Property, plant and equipment items are always capitalized with setting a few specific considerations to them alongside with the accounting entry itself. Amongst other things the information set includes also something called a useful life. When we’ve already talked about the meaning behind the useful lives and how they’re used, there’s a little bit more to it that we’d like to share with you.
Namely when you think about bigger machinery and something that does indeed include replaceable components which on their own are also significant of value and do last longer than 12 months, but just not as long as the whole item would. How would you treat those components?
Components like these are to be capitalized on their own and separately from the initial item itself. Just as a side note, when you give PPE items ID codes those components can in fact be part of the items subgroup. Anyhow, if for an example the asset itself is set to last for 15 years, but the component cannot be used more than 3 years, it should be capitalized separately so the component is in fact depreciated fully after 3 years is over and you’ll purchase a new one. In case the acquisition for the whole item was done with one invoice and one line on the invoice, you can set the value for the component by doing a bit of research on the market about the replacement cost. If the time comes and you have to replace it there are bound be to be supplier selling the components.
Always consider if there are components to be used during a shorter period in time then the PPE item. And if so, is the component significant in value enough as well to capitalize it on its own. Often times the value isn’t all that considerable so there’s no point in capitalizing it separately.