We have a machinery whose useful life is 10 years as per Companies Act, 2013. It has an identified component whose useful life is also 10 years. But, the component can be replaced at the end of 10th year and then the machinery can again be used for another 7 years. How should that be accounted in books.
Shall the company at present account the useful life as 10 years and at the end of 10th year (if the component is replaced) revise the remaining useful life to 7 years (but by that time, the overall asset cost will be its residual value) and do the same will be treated as a change in accounting estimates as per Ind AS 8 ? Or some other treatment will aptly present the case.
The useful life of asset (other than component) shall be taken a 17 years and disclosures shall be given in Notes to accounts as this is change is estimate and accounting policy also because of change in depreciation rate. However, if at the end of 10th year, entity decides to dispose of the asset then accounting for the same will be done at that time.
19 April 2016
Thanks Sir.. But at present we are not certain that we will go for changing the component or not in future. So can't be go for changing the useful life and hence, depreciation at the end of 10th year, when we are certain about the decision to discard the machinery or to go for purchase of component...?? Because there may be lot of such machineries in similar scenario. So, from practical aspect, revising the useful life at present may get complicated.
19 April 2016
Ind AS says to identify the component and recognise and depreciate separately based on their useful life. However, if you want to depreciate the asset over 10 years and dispose off, you can do that by giving a disclosures. (auditors opinion also required)
If you go for componentization today and later on decide not to replace the component and dispose the asset in 10 years only then it can be done as change in accounting estimate.
CAclubindia
