Under IFRS vs US GAAP, what is a major difference in the treatment of depreciation?

• A. IFRS requires single depreciation method for all assets; US GAAP allows multiple methods.
• B. IFRS uses accelerated depreciation by default; US GAAP uses straight-line by default.
• C. IFRS often requires component depreciation; US GAAP is less likely to require component depreciation unless significant.
• D. There is no difference in depreciation treatment between IFRS and US GAAP.

Answer: (C)

Under IFRS, depreciation is often calculated on a component basis, meaning significant parts of an asset that have different useful lives or depreciation methods are depreciated separately. This reflects that different components wear out at different rates, so the expense matches the actual consumption of each part. For example, a machine might have a long-lived frame but a shorter-lived motor; IFRS would require depreciating those components separately if the difference is material.

Under US GAAP, depreciation is typically applied to the asset as a whole, and component depreciation is not routinely required unless a component is considered significant enough to warrant separate treatment. In practice, many US GAAP applications depreciate the asset as a single unit unless a particular part’s life is clearly material.

So the key difference is IFRS’s emphasis on component depreciation for significant parts, whereas US GAAP is less likely to require it unless a component is material. This can affect the timing and amount of depreciation expense reported.