Component depreciation

Component depreciation is the part of IAS 16 that most often differs from practice in other frameworks, and it matters most for airlines, shipping, utilities and telecom. This guide explains how to identify significant parts, how major inspections and replacements are treated, and works through an aircraft.

By Awais Jameel, Chartered Accountant. Reviewed by Muhammad Bilal, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

Component depreciation means depreciating separately each part of an item of property, plant and equipment whose cost is significant in relation to the total cost of the item and whose useful life differs. IAS 16 requires it. An aircraft costing CU 100 million, split into airframe, engines, cabin interior and the cost of the next heavy maintenance check, is depreciated by CU 7.36 million a year by component, against CU 4.0 million if the whole aircraft were depreciated over the airframe's 25-year life.

At a glance

Required
Significant parts with different lives
Significant
Cost significant to the total
Grouping
Parts with similar lives may be grouped
Major inspections
Capitalised as a component
Replacement
Capitalise new, derecognise old
Excel
Depreciation and revaluation schedule
Component depreciationRequired: Significant parts with different lives; Significant: Cost significant to the total; Grouping: Parts with similar lives may be grouped; Major inspections: Capitalised as a component; Replacement: Capitalise new, derecognise old; Excel: Depreciation and revaluation schedule.KEY FACTS AT A GLANCEComponent depreciationRequiredSignificant parts withdifferent livesSignificantCost significant to thetotalGroupingParts with similar livesmay be groupedMajor inspectionsCapitalised as acomponentReplacementCapitalise new,derecognise oldExcelDepreciation andrevaluation scheduleChecked against official sourcesTax BakersComponent depreciationRequired: Significant parts with different lives; Significant: Cost significant to the total; Grouping: Parts with similar lives may be grouped; Major inspections: Capitalised as a component; Replacement: Capitalise new, derecognise old; Excel: Depreciation and revaluation schedule.KEY FACTS AT A GLANCEComponent depreciationRequiredSignificant parts with different livesSignificantCost significant to the totalGroupingParts with similar lives may be groupedMajor inspectionsCapitalised as a componentReplacementCapitalise new, derecognise oldExcelDepreciation and revaluation scheduleChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

What is component depreciation?

Each part of an item of PPE with a cost that is significant in relation to the total cost of the item is depreciated separately. Parts with similar useful lives and methods may be grouped together, and the remainder, the parts that are not individually significant, is depreciated as one. A part need not be physically separate; the cost of a major inspection is a component too.

A componentisation example: an aircraft

An aircraft, depreciated by component (CU million)An aircraft, depreciated by component (CU million)CostUseful lifePer yearAirframe6025 years2.40Engines258 years3.12Cabin interior1010 years1.00Heavy maintenance check56 years0.83Total1007.36
By component: CU 7.36 million a year. As one asset over 25 years: CU 4.0 million.

Depreciated as a single asset over 25 years, the aircraft would cost CU 4.0 million a year. By component, it costs CU 7.36 million, nearly double, because the engines, interior and maintenance check wear out much faster than the airframe. The single-asset approach would overstate profit in the early years and then produce large losses when the engines are replaced. The components sheet of the Depreciation and revaluation schedule (Excel) runs this calculation.

How are major inspections treated?

When a major inspection or overhaul is performed, its cost is recognised in the carrying amount as a replacement, if the recognition criteria are met, and depreciated until the next inspection. Any remaining carrying amount of the previous inspection is derecognised. For a new aircraft, part of the purchase price is identified as the cost of the inspection embedded in it and depreciated to the first check, here CU 5 million over 6 years.

What happens when a part is replaced?

The cost of the new part is capitalised and the carrying amount of the replaced part is derecognised, with any loss in profit or loss. If the carrying amount of the replaced part is not known, for example because it was not depreciated separately, the cost of the replacement can be used as an indication of what the replaced part cost when acquired or built.

How do you identify components in practice?

  1. Start with the supplier's price breakdown or the construction budget, which usually separates major systems.
  2. Use engineering data on replacement cycles: parts replaced on different cycles are candidates for separate components.
  3. Compare each part's cost with the total and set a significance threshold in the accounting policy.
  4. Group the remaining parts with similar lives, and depreciate the rest of the asset as one component.

Common mistakes

  • Depreciating a new aircraft or ship as one asset and then writing off engines or dry-docking costs when they are replaced.
  • Forgetting to derecognise the old part's carrying amount when capitalising a replacement.
  • Expensing major inspections that meet the recognition criteria.

Which industries does component depreciation affect most?

IndustryTypical components
AirlinesAirframe, engines, landing gear, interiors, maintenance checks
ShippingHull, engines, dry-docking costs
TelecomTower structure, radio equipment, power systems and batteries
Real estate and hotelsStructure, roof, lifts, heating and cooling, fit-out
UtilitiesTurbines, generators, transmission lines, control systems

How detailed should componentisation be?

Detailed enough that depreciation is not materially different from what full componentisation would give. Companies often set a policy, such as identifying parts above a percentage of total cost or with lives differing by more than a few years from the main asset. US GAAP permits but does not require component depreciation; see IAS 16 vs US GAAP and depreciation methods.

Need help applying the standards?

Our Chartered Accountants help finance teams and students apply IFRS and US GAAP to real transactions.

Book a call Chat on WhatsApp

Questions people ask

What is component depreciation under IAS 16?

Depreciating separately each significant part of an item of PPE that has a different useful life or depreciation method.

Is component depreciation required under IFRS?

Yes. IAS 16 requires significant parts to be depreciated separately; US GAAP permits but does not require it.

How is a major inspection accounted for?

Its cost is capitalised as a component and depreciated until the next inspection, and the remaining carrying amount of the previous inspection is derecognised.

What happens to the old part when it is replaced?

Its carrying amount is derecognised and any loss recognised in profit or loss.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IAS 16 Property, Plant and Equipment

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IAS 16Depreciation methods, useful life and residual valueIAS 16IAS 16 property, plant and equipment explainedIFRS vs US GAAPIAS 16 vs US GAAP: revaluation of property, plant and equipment

More in IAS 16

Next in this topicThe revaluation model and revaluation surplusTopicAll 5 guides in IAS 16

This guide is general information. It is not tax or legal advice for your situation.