Ind AS 16 Subsequent Costs and Component Accounting

Understand Subsequent Costs and Component Accounting

Key rules to remember

Day-to-day servicing

Labour + consumables + small parts → Profit or loss as incurred

Not added to the carrying amount of PPE. Usually called repairs and maintenance.

Replacement of a part

Cost of replacement → add to carrying amount, if recognition criteria are met; carrying amount of replaced part → derecognise

Derecognise whether or not the replaced part was depreciated separately.

Carrying amount of replaced part when not known

Estimated cost of replaced part ≈ cost of the replacement

Use only if it is not practicable to determine the carrying amount. The replacement cost is an indication of the original cost; you then depreciate it to date to find the carrying amount.

Major inspection

New inspection cost → capitalise; remaining carrying amount of previous inspection → derecognise

Applies even if the previous inspection was not identified when the asset was acquired.

Loss on derecognition of replaced part

Loss = Carrying amount of replaced part − any sale proceeds

Recognise in profit or loss. Compute carrying amount as original cost less depreciation up to the replacement date.

How to solve Subsequent Costs and Component Accounting questions

1. 1List each cost in the question and decide its nature: servicing, replacement of a part, major inspection, or an addition.
2. 2Apply the recognition test. Servicing (labour, consumables, small parts) goes to profit or loss. Replacements and inspections that meet the criteria are capitalised.
3. 3Find the carrying amount of the replaced part or old inspection. Use its original cost, or the replacement cost as an indication if the original is unknown. Deflate the figure to the original date if the question says to adjust for price changes.
4. 4Depreciate that cost from the original date up to the date of replacement to get its carrying amount.
5. 5Derecognise that carrying amount and show the loss in profit or loss, after deducting any scrap proceeds.
6. 6Add the new cost to the asset or component, and depreciate it over its own useful life from the date it is available for use.
7. 7Compute the year's depreciation on each component separately and total it. Then give the closing carrying amount.

Quickest way: Capitalise, derecognise, depreciate in three lines

Common mistakes in Subsequent Costs and Component Accounting

• Capitalising every repair because it benefits the asset

  Students link any large spend to a future benefit.

  Fix: Servicing costs, mainly labour and consumables, go to profit or loss. Capitalise only when the cost replaces a part or is a major inspection and the recognition criteria are met.

• Adding the new part but not derecognising the old one

  Students forget that the old part is still in the carrying amount.

  Fix: Always remove the carrying amount of the replaced part. Otherwise the asset is overstated and depreciation is charged twice.

• Derecognising the original cost instead of the carrying amount

  Students ignore depreciation already charged on the part.

  Fix: Derecognise cost less accumulated depreciation. The loss in profit or loss is the carrying amount, less any sale proceeds.

• Saying derecognition applies only when the part was depreciated separately

  Students confuse component accounting with the derecognition rule.

  Fix: The standard says to derecognise the replaced part regardless of whether it was depreciated separately.

• Leaving the old inspection cost in the asset when a new inspection is capitalised

  Inspection is treated as a pure expense or as an addition only.

  Fix: Treat each inspection as a component. Write off its remaining carrying amount when the next one is capitalised, even if it was never identified at purchase.

Worked examples