocks of most of the organizations. Utmost care is required to manage these assets to achieve maximum productivity. There are different techniques to achieve this, and one such technique is asset componentization. When the cost of specific component of a large asset is significant as compared to the whole asset, then the asset componentization is lifesaver. This allows companies to account each component as an individual asset and take advantage of difference in physical and economic life of individual components of asset. Using different rates to depreciate the assets based on their physical life. Assets with shorter life are depreciated with higher rates as compared to assets with longer lives.
Aircraft is a classic example of such an asset. The airframe (i.e. the body of the aircraft), the engines and the interiors have different individual useful lives. The concern then is: what is the useful life of the aircraft? If the life of the airframe (being the longest of the individual lives of the three major types of components) is taken as the life of the aircraft, then how should the expenditure on replacement of interiors and engines during the useful life of the aircraft be dealt with? In certain cases, the components (usually small and low value) may require replacement very frequently, while in some other cases, the components may require replacement only once or twice during the estimated useful life of the asset (usually of high value)
In the new Companies Act 2013, it is clearly stated, “Useful life specified in Part C of the Schedule is for whole of the asset. Where cost of a part of the asset is significant to total cost of the asset and useful life of that part is different from the useful life of the remaining asset, useful life of that significant part shall be determined separately” and also stated the maximum residual value of assets should not exceed 5% of the actual cost.
The provisions of component accounting are provided in Para 43 to 47 in Ind AS 16, Property Plant and Equipment which provides as follows:
- Each part of an item with a cost that is significant in relation to the total cost shall be depreciated separately.
- The entity allocates the amount initially recognized in respect of an item to its significant parts and depreciates separately each such part.
- If two or more items are of same useful life and depreciation method may be grouped for determining depreciation.
- For the balance of the parts, the useful life and depreciation can be determined from approximation.
- The entity may choose to depreciate separately the parts of an item that do not have a cost that is significant in relation to the total cost of the item.
Objectives of component accounting:
- To ensure, the depreciation is in line with the actual usage of assets and to maximize the usage of significant components of the asset
- 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
It is good practice to split the assets in to different components to ensure the component with significant value in relation to whole assets is fully utilized. Fixed Asset Componentization can be implemented by any organization irrespective of industry.
Tracet is a Comprehensive Fixed Asset Management Solution helping organizations to effectively track, optimally manage and effortlessly comply with government policies. Tracet manages end-to-end asset lifecycle starting from procurement to disposal of asset and includes asset assignment, asset split, asset componentization, asset revaluation & tracking the movement of assets etc.
Tracet also offers fixed asset auditing services including physical verification, asset mapping and asset tagging with barcodes/RFID tags. It enables organizations to gain great control over their fixed assets.