A utility company owns a power plant comprising a turbine with a 10-year useful life and a building shell with a 40-year useful life, acquired together as a single asset. Under US GAAP, is the utility required to separately depreciate the turbine and building shell as distinct components with their own useful lives?
- Yes, ASC 360 requires component depreciation whenever an asset's parts have materially different useful lives
- No — US GAAP permits, but does not require, component depreciation for parts of an asset with differing useful lives; a company may instead depreciate the entire plant as a single unit using a composite or blended rate, unlike IFRS's IAS 16, which requires separate depreciation of significant components
- No, component depreciation is prohibited under US GAAP and may only be used under IFRS
- Yes, but only for public companies; private companies are exempt from component depreciation under the private company accounting alternatives
Why B? And why not the others?
Correct answer: B. No — US GAAP permits, but does not require, component depreciation for parts of an asset with differing useful lives; a company may instead depreciate the entire plant as a single unit using a composite or blended rate, unlike IFRS's IAS 16, which requires separate depreciation of significant components
Under US GAAP, component depreciation of property, plant, and equipment is permitted but not required: a company may split an asset into significant parts with different useful lives and depreciate each separately, or it may depreciate the whole asset as one unit using a composite rate. IFRS's IAS 16 takes the opposite position, requiring separate depreciation of each significant component with a materially different pattern of consumption or useful life. Option A wrongly states component depreciation as mandatory under US GAAP, which is the IFRS rule, not the GAAP rule. Option C is wrong because component depreciation is not prohibited under US GAAP; it remains an available accounting policy choice. Option D is wrong because no such public/private company distinction exists for component depreciation — the private company accounting alternatives address goodwill amortization, certain intangible assets, and hedge accounting, not PP&E componentization.
Source: US GAAP vs IFRS comparison (PP&E component approach); FASB ASC 360 has no component depreciation requirement