Componentization of a major overhaul and inspection and related depreciation, is another area where there can be significant differences between Canadian GAAP and IFRS. Please refer to Property, Plant & Equipment (PP&E) Componentization for an overview of componentization.
When we think of PP&E, we normally think of physical assets with physical components. However in component accounting under IFRS, we must also deal with “non physical” components, reflecting in the total cost of the asset, major overhauls and inspections, if specified criteria are met. This arises when a condition of continuing to operate an item of PP&E is performing major inspections or overhauls, regardless of whether parts of the item are replaced.
Take for instance the example of a ship, which every 3 years is required to be dry docked, inspected and a major overhaul performed to repair and maintain the hull. If this is an activity that is going to be done on a regular basis, and assuming the overhaul and inspection has a benefit over 1 year, then IFRS requires you to capitalize the estimated amount of the overhaul at the time of asset original acquisition, and amortize it separately over the period to the next overhaul and inspection. After 3 years, when the overhaul is performed, the cost of the overhaul is once again capitalized and amortized over the next 3 years. If for some reason the overhaul is required to be performed in 2 years, rather than 3 years, then the remaining NBV of the capitalized component of the overhaul must be expensed. This is different from Canadian GAAP, wherein there would not be a requirement to capitalize the estimated overhaul at the time the asset is acquired, or write-off the remaining NBV of the overhaul.
I hope this helps. This is one of a series of blogs that is meant to convey information relating to Canada’s transition from Canadian GAAP to IFRS.
For further information, please refer to the ongoing series of IFRS blogs on the Edelkoort Smethurst Schein CPA’s LLP web-site and please remember to contact your CGA or other accounting professional for further guidance.
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