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Componentization and Cost Segregation

Componentization
IFRS requires a "component approach" when accounting for property, plant and equipment. Where fixed assets have two or more major components with substantially different useful lives, the assets should be treated as separate components and depreciated over these different useful lives. The objective is to ensure that the financial position is fairly reflected in the balance sheet and that the income and expenditure account appropriately reflects the consumption of economic benefits inherent in those assets.

Achieving conformity with IFRS requires certain efforts, but these efforts provide apparent benefits through more accurate depreciation calculation, more accurate reflection of capitalized turnaround costs, and simple and more accurate reflection of fixed asset components disposal in the accounting ledger.

A more accurate accounting of fixed assets is beneficial for other uses that may be important for an asset-heavy company or including property tax, insurance or asset-backed financing. Having componentized accounts of fixed assets for a complex production plant allows achievement of significant savings when preparing valuations of assets for other purposes. Our scope includes evaluation of assets, especially machinery and equipment, which can be componentized for IFRS purposes.

According to IAS 16 (proposed revision), an entity allocates the amount initially recognized in respect of an asset to its component parts and accounts for each component separately when:

  1. The components have different useful lives, or
  2. The components provide benefits to the entity in a different pattern. 

American Appraisal provides componentization services for plant and machinery to assist clients in complying with IFRS, especially IAS 16.

Cost Segregation
Cost segregation is the comprehensive analysis of all costs associated with a construction project or building acquisition with the objective to maximize depreciation benefits by segregating and documenting the cost of all short-lived property identified as part of the capitalized cost of the project. Cost segregation is similar to componentization; however, it is only applicable to construction projects or buildings. Cost segregation analysis can be performed for real estate properties in the following cases:

  • Construction or expansion projects
  • Acquisitions of an operating facility
  • Prior acquisition/construction project
  • After initial capitalization where cost segregation has not previously been performed

Our services provide clients with accurate and up-to-date analysis for many purposes, including:

  • Distinguishing long-lived property from short-lived property for income tax purposes.
  • Distinguishing real property and fixtures from personal property for property tax and sales/use tax purposes
  • Separating non-assessable costs for property tax base year reporting
  • Distinguishing insurable from uninsurable property
  • For IFRS compliance

Why American Appraisal?
We have extensive experience working with institutions and their auditors to meet financial reporting requirements and maintain accurate componentization/cost segregation records. We perform comprehensive research and due diligence to guarantee the accuracy of our reports and ensure that errors are not perpetuated.

Please feel free to contact one of our experts to discuss how we might assist you with your componentization/cost segregation analysis of fixed assets.