Wind and solar asset lives: depreciation by component

Which components are depreciated separately?

IAS 16 requires each part with a cost significant to the total to be depreciated separately if its useful life differs. For a wind farm, that usually means turbines, which are towers, nacelles and rotors; major replaceable parts such as gearboxes, generators and blades; foundations and access roads; and electrical infrastructure such as cables and the substation. For a solar farm, it means panels, inverters, mounting structures or trackers, and electrical infrastructure. Inverters in particular rarely last as long as the panels. Payments to a network operator for the connection are covered in grid connection contributions, and battery cells in battery storage projects. See component depreciation.

Wind and solar asset lives: a wind farm example

A wind farm costs US$ 150 million. It sits on land leased for 25 years, with no extension the company is reasonably certain to exercise, and its permit runs for the same period.

Foundations and cables could last 40 years, but the company can only use them for the 25 years of the lease and permit, so that is their useful life. Gearboxes and similar parts are depreciated over 12 years and replaced, with the replacement capitalised and the old part derecognised. Depreciating the whole farm over 25 years would give 6.00 million a year, understating early depreciation by 0.43 million.

How do land leases and permits limit useful lives?

Useful life is the period over which the company expects to use the asset, not its physical life. If the land lease, planning permit or grid connection agreement ends before the asset wears out, and renewal is not reasonably certain, the useful life of assets that cannot be moved ends with it. The land lease itself is a right-of-use asset under IFRS 16, depreciated over the lease term, which includes extension periods only if their exercise is reasonably certain. The lease term and the useful lives of the farm's assets should be assessed consistently. See IFRS 16 lease term.

Straight-line or units of production?

Most companies use straight-line, because turbines and panels wear with time and weather as much as with output, and output varies from year to year with the wind and sun. Some use units of production for parts whose wear is driven by output. Solar panels lose a little efficiency each year, but that degradation is usually reflected in the cash flows rather than in the depreciation method. Revenue-based methods are not allowed. See IAS 16 depreciation methods.

How are major overhauls and spare parts treated?

The cost of a major overhaul or inspection, such as a scheduled gearbox overhaul, is capitalised as a separate component when it is performed, and depreciated until the next one, with any remaining carrying amount of the previous overhaul derecognised. Strategic spare parts, such as a spare transformer, are property, plant and equipment if they are expected to be used for more than one period, depreciated from when they are available for use. Routine maintenance is expensed.

How does repowering affect asset lives?

Repowering replaces old turbines with larger, more efficient ones, often before the originals are worn out, to make better use of a good site and its grid connection. Once repowering is planned with reasonable certainty, the remaining useful lives of the turbines to be replaced are shortened, which increases depreciation prospectively, and the decommissioning provision may move earlier. A decision to repower can also be an impairment indicator for the old assets. See decommissioning wind and solar farms.

How often are useful lives reviewed?

At least at each financial year end. Technology changes quickly in renewables, so the economic life of a turbine model can end before its physical life does, and some companies have extended lives as experience showed assets lasting longer than expected. Changes are applied prospectively as changes in estimate. See power and utilities accounting.

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