Depreciation of a part of an asset

Question

We recently purchased a used passenger bus for our staff transport which we expect to use at least 04 years and therefore depreciate at the rate of 25% a year. However after purchasing we replaced the seats of the vehicle with brand new seats which we have a useful life more than 05 years. My question is whether we can depreciate the cost of seats separately at the rate of 20% for 05 years? Is it allowed under IFRS 16?

Answer 1

Read IAS 16.43 "Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately."

Also note IAS 16.44 " An entity allocates the amount initially recognised in respect of an item of property, plant and equipment to its significant parts and depreciates separately each such part. For example, it may be appropriate to depreciate separately the airframe and engines of an aircraft, whether owned or subject to a finance lease. Similarly, if an entity acquires property, plant and equipment subject to an operating lease in which it is the lessor, it may be appropriate to depreciate separately amounts reflected in the cost of that item that are attributable to favourable or unfavourable lease terms relative to market terms."

Therefore it is allowed to depreciate parts of a fixed asset separately at different rates. However you need to derecognize the carrying amount of the existing seats & recognize the profit/loss of derecognition in profit/loss A/C as per IAS 16.67-72.