For any amortizable assets, its cost is allocated on a systematic basis over the asset’s useful life.  Depending on the depreciation (or amortization) method, the amount recognized in each accounting period is determined by the asset’s historical cost, its estimated useful life, its residual value:

  • Historical cost – The price paid for an asset at the time of its acquisition, including any reasonable costs incurred in obtaining the asset and preparing it for use;
  • Estimated useful life – An estimate of the time a limited-life asset can be expected to produce revenue or of the total number of service units the asset is expected to produce; and
  • Residual value – The estimated value to be realized upon the sale or other disposition of a tangible fixed asset at the end of its useful life.

Component deprecation is the individual depreciation of each separate component of an asset that is significant to the total cost of the asset when the components have different periods of benefit.  The depreciation of each component will depend on its cost, the periods it benefits, its residual value and the method by which it is depreciated.

Component Depreciation – US GAAP vs. IFRS
US GAAP IFRS
Depreciation of an asset’s components is permitted, but not common practice. Component depreciation is required when patterns of economic benefits differ from the underlying asset.

Although the rate of cost allocation varies, generally the total amount of depreciation is ultimately the same regardless of the depreciation method used.  The method an entity uses should most accurately reflect the pattern in which the asset’s economic benefits are consumed.

Depreciation with and without Component Depreciation (Example)
Assuming a truck costing a total of $50,000 with a service life of five years and its components of tires and transmission with a service life of two and three years costing $4,000 and $6,000, respectively.
Asset Service Life With Without
Truck 4 years $ 40,000 $ 50,000
Tires 2 years 4,000 –
Transmission 3 years 6,000 –
$ 50,000 $ 50,000

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