How do you handle component depreciation (IFRS), and why does it make a difference versus local GAAP?
Under IAS 16.43, PP&E assets made up of significant components with different useful lives must be depreciated separately (component depreciation).
| Aspect | Local GAAP | IFRS (IAS 16.43) |
|---|---|---|
| Component-depreciation requirement | no explicit requirement; standard practice: bulk depreciation over the whole asset's useful life | required for significant components with different useful lives |
| D&A level (typical) | lower | 5–15% higher for complex assets |
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Components and useful lives:
- Engine: 12 years
- Airframe: 25 years
- Cabin interior: 8 years
Instead of bulk depreciation over 25 years, three separate components are depreciated — higher D&A in the early years.
Real estate (building vs. heating vs. elevators), aviation (see the aircraft example), power plants (turbine vs. building vs. controls). Listed companies (airlines, airport operators, utilities) must apply component depreciation; middle-market local-GAAP reporters rarely do.
recompute component depreciation — for real-estate-heavy targets this can shift D&A by 10–20%.
For real-estate- or asset-heavy middle-market companies, show the component-depreciation adjustment explicitly in the local-GAAP-to-IFRS bridge — otherwise the EBIT comparison to public comps is distorted.