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Component depreciation IFRS GAAP

in this presentation I'm going to cover

the difference in treatment of component

depreciation under GAAP and the

international standard okay under GAAP

flow that is permitted to bring found a

depreciable asset into components if

they have various lives to depreciate

this is not commonly used normally what

will happen for example if we bought a

building the whole building would be

depreciated at the same rate even though

we know that the roofing may last

differently than maybe the

air-conditioning or the floor covering

instead we just throw it all together

and come up with one rate under the

international standard is required that

a depreciable asset comprised of

components with different useful lives

and or Salvage values be depreciated on

a component basis so it is a requirement

under the international standard so if

we're going from GAAP to the

international standard we have to take

this into account or the other way so

now let's take a look at an example in

this example Mike bought a building on

January 1st 2017 at a cost that's Mike's

company had a cost of ten thousand

rupees so in this case we're going to be

going from the international standard to

GAAP

the building has an estimated life of

four years and no salvage value the

company decided that the building is

composed of three significant components

we have the building and we're asset

we're assigning a value of 8 million

rupees to that it has a 40-year life and

so therefore the annual depreciation on

that would be 200,000 it has a roof with

a cost of 1.5 million rupees with a

useful life of 15 years so we get a

hundred thousand for that and then we

have a cooling system with a value of

five hundred thousand ten year life and

therefore 50 thousand annual

depreciation so when we add that up for

component depreciation

would get an annual depreciation of

350,000 rupees now Mike's company must

convert from the international standard

to GAAP for consolidated financials what

journal entries would intern under under

the international standard a GAAP be

required for 2017 and 2018 and also what

would the conversion worksheet look like

for those two years so again we're going

from the international standard which

uses component depreciation to GAAP

which doesn't right for 2017 entries so

when we look at the differences between

GAAP and the international standard for

the international standard under

component depreciation we would record

three hundred and fifty thousand rupees

as shown on the previous page under GAAP

depreciation expense would be 10,000

rupees divided by forty thousand giving

us an annual depreciation in total of

two hundred and fifty thousand now we

end up with a difference of depreciation

each year of a hundred thousand between

the international standard and GAAP so

here are the journal entries for 2017

under the international standard

recording of the purchase of the

building and the cash will be the same

under GAAP and the international

standard however our depreciation

expense is different so for the

international standard it's three

hundred and fifty thousand based on this

previous slide and under GAAP it is

going to be two hundred and fifty

thousand which is the ten million rupees

divided by 40 in 2018 we have the same

journal entries and again we've got

another hundred thousand dollar

difference so now our cumulated

depreciation is different by two hundred

thousand so now let's take a look at our

work papers though in 2017 on the

conversion work efforts converting from

the international standard to GAAP we

would have to remove

that's depreciation of a hundred

thousand rupees so what we would do is

decrease accumulated depreciation and

decrease depreciation expense in 2018

now we have an accumulated amount of two

hundred thousand so we would reduce

accumulated depreciation by two hundred

thousand however what we're going to do

is we're going to credit retain earnings

for the hundred thousand from the prior

year and we're also going to take out of

the current year depreciation expense a

hundred thousand rupees now in summary

what does that look like so on the

income statement we have prints each

year between the international standard

in GAAP of a hundred thousand which

means that for GAAP what we have to do

is reduce our depreciation expense by a

hundred thousand each year on the

balance sheet our net book value is

going to be different between the

international standard and GAAP as our

depreciation accumulates you can see

that by 2018 we have a difference of our

two hundred thousand and that concludes

what happens when we use component

depreciation versus regular depreciation

and the difference between the

international standard and GAAP