CFA Level IFinancial Statement AnalysisMedium
A company purchases an aircraft for $10,000,000, consisting of an engine valued at $2,000,000 with a 5-year useful life and an airframe valued at $8,000,000 with a 20-year useful life. Under IFRS component depreciation requirements, both components are depreciated separately using the straight-line method with no salvage value. What is the total depreciation expense recognized in Year 1?
- A$400,000
- B$1,200,000
- C$1,000,000
- D$800,000
Show answer & explanationAnswer & explanation
Correct answer: D. $800,000
Under IFRS, significant components with different useful lives must be depreciated separately. Engine depreciation = $2,000,000/5 = $400,000; airframe depreciation = $8,000,000/20 = $400,000. Total Year 1 depreciation = $400,000 + $400,000 = $800,000.
Why the other options are wrong
- A. Reflects only one component's depreciation, omitting the other.
- B. Overstates depreciation by incorrectly using shorter useful lives for both components.
- C. Reflects depreciating the entire $10,000,000 over a blended 10-year life, ignoring component treatment.
Component Depreciation (IFRS)
IFRS requires that significant parts of an asset with materially different useful lives be depreciated separately, rather than as a single unit, to better reflect the pattern of economic benefit consumption.
- Each component's depreciable base is divided by its own useful life
- US GAAP permits but does not require component depreciation
- Common in aircraft, buildings, and machinery with distinct parts
Memory trick: Split the plane, depreciate each lane.