‘Componentization’ is an approach generally used for property, plant and equipment, where fixed assets having major identifiable components with substantially different useful lives are identified and these assets are treated as separate components and depreciated over their different useful lives.
A typical example for componentization could be of an aircraft, where the aircraft engine, fuselage (body), tires, and other parts could be treated as different components, basis their useful lives.
Componentization requires each part of a fixed asset with a cost that is significant in relation to the total cost of the item to be depreciated separately.
Why componentization of assets is required?
1. Compliance requirements (e.g. Requirement under the Indian Companies Act 2013)
2. IFRS requires a ‘Component Approach’ when accounting for Property, Plant, and Equipment
3. Easy to determine the depreciation of separate components of the total asset.
4. To arrive at fair value of the asset
How asset tagging helps in componentization of assets?
Total asset might be split into a large number of components in case of componentization of assets. It is usually difficult to identify each asset and carry out the asset verification in the traditional register-based records.
Not only that, separate components may undergo maintenance or maybe replace during the life of the asset. Manual or excel spreadsheet method to track and maintain the details of changes is not only cumbersome but poses a risk of losing version control.
Tagging of such assets along with their components makes the asset management process easier and efficient, due to lower time involvement in such exercises. Asset tagging will save the resources of an entity by adopting these practices.