PPE components – what if something is consisting of components?

A property, plant and equipment (from hereon “PPE”) item, a tangible asset can consist of components rather than being one unit. Sometimes it can be apparent, however often enough it’s just forgotten.

When it comes to PPE items and their components – think useful lives and replacement. If something of something that’s exceeding the threshold for being recognized as an asset on its own will be replaced sooner than the something itself, than this something of something should be accounted as a component of this something.  

For an example, you build a house (or buy for that matter) alongside with all the structures and infrastructure (i.e. electricity, security cameras, plumbing, heating etc.) with it. When normally you’d consider all of it as a one unit, it isn’t necessarily so. When laws explain you the “physically removable without damaging the building” factor to be considered if an item is part of an asset, in accounting it’s fairly simpler. It’s not so much as if it can be removed, but when it will be removed. Say the heating system needs to be completely renovated after certain number of years, say 10 years, and the building itself is expected to stand for a 100 years (yes, I am simplifying). A heating system in itself is an expensive investment and evidently, a crucial part of a building (unless you live in a country, which has no cold weather). However, since it needs to be completely renovated after 10 years, it’s an extra considerable investment needed to be made for the building (you obviously won’t consider lightbulbs as components accounted for separately into PPE items). 

For 10 years you’ve used the heating system and after 10 years it should be depreciated to zero. At this point you will invest into renovation which in essence will be part of the building and in your accounting is replacing the old heating system component of the building. The system is still shown under buildings in your PPE classes, but it’s just with a separate asset tag. 

So the question to “What if something is consisting of components?” is simple. If something does consist of components, those components need to be accounted separately in the accounting. Another good point for accounting components separately even if the useful lives essentially are the same, is the need to replace them if they break down. It would be hard to know which amount really needs to be accounted off from the cost and the accumulated totals then. So essentially, think about useful lives and possible replacement. Saves you a trouble.