CFA Level I · CFA Level I Exam · Analysis of Long-Term Assets
A building has a major component, the roof, with a useful life much shorter than the rest of the structure. Under IFRS, the most appropriate depreciation treatment is to:
The roof should be depreciated separately over its own useful life. IFRS requires component depreciation when significant parts of an asset have different useful lives, so each part is depreciated over its own life rather than using a single life for the whole building.
- Adepreciate the roof separately over its own useful lifeCorrect
- Bdepreciate the whole building over the roof's useful life
- Cdepreciate the whole building over the longest component's life
Explanation
IFRS requires component depreciation: significant parts of an asset with different useful lives are depreciated separately over their own lives. Using one life for the whole building would misstate expense.
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