The IFRS requirement for the componentization of Property, Plant and Equipment (PP&E) or “Fixed Assets” might require a change to a company’s data collection processes and systems. This will be a larger issue for companies that are capital intensive. The requirement under IFRS is to take the cost of an asset and split it into its component parts. Componentization has a huge impact on the type of data that must be collected.
For example, a company may have a building within its fixed asset ledger that is being amortized over a forty year useful life, but the company has never considered how long the HVAC system in the building is going to last, and how much the HVAC system costs. Component accounting is not widespread in Canadian accounting, as very few companies were required to do this. Under IFRS, companies need to examine what the components are, and determine if it is going to have a material impact on its annual amortization expense.
To illustrate the need to determine if componentization is material, take the example of a shipping company. The ship has a hull, engine, and perhaps loading cranes – all of these are different components and have different useful lives. The company needs to calculate what the impact will be on amortization if all of these major components are amortized using useful lives that are specific to each of the components – for instance the hull at 50 years, the engines at 20 years and the cranes at 10 years. If the impact is material, then the assets must be componentized. Remember that materiality is based on professional judgement, and should be carefully reviewed by management, perhaps in conjunction with subject matter experts.
At the end of this review, the company may determine that there are no material differences and it is not necessary to split the fixed assets into separate components. However, this can only be decided after performing the proper reviews – assessing the different major components and their useful lives. Therefore, it is critical from a data collection point of view to begin the componentization review as soon as possible. In my opinion, it will be very important for companies, especially those with significant PP&E, to maintain the supporting documentation for this analysis, for review by auditors and other interested stakeholders.
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 accounting professional for further guidance.
Edelkoort | Smethurst | Schein CPAs LLP is located in Burlington Ontario servicing the Golden Horseshoe and Greater Toronto Area and beyond. The firm is fully licensed with CPA Ontario to provide assurance, tax and accounting services as well as registered as tax preparers with the Canada Revenue Agency (CRA) & Internal Revenue Service (IRS). The firm is also registered as an IRS Certified Acceptance Agent.
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