Componentization and valuation of fixed assets

Posted @ 7/20/2017 1:22:42 AM by admin Under( Componentization and Valuation of Assets)

Componentization of Fixed assets
Componentization regarding fixed assets is to allocate and apportion the initially recognized amount into different parts and capitalizing each part independently. This results into separate depreciation rates and life of each component.
In short, componentizing an asset means separating the asset into its component parts.
This practice is generally followed when a specific component of a large asset is of a significant value when compared to the whole asset.
Statutory requirement for componentization-
As per Companies Act, 2013, Schedule II, it requires that depreciation and useful life of significant components of an asset should be ascertained separately.
Also as per Ind AS 16, Property Plant & Equipment (PPE) 
- Each part of the fixed asset, having cost that is significant in relation to the cost of the asset, shall be depreciated seperately.
- All the parts having same useful life and method of depreciation may be grouped together for depreciation purposes.
- Useful life of balance parts can be determined on approximation basis.
- If the cost of a component is insignificant in relation to the overall cost of the asset, it is entitys choice weather to depreciate such components separately or not.
Valuation of fixed assets and components
Valuation of components means to ascertain the value of significant components of the fixed asset, in turn ascertaining the amount on which future depreciation for the component will be charged. 
For the valuation and componenization purposes, the Institute of Chartered Accountants of India (ICAI) has issued an application guide on 10th April 2015.
The application guide provides clarification on a number of important issues such as -
Determination of significance of the part of the asset, following factors must be assessed -
  • Comparison of the cost allocated to the item in relation to the total cost of the aggregated PPE
  • Consideration of impact of componentisation on the depreciation expense
- Factors for determination of cost of a component -
  • Break up of costs provided by the vendor from whom the asset is purchased.
  • Cost break up given by internal / external valuation expert.
  • Current replacement cost of the individual component and applying the same basis on the historical cost of the asset
Thus its clear that company needs to identify only material/significant parts and components separately for depreciation. This should be decided on circumstance and case to case basis. 
A fair practice would be to consider a threshold of 10 percent of the overall cost of the asset. If the independently valued cost of the component is more than 10% of the overall cost of the asset, then the component may be considered to be significant. Also the components impact on the future profits should be considered to be significant and thus requires seperate identification.
It should be noted that such identification requires technical expertise and thus necessary experts must be involved to determine the above.
If the useful life of the component is more than the life of the asset, then it should be recognized over such longer period only if the management intends to use the component even after the expiry of the useful life of the asset.
It should be noted that the componentization of assets is a mandatory requirement even of opening block of assets as existing on 1st April 2014 and no just the case of applicable  on new assets acquired by the company.
As can be seen from the above explanation, componentization and valuation of such components goes hand in hand. Recently, such componentization activity is increasingly becoming an important part of fixed asset verification and audit exercise. 
AAA asset verification services is a comprehensive Fixed asset Management solution and service provider. We help organizations to effectively track, manage and adhere to government policies and laws. Our services includes asset mapping from invoices, preparing Fixed asset register of companies including asset componentization and splitting, valuation of components, revaluation of existing assets. The asset verification service includes physical verification of assets pan-India, tagging of assets with tags having bar codes. Metal tags and RFID's are also provided.
AAA provides componentization and valuation of fixed assets services besides our host of other services.
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