Replacing parts of a PPE item

Be it components with different useful lives that are to be replaced or some parts of the main item – the treatment is the same.

Your first course of action is to take off the fully depreciated or broken component from the balance sheet. With components that are capitalized separately it’s easier in a way that they already have their cost price and depreciation whilst just broken components which are capitalized as a part of the item there’s one more thing that needs to be done – setting their cost price and accumulated depreciation. How it’s done is relatively easy really.

It’s broken so no doubt you already have bought or will buy soon enough the new component. As such you also know the price of it and that in fact is going to be your cost price to be taken off from the cost price of the asset. Now, depreciation is a mathematical measure – for how long has the asset been in use and what is its useful life? With this you reach to the depreciation charge to be deducted from the main assets accumulated depreciation.

So simply put for both types of components what you do is take off the acquisition cost and the accumulated depreciation both relating to the component and add back the cost price of the new component. Do note that when it comes to broken down components it’s tempting to simply add the new replacement’s price to the cost price of the main asset, but often enough it’s significant enough that the broken component should in fact be taken off from the initial price. Why? Think about the depreciation expense that’s going to increase without there being a good reason for it. Had you enhanced the asset, sure, but you merely replaced a broken component without really increasing the value really.