Plant components and useful lives

Useful life of plant and machinery: a production line example

A manufacturer commissions a new forging line for CU 10,000,000. Its engineers split the cost into four parts with different lives.

Treating the line as one asset with a 15-year life would charge 666,667 a year, 283,333 less than the component approach in the early years. The difference reverses later: the lining and controls would still be on the balance sheet when they are physically replaced, and their remaining carrying amount would have to be written off then. Componentisation puts the cost of each part in the years that part is used.

Which parts of plant are separate components?

A part is depreciated separately when its cost is significant in relation to the total and its useful life differs materially from the rest. Typical examples in manufacturing are furnace and kiln linings, rollers in rolling mills, moulds and dies, control and automation systems, motors and drives, and the buildings and foundations that house the line. Parts with similar lives and methods can be grouped. Insignificant parts can be grouped too, with a life that approximates the group.

When does units of production suit plant better?

When wear follows output rather than time. A set of stamping dies costing 600,000 is expected to make 2,000,000 parts, so it is depreciated at 0.30 per part. In a year when it makes 450,000 parts, depreciation is 135,000. Straight-line over an assumed five years would charge 120,000 regardless of output. The method should reflect the pattern in which the asset's benefits are consumed; revenue-based methods are not allowed for property, plant and equipment. Dies and moulds paid for by a customer may not be the manufacturer's asset at all; see customer-funded tooling.

How are major overhauls and relinings treated?

As components. When the lining is replaced after five years for 1,700,000, the new lining is capitalised and depreciated over its own life, and the old lining, by then fully depreciated, is derecognised. Major inspections required to keep plant running, such as a statutory boiler inspection, are capitalised in the same way. Day-to-day servicing, small parts and labour for routine repairs are expensed.

Which spare parts are property, plant and equipment?

Major spare parts and standby equipment that the manufacturer expects to use for more than one period, or that can only be used with a particular item of plant, are property, plant and equipment, depreciated from when they are available for use. Small spares and consumables used up in maintenance are inventory, expensed when used. A spare motor kept for a critical line is typically property, plant and equipment; boxes of bearings and seals are inventory.

What about testing and commissioning?

The costs of testing whether a new line works properly are part of its cost. Since 2022, sales of items produced while the line is being brought into use, such as samples sold during commissioning, are recognised in profit or loss with their cost, not deducted from the cost of the plant. Depreciation starts when the line is available for use as management intends, even if it has not yet reached full output.

Does depreciation stop when plant is idle?

No. Depreciation continues while plant is idle or retired from active use, unless it is fully depreciated or classified as held for sale. Under units of production, idle plant has a nil charge because nothing is produced. A long shutdown is also an impairment indicator; see impairment of manufacturing plants.

How often are useful lives and residual values reviewed?

At least at each financial year end. Changes, such as a decision to replace a line earlier because a new technology arrives, are changes in accounting estimate under IAS 8, applied prospectively. Residual values for plant are often close to scrap value and so small, but dedicated equipment with an active second-hand market can carry a meaningful residual value. The Depreciation and revaluation schedule (Excel) schedules depreciation by component.

How does US GAAP differ?

US GAAP permits component depreciation but does not require it, and allows several methods for planned major maintenance, including expensing it as incurred. Revaluation of plant is not permitted. See IAS 16 vs US GAAP, component depreciation and manufacturing accounting.

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