Financial Reporting · Ind AS 16 Property, Plant and Equipment

Ind AS 16 Depreciation and Component Accounting

Updated 5 October 2026 · Fact-checked

Under Ind AS 16, depreciation allocates the depreciable amount (cost less residual value) of an asset systematically over its useful life. Each part of PPE with a cost significant to the total cost is depreciated separately. To solve: split cost into components, fix life, residual value and method for each, compute, and treat any later change as a change in estimate.

Understand Depreciation and Component Accounting

Depreciation is not a way of valuing an asset. It is a way of spreading the cost of an asset over the periods that benefit from using it. Ind AS 16 asks you to charge the depreciable amount to profit or loss over the useful life, unless the charge is included in the carrying amount of another asset (for example, depreciation of a machine used to build another asset).

The depreciable amount is cost (or the revalued amount substituted for cost) less residual value. Residual value is the amount you would get today from disposing of the asset, after deducting disposal costs, if it were already as old and in the condition expected at the end of its useful life. Useful life is the period over which the entity expects to use the asset, or the number of production or similar units it expects to get from it. It is an entity-specific judgement, not the life the tax law allows.

The component approach says that each part of an item of PPE whose cost is significant in relation to the total cost must be depreciated separately. An aircraft body and its engines, or a building and its lift, are typical examples. Parts with the same useful life and the same method may be grouped. Where an entity depreciates some parts separately, it also depreciates the remainder separately, and that remainder is made up of the parts that are not individually significant. When a component is replaced, the cost of the new component is capitalised and the carrying amount of the old one is derecognised. This is also true for major inspections or overhauls, where the cost of the inspection is recognised in the carrying amount and any remaining carrying amount of the previous inspection is derecognised.

Depreciation starts when the asset is available for use, meaning it is in the location and condition needed to operate as management intends. It stops at the earlier of the date it is classified as held for sale (under Ind AS 105) and the date it is derecognised. Depreciation does not cease when the asset is idle, unless it is fully depreciated. Under a usage method, the charge can be nil when there is no production. Land normally has an unlimited life and is not depreciated. Buildings on it are depreciated. If the cost of land includes site dismantling or restoration costs, those are depreciated over the period of benefit.

The method must reflect the pattern in which the future economic benefits are expected to be consumed. Straight-line, diminishing balance and units of production are all allowed. A revenue-based method is not appropriate for PPE. At least at each financial year end, the entity reviews the residual value, the useful life and the method. Any change is a change in accounting estimate under Ind AS 8, applied prospectively from the date of change. It is not a restatement of past depreciation.

Key rules to remember

Depreciable amount: Depreciable amount = Cost (or revalued amount) − Residual value; Residual value is estimated net of expected disposal costs. If residual value equals or exceeds carrying amount, the depreciation charge is zero until it falls below carrying amount.
Straight-line depreciation: Annual depreciation = (Cost − Residual value) ÷ Useful life; Charge is time-apportioned for part years, from the date the asset is available for use.
Diminishing balance: Depreciation for the year = Opening carrying amount × Rate; Residual value is built into the rate, not deducted from cost. Depreciation under this method must not take the carrying amount below the residual value.
Units of production: Depreciation = (Cost − Residual value) × Units produced in the year ÷ Total expected units; Use when benefits are consumed in line with output.
Component approach: Total depreciation = Σ depreciation of each significant component + depreciation of the remainder; Each component has its own cost, life, residual value and method.
Change in estimate: Revised annual depreciation = (Carrying amount at date of change − Revised residual value) ÷ Remaining useful life; Prospective only. No adjustment to prior years' depreciation.
Replacement of a component: Capitalise cost of new part; derecognise carrying amount of old part; Loss on derecognition goes to profit or loss. If the old carrying amount is unknown, the cost of the new part may be used as an indication of the old part's cost when it was acquired or constructed.

How to solve Depreciation and Component Accounting questions

Use this order for any depreciation or component question. It keeps your working clean and shows the examiner the Ind AS 16 logic.

1Read the facts and list each asset or part with its cost, date available for use, expected life, residual value and pattern of use.
2Decide whether the part is significant in relation to total cost. If yes, treat it as a separate component; group parts with the same life and method. Exclude land from depreciation.
3Fix the depreciable amount for each component: cost less residual value. For diminishing balance, use the given rate on the carrying amount.
4Apportion for the period. Start from the date the asset is available for use and stop at the earlier of held-for-sale classification or derecognition.
5Compute depreciation for each component and add them up. State the total charge and the closing carrying amount.
6If the question mentions a review of life, residual value or method, treat it as a change in estimate. Take the carrying amount at the date of change and spread it (less new residual value) over the remaining life, prospectively.
7If a component is replaced or an overhaul is done, capitalise the new cost, derecognise the old carrying amount and show the loss in profit or loss.
8Close with a one-line conclusion citing Ind AS 16 and Ind AS 8 where relevant.

Quickest way: Component table method

When to use it: Use in written answers and in case-scenario MCQs where the asset has several parts or a mid-life change.

Draw a small table with columns: component, cost, residual value, life, annual depreciation.
Fill every row first, then multiply by the time fraction. Do not compute while reading.
For a change in estimate, write only three numbers: carrying amount at change date, new residual value, remaining life. Divide.
For MCQs, check the year-end date and the date of use first. Most wrong options come from wrong period counts.

Common mistakes in Depreciation and Component Accounting

Depreciating land along with the building
The asset is bought as one lump sum and students apply one rate to the whole cost.
Fix: Split the price between land and building. Depreciate only the building. Land is generally not depreciated because it has an unlimited life.
Restating prior years' depreciation when useful life or method changes
Students confuse a change in estimate with a change in accounting policy or a prior period error.
Fix: A change in depreciation method, life or residual value is a change in estimate under Ind AS 8. Apply it prospectively from the date of change and disclose its nature and effect.
Deducting residual value in the diminishing balance method
The straight-line formula is applied automatically.
Fix: In the diminishing balance method, the rate is applied to the opening carrying amount. Residual value is reflected in the rate, not deducted from cost each year. Depreciation must still not take the carrying amount below the residual value.
Not derecognising the old component when it is replaced
Students capitalise the new part and keep the old one in the books.
Fix: Remove the carrying amount of the replaced part and charge the loss to profit or loss. If the old part's cost is not known, the cost of the new part can be used as a guide to estimate it.
Stopping depreciation when the asset becomes idle
Idle is mistaken for retired.
Fix: Depreciation does not cease when the asset is idle, unless it is fully depreciated. Under a usage method, the charge can be nil when there is no production. It stops on held-for-sale classification or derecognition.
Using the tax rate or Schedule II rate as the useful life without thinking
Students remember the statutory rates and apply them mechanically.
Fix: Ind AS 16 requires the entity's own estimate of expected use. Use the life given in the question. Schedule II lives are a reference point, but a component approach may need a different life.

Worked examples

Example 1

Case: Meridian Ltd (an Ind AS company) buys a machine on 1 April 2026 for ₹60,00,000, ready for use immediately. Of this cost, a motor unit costs ₹12,00,000 with an expected life of 5 years. The rest of the machine has a life of 10 years. Residual value is nil for both. Meridian uses straight-line depreciation and its year ends on 31 March. Compute depreciation for the year ended 31 March 2027 and say how the motor will be treated at the end of year 5.

Show the solution

The motor is significant (₹12,00,000 of ₹60,00,000, which is 20%) and has a different life, so it is a separate component under Ind AS 16.
Remainder of machine: ₹60,00,000 − ₹12,00,000 = ₹48,00,000. Depreciation = ₹48,00,000 ÷ 10 = ₹4,80,000.
Motor: ₹12,00,000 ÷ 5 = ₹2,40,000.
Total depreciation for the year = ₹4,80,000 + ₹2,40,000 = ₹7,20,000.
At the end of year 5 the motor is fully depreciated. When it is replaced, the cost of the new motor is capitalised and the old motor's carrying amount (nil) is derecognised, with no loss, assuming no disposal proceeds.

Answer: Depreciation for the year ended 31 March 2027 is ₹7,20,000 (₹4,80,000 on the machine body plus ₹2,40,000 on the motor). The new motor is capitalised on replacement and the old one derecognised at nil carrying amount, with no loss assuming no disposal proceeds.

Example 2

Case: Zenith Ltd bought equipment on 1 April 2023 for ₹40,00,000 with a useful life of 10 years and residual value of ₹4,00,000, using straight-line depreciation. On 1 April 2026, after a technology review, management revises the remaining useful life to 5 years from that date and the residual value to ₹2,00,000. Compute depreciation for the year ended 31 March 2027 and explain the treatment.

Show the solution

Original annual depreciation = (₹40,00,000 − ₹4,00,000) ÷ 10 = ₹3,60,000.
Depreciation for 3 years (2023-24, 2024-25, 2025-26) = ₹3,60,000 × 3 = ₹10,80,000.
Carrying amount on 1 April 2026 = ₹40,00,000 − ₹10,80,000 = ₹29,20,000.
Revised depreciable amount = ₹29,20,000 − ₹2,00,000 = ₹27,20,000.
Revised annual depreciation = ₹27,20,000 ÷ 5 years of remaining useful life = ₹5,44,000.
The revision of life and residual value is a change in accounting estimate under Ind AS 8. It is applied prospectively from 1 April 2026. Earlier years are not restated, and the nature and amount of the effect are disclosed.

Answer: Depreciation for the year ended 31 March 2027 is ₹5,44,000. Prior years remain unchanged because this is a change in estimate, applied prospectively.

Exam tips

In written answers, always name the standard paragraph logic: component approach, review at each year end, and change in estimate under Ind AS 8. Marks are given for the reasoning as well as the number.
In case-scenario MCQs, read dates first. The most common trap is the date the asset is available for use versus the date it is purchased or paid for.
If a question gives a lump-sum price for land and building, split it first. Examiners often add an allocation basis in the facts, such as fair values.
When a question mentions a change in method, state clearly that it is a change in estimate, not a change in policy, and show only the prospective calculation.
Check whether the question asks for depreciation, closing carrying amount or the loss on replacement. Answer the exact item and label it.

Practice questions from Ind AS 16 Property, Plant and Equipment

Depreciation and Component Accounting in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Depreciation and Component Accounting: frequently asked questions

Is a change in depreciation method a change in accounting policy under Ind AS 16?

No. Ind AS 16 treats a change in depreciation method as a change in accounting estimate under Ind AS 8. You apply it prospectively from the date of change and do not restate earlier years. You should disclose the nature and effect of the change.

How often must useful life and residual value be reviewed?

At least at each financial year end. If expectations differ from earlier estimates, the change is accounted for as a change in estimate. The review is needed even if you do not expect any change.

Do I need to depreciate each part of an asset separately?

You must depreciate separately each part whose cost is significant in relation to the total cost. Parts with the same useful life and method can be grouped. The less significant parts are depreciated together as the remainder.

Is land depreciated under Ind AS 16?

Land generally has an unlimited useful life, so it is not depreciated. Buildings on it are depreciated. An exception can arise where the land cost includes items such as site restoration cost, which is depreciated over the period of benefit.

Can I use a revenue-based depreciation method for PPE?

No. A method based on revenue generated by using the asset is not appropriate for PPE, because revenue reflects factors other than the consumption of the asset's economic benefits.