an entity buys a piece of machinery with an estimated useful life of ten years for e 612385

Recognition and derecognition of parts

An entity buys a piece of machinery with an estimated useful life of ten years for €10 million. The asset contains two identical pumps, which are assumed to have the same useful life as the machine of which they are a part. After seven years one of the pumps fails and is replaced at a cost of €200,000. The entity had not identified the pumps as separate parts and does not know the original cost. It uses the cost of the replacement part to estimate the carrying value of the original pump. With the help of the supplier, it estimates that the cost would have been approximately €170,000 and that this would have a remaining carrying value after seven year’s depreciation of €51,000. Accordingly it derecognises €51,000 and capitalises the cost of the replacement.

It may be that the entity has no better information than the cost of the replacement part, in which case it appears that the entity is permitted to use a depreciated replacement cost basis to calculate the amount derecognised in respect of the original asset.