Component accounting in practice: deciding what to split and how to price it

Why this still causes arguments

Component accounting has been part of Indian GAAP for a decade. Schedule II to the Companies Act, 2013 says that where the cost of a part of an asset is significant to the total cost of the asset, and the useful life of that part is different from the useful life of the rest of the asset, the useful life of that significant part is to be determined separately. It became mandatory for financial years beginning on or after 1 April 2015. Ind AS 16 (paragraphs 43 to 47) and revised AS 10 carry the same principle.

The rule is short. The difficulty is that it is built entirely on two judgements, "significant" and "different life", and neither has a number attached. This article looks at how finance teams make those judgements in practice, how they put a cost on each part, and what the register has to hold so that a later replacement is accounted for correctly. For the standard itself, read the Ind AS 16 guide and the component section of the Schedule II guide.

Step 1: find the candidates

Start with the assets where splitting is likely to change the answer, not with the whole register. A laptop or an office chair does not need components. The usual candidates share three features: high cost, a long overall life, and parts that are replaced on a cycle much shorter than that life. Typical examples:

• Furnaces and kilns with refractory linings
• Aircraft, ships and heavy vehicles, where engines, major overhauls and interiors run to different cycles
• Buildings, where lifts, HVAC plant, roofing and electrical installations wear out long before the structure
• Process plant with catalysts, membranes, moulds or rollers that are periodically replaced
• Power plant, where turbines, boilers and control systems have different lives

The best source is not the accounts department. Maintenance records and the engineering team know which parts are replaced, how often and at what cost. A replacement that appears in the repairs ledger every four or five years for a large amount is a strong sign that a component has been missed.

Step 2: apply "significant" with a written policy

Neither Schedule II nor Ind AS 16 sets a percentage for significance. Ind AS 16 paragraph 47 also allows an entity to depreciate separately parts that are not significant, and paragraph 45 allows significant parts with the same useful life and method to be grouped. So the test is really about whether separating the part produces a materially different depreciation charge and a correct accounting result on replacement.

Many companies record a quantitative trigger in their accounting policy, for example a share of the asset's total cost below which parts are not separated, combined with a qualitative override for parts that are replaced regularly. The figure is a judgement: document it, apply it consistently, and agree it with your auditor before the year-end rather than during it.

Step 3: confirm the life is actually different

A part that costs a lot but lasts as long as the asset does not need to be separated. Ask the engineers for the expected replacement cycle and the evidence for it: manufacturer recommendations, past replacement history, statutory inspection cycles. Where the component life you adopt differs from the life in Part C of Schedule II for the parent asset, remember that Schedule II requires the financial statements to disclose any difference from the Part C life and the justification, supported by technical advice. Keep the technical note on file with the asset.

Step 4: put a cost on each part

For a new asset the cost split is usually easier than people expect, because the purchase is fresh:

• Vendor quotations and invoices often price the main assemblies separately.
• Engineering estimates or the vendor's own breakdown can be used where the invoice is a single lump sum.
• Directly attributable costs such as freight, installation and testing can be allocated in proportion to the base cost of each part, unless a cost clearly belongs to one part.

For assets already in the register, and especially for older assets that were never split, the cost of the part at the original date is rarely known. Ind AS 16 paragraph 70 allows the cost of the replacement part to be used as an indication of what the replaced part cost when it was acquired or constructed, if it is not practicable to determine the carrying amount of the replaced part. A common approach is to take today's replacement cost and discount it back to the acquisition date with a suitable price index. Whatever method you choose, write it down.

A worked example

A company installs a furnace on 1 April 2025 at a total capitalised cost of ₹2,00,00,000. The engineers confirm that the refractory lining, costing ₹30,00,000, is relined every five years; the shell and burners last fifteen years. The company uses the straight-line method, a 5% residual value for the shell and nil residual for the lining. (Figures are illustrative.)

Without components, the whole furnace is depreciated over fifteen years: (₹2,00,00,000 less ₹10,00,000 residual) ÷ 15 = ₹12,66,667 a year.

With components:

• Shell and burners: (₹1,70,00,000 less ₹8,50,000) ÷ 15 = ₹10,76,667 a year
• Lining: ₹30,00,000 ÷ 5 = ₹6,00,000 a year
• Total: ₹16,76,667 a year

In year six the lining is replaced for, say, ₹34,00,000. With components, the old lining is fully depreciated, so derecognising it removes ₹30,00,000 of cost and ₹30,00,000 of accumulated depreciation with no loss, and the new lining is capitalised and depreciated over the next five years. Without components, the company faces an awkward choice: expense ₹34,00,000 as a repair in one year, or capitalise it on top of an asset that still carries the old lining in its cost. Either way the accounts are distorted. That distortion is what the rule exists to prevent.

Use the Schedule II depreciation calculator to check each component's charge, and the useful life table for the Part C life of the parent asset.

Replacement and major inspections

Two related rules are easy to miss:

• Derecognising the replaced part. When a component is replaced, the carrying amount of the old part is derecognised, whether or not it was depreciated separately (Ind AS 16 paragraph 70). If the part was not identified as a component, the cost of the replacement can be used to estimate what is being removed, and any remaining carrying amount is a loss.
• Major inspections and overhauls. Ind AS 16 paragraph 14 treats the cost of a major inspection, where it is a condition of continuing to operate the asset, as a component when the recognition criteria are met. Any remaining carrying amount of the previous inspection cost is derecognised. Aircraft checks and statutory boiler inspections are the classic examples.

Day-to-day servicing, by contrast, is expensed as incurred (paragraph 12). Labour, consumables and small parts are repairs, not components.

What the register needs to hold

A register that supports component accounting needs more than a "component" tick box:

• A parent-child link, so that the furnace and its lining are reported together in the Schedule III note but depreciated separately
• A separate cost, useful life, residual value and method for each component, with its own put-to-use date
• The source of the cost split (invoice, engineering estimate, replacement cost indexed back) and the technical note for the life
• A replacement transaction that derecognises the old component and capitalises the new one in a single, approved step
• An audit trail showing who changed a life or split a cost, and why

Income-tax is a different story

Component accounting is a book concept. Under the Income-tax Act, depreciation is computed on blocks of assets at prescribed rates, so splitting the furnace does not change the tax block. A replacement lining that is capitalised in the books will normally be an addition to the plant and machinery block for tax, but whether a particular replacement is capital or revenue for tax purposes is a separate question. The Income-tax Act, 2025 applies from tax year 2026-27, with new section numbers for the depreciation provisions, so confirm the treatment with your tax adviser. The block of assets guide covers the tax side.

How FixedAsset Pro handles components

In FixedAsset Pro, components are recorded on the asset with their own useful lives, and component depreciation is applied by policy in the Companies Act book (Depreciation). Every change to a life or cost is written to the audit trail with a reason. If you want to see it with your own assets, book a demo.

This article is general information as at October 2026, not accounting or tax advice. The significance threshold, component lives and the cost split are judgements; agree them with your auditor.