Академический Документы
Профессиональный Документы
Культура Документы
Definition of Depreciation:
Depreciation is the systematic allocation of the depreciable amount of an asset over
its useful life. The depreciable amount of an asset is the cost of an asset or other amount
substituted for cost, less its residual value. The useful life of an asset is the period over
which an asset is expected to be available for use by an entity, or the number of production
or similar units expected to be obtained from the asset by the entity.
For the purpose of this Schedule, the term depreciation includes amortization.
Useful Life:
In case of such class of companies, as may be prescribed and whose financial
statements comply with the accounting standards prescribed for such class of
companies under section 133 the useful life of an asset shall not normally be different
from the useful life and the residual value shall not be different from that as indicated
in Part C, provided that if such a company uses a useful life or residual value which is
different from the useful life or residual value indicated therein, it shall disclose the
justification for the same.
(ii) In respect of other companies the useful life of an asset shall not be longer
than the useful life and the residual value shall not be higher than that prescribed in
Part C.
(iii) For intangible assets, the provisions of the Accounting Standards mentioned
under sub-para (i) or (ii), as applicable, shall apply.
Component Accounting:
The Companies Act, 2013 has introduced the concept of Component accounting which was not the case of
Companies Act 1956. To understand Component Accounting, we can take guidance from IND AS-16 which
Provides as under:
Each Part of an item of an asset with a cost significant in relation to the total cost of the item shall be
depreciated separately.
Where cost of the part of the asset and useful life of that part is different from the useful life of the remaining
asset, useful life of that significant part should be determined separately.
For Example:
X Ltd Purchased a Ship of Rs.30 Crore which Comprises Engine of Rs. 27Crore and Structure and others for
Rs.3Crore.The residual value and useful life would be Rs. 7crore and Rs. 1crore respectively. The Useful
Life of an asset is 30years.
Ship
Residual Value
Useful Life
Engine
27 Crore
7 Crore
10 Year
Others
3 Crore
1 Crore
20 Year
Useful Life
Depreciation
Engine
10 year
2 Crore
Others
20 Years
10 Lakh
Total
2.10 Crore
When at the end of respective useful lives of the component, the components will be replaced, the
replacement cost should be capitalized and the existing carrying value, if any, should be decapitalised.
Thus, although the overall amount that will be charged to the statement of profit and loss will be same during
the entire life of the ship, the annual charge to the statement of profit and loss will differ significantly.
Residual Value:
If residual value is considered as an insignificant, it is normally regarded as NIL. On the Contrary, if the
residual value is likely to be significant, it is estimated at the time of acquisition/installation, or at the time of
subsequent revaluation of an asset. One of the basis for determining the residual value would be realizable
value of similar assets which have reached to end of their useful lives and have operated under conditions
similar to those in which the asset will be used.
Ordinarily, the residual value of an asset is often insignificant, but it should generally be not more than 5% of
the original cost of the asset.
Can it be possible to take different residual value and useful life as prescribed in companies act 2013
Basis
Regulated Entities
Such class of
CompaniesAs may be
prescribed and
Whose financial
For other companies
statements
comply with the
accounting standards
For
Management can
take only shorter
useful life and lower
residual value.
Explanation Mandatory
Transitional Provisions
From the date schedule-II comes into effect, the carrying amount of the asset as on that date:
Shall be depreciated over the remaining useful life of the asset as per schedule-II
After retaining the residual value, shall be recognized in the opening balance of retained earning where the
remaining useful life of an asset is Nil.
For Example
A Company acquired a building at accost of Rs. 10 Crore. The Company was depreciating the building
according to schedule XIV SLM rate i.e. 1.63%. Now In August 2013 Schedule-II was introduced via the
companies Act 2013 in which the useful life specified is 30 year.
If the building is acquired on 01/04/2000
Depreciation charges till FY 2012-13, depreciation on SLM Basis for 13 year
Rs 10Crore X1.63%X13 Year=Rs.21190000/Carrying Value=10 crore-2.11 Crore=7.88Crore approx.
Now the carrying value as on 01 April 2013 will be depreciated over the remaining useful life of the asset as
per schedule II of the companies Act 2013. The remaining useful life is 17 year (30-13)
So annual depreciation to be charged to the profit and loss account from FY 2013-14 would be Rs7.88
crore/17= Rs.46.35 Lakh approx.
p e r S c h e d u l e - I I o f C o mp a n i e s A c t , 2 0 1 3 b e c a me
o p e ra t i o n a l f ro m 0 1 / 0 4 / 2 0 1 4 vi d e MC A n o t i f i c a t i o n n o S . O . 9 0 2 (E ) d a t e d 2 6 / 0 3 / 2 0 1 4 . I n n e w
e ra
of
d e p re c i a t i o n ,
d e p re c i a t i o n .
Th e
useful
life of
change
in
the asset
p l a ys
a c ru c i a l
t h e me t h o d o f
p r o vi d i n g
d e p re c i a t i o n
of
f ro m
f i x e d p e rc e n t a g e (S c h e d u l e - XI V o f C o mp a n i e s A c t 1 9 5 6 ) t o u s e f u l l i f e (S c h e d u l e -I I o f
C o m p a n i e s A c t , 2 0 1 3 ) r e q u i re s c h a n g e i n a c c o u n t i n g p o l i c y o f t h e c o mp a n y. Fo r c h a n g e i n
a c c o u n t i n g p o l i c y, p ro v i s i o n c o n t a i n e d i n A c c o u n t i n g S t a n d a rd s -5 Ne t P r o f i t o r L o s s f o r t h e
P e ri o d ,
P ri o r
P e ri o d
I t e ms
and
Changes
in
Accounting
Policies
as
well
as
AS -6
D e p re c i a t i o n A c c o u n t i n g b o t h a re re q u i re d t o b e t a k e n i n t o c o n s i d e ra t i o n .
I t i s p e rt i n e n t t o n o t e t h a t , p r o vi s i o n c o n t a i n e d i n S c h e d u l e -I I o f Co m p a n i e s A c t , 2 0 1 3 a n d
p ro vi s i o n c o n t a i n e d i n A S -6 a re vi o l a t i n g e a c h o t h e r . L e t s h a ve a n a n a l ys i s .
P a r a - 2 1 o f AS - 6 , D e pr e c i a ti o n Ac c o u nt i n g:
T h e d e p re c i a t i o n m e t h o d s e l e c t e d s h o u l d b e a p p l i e d c o n s i s t e n t l y f r o m p e ri o d t o p e ri o d . A
c h a n g e f r o m o n e m e t h o d o f p r o v i d i n g d e p re c i a t i o n t o a n o t h e r s h o u l d b e m a d e o n l y i f t h e
adoption
of
the new
method
is
re q u i r e d
by
statute or
for
compliance
wi t h
an
a c c o u n t i n g s t a n d a rd o r i f i t i s c o n s i d e re d t h a t t h e c h a n g e w o u l d r e s u l t i n a m o re a p p r o p ri a t e
p re p a ra t i o n o r p r e s e n t a t i o n o f t h e f i n a n c i a l s t a t e m e n t s o f t h e e n t e rp ri s e . W h e n s u c h a
c h a n g e i n t h e m e t h o d o f d e p re c i a t i o n i s m a d e , d e p re c i a t i o n s h o u l d b e re c a l c u l a t e d i n
a c c o r d a n c e wi t h t h e n e w m e t h o d f r o m t h e d a t e o f t h e a s s e t c o m i n g i n t o u s e . T h e d e f i c i e n c y
o r s u rp l u s a ri s i n g f r o m re t r o s p e c t i v e r e c o m p u t a t i o n o f d e p re c i a t i o n i n a c c o r d a n c e wi t h t h e
n e w m e t h o d s h o u l d b e a d j u s t e d i n t h e a c c o u n t s i n t h e y e a r i n wh i c h t h e m e t h o d o f
d e p re c i a t i o n i s c h a n g e d . I n c a s e t h e c h a n g e i n t h e m e t h o d r e s u l t s i n d e f i c i e n c y i n
d e p re c i a t i o n i n r e s p e c t o f p a s t y e a rs , t h e d e f i c i e n c y s h o u l d b e c h a rg e d i n t h e s t a t e m e n t
o f p ro f i t a n d l o s s . I n c a s e t h e c h a n g e i n t h e m e t h o d r e s u l t s i n s u r p l u s , t h e s u r p l u s s h o u l d b e
c re d i t e d t o t h e s t a t e m e n t o f p ro f i t a n d l o s s . S u c h a c h a n g e s h o u l d b e t re a t e d a s a c h a n g e i n
accounting policy and its effect should be quantified and disclosed.
N o te s - 7 , t o th e S c h e d ul e -I I of C o mp a ni e s Ac t 2 0 1 3
Fr o m t h e d a t e t h i s S c h e d u l e c o m e s i n t o e f f e c t , t h e c a r ry i n g a m o u n t o f t h e a s s e t a s o n t h a t
date
(a ) s h a l l b e d e p re c i a t e d o v e r t h e r e m a i n i n g u s e f u l l i f e o f t h e a s s e t a s p e r t h i s S c h e d u l e ;
(b ) a f t e r re t a i n i n g t h e r e s i d u a l v a l u e , s h a l l b e re c o g n i s e d i n t h e o p e n i n g b a l a n c e o f re t a i n e d
e a r n i n g s w h e re t h e r e m a i n i n g u s e f u l l i f e o f a n a s s e t i s n i l .
Example :
Depreciation Treatment as per Companies Act, 2013
Name of the asset: Furniture & Fixtures
Year of
Acquisition
of asset
Original No of year
Cost
used as on
31/03/2014
Depreciation
Charged as on
31/03/2014 @
6.33% (Sch-XIV
CA-1956)
Net
Residual Useful life Remaining Amount to be Depreciation to be
Carrying Value 5%
as per
Useful life charged from provided for 2014Amount as
of cost Companies
as on
Opening
15
on
Act 2013 31/03/2014
retain
31/03/2014
earnings on
01/04/2014
1
2002-03
2
10,000
3
11
4
6,963.00
5= 2-4
3,037.00
6=2 x 5%
500
7
10
8
0
9= 5-6
2,537.00
10=(5-6)/8
2003-04
10,000
10
6,330.00
3,670.00
500
10
3,170.00
2004-05
10,000
5,697.00
4,303.00
500
10
3803.00
2005-06
10,000
5,064.00
4,936.00
500
10
2218.00
AS-6 Vs Schedule-II 1
It is clear from the above table that, by virtue of useful life of depreciation as envisaged in Schedule-II of
Companies Act, 2013 the carrying amount of Asset is charged to opening retain earnings if remaining useful life is
NIL (Note-7(i) of Schedule-II). The above adjustment which is in due course of change in method of depreciation is
not as per the requirement of AS-6.
AS-6 Vs Schedule-II 2
From the example cited above it is clearly understood that the depreciation on fixed asset which are having useful
life charged to statement of profit and Loss on prospective basis not as per retrospective basis.
From the above analysis, It depicts that at the time of transition to new method of depreciation as per Schedule-II
of Companies Act,2013, the requirement of Accounting Standard -6 Depreciation Accounting has been violated.
Earlier as per Companies Act, 1956, depreciation on fixed asset has been calculated as per the percentage
provided in schedule-XIV of Companies Act,1956 and As far as Accounting of depreciation is concerned provision
contained in Accounting Standards-6: Depreciation Accounting is required to be followed.
But Companies Act,2013 vide its Schedule II prescribe for both calculation of depreciation based on Useful life of
individual Asset as well as accounting of depreciation.
Hence, In authors view the requirement of Schedule-II of companies Act,2013 is always prevail over the
treatment prescribed in Accounting Standard-6
Useful
Rate
Rate
Life
[SLM]
[WDV]
60 Years
1.58%
4.87%
30 Years
3.17%
9.50%
30 Years
3.17%
9.50%
Years
19.00%
45.07%
3 Years
30 Years
31.67%
3.17%
63.16%
9.50%
Buildings [NESD]
(a) Building (other than factory buildings) RCC Frame
Structure
(b) Building (other than factory buildings) other than RCC
Frame Structure
II
III
Roads [NESD]
(a) Carpeted Roads
(i)
10 Years
9.50%
25.89%
(ii)
Years
19.00%
45.07%
Years
31.67%
63.16%
15 Years
6.33%
18.10%
11.88%
31.23%
(ii)
Years
13 Years
7.31%
20.58%
13 Years
7.31%
20.58%
theproductionandexhibitionof
cinematograph
Reproducing
films,
recording
equipments,
machines, printing
and
developing
machines,
editing
2
Projecting equipment for exhibition of films
Plant and Machinery used in glass
1
13 Years
7.31%
20.58%
Years
11.88%
31.23%
10 Years
9.50%
25.89%
11.88%
31.23%
3
(iii)
Years
Useful
Rate
Rate
Life
[SLM]
[WDV]
18 Years
5.28%
15.33%
13 Years
7.31%
20.58%
(v)
18 Years
5.28%
15.33%
Satellites
18 Years
5.28%
15.33%
25 Years
3.80%
11.29%
wells), 25 Years
3.80%
11.29%
Petrochemical Plant
25 Years
3.80%
11.29%
25 Years
3.80%
11.29%
Pipelines
30 Years
3.17%
9.50%
Drilling Rig
30 Years
3.17%
9.50%
Field operations (above ground) Portable 8 Years 11.88% 31.23% boilers, drilling
tools, well-head tanks, etc.
8
(vi)
Loggers
40 Years
2.38%
7.22%
Generation Plant
2
40 Years
2.38%
7.22%
40 Years
2.38%
7.22%
40 Years
2.38%
7.22%
network assets
(vii)
22 Years
4.32%
12.73%
35 Years
2.71%
8.20%
30 Years
3.17%
9.50%
30 Years
3.17%
9.50%
Sinter Plant
20 Years
4.75%
13.91%
Blast Furnace
20 Years
4.75%
13.91%
Coke Ovens
20 Years
4.75%
13.91%
20 Years
4.75%
13.91%
25 Years
3.80%
11.29%
Useful
Rate
Rate
Life
[SLM]
[WDV]
40 Years
2.38%
7.22%
40 Years
2.38%
7.22%
40 Years
2.38%
7.22%
Turbine [NESD]
40 Years
2.38%
7.22%
40 Years
2.38%
7.22%
40 Years
2.38%
7.22%
Roll Grinder
40 Years
2.38%
7.22%
Soaking Pit
30 Years
3.17%
9.50%
Annealing Furnace
30 Years
3.17%
9.50%
10
Rolling Mills
30 Years
3.17%
9.50%
11
30 Years
3.17%
9.50%
25 Years
3.80%
11.29%
25 Years
3.80%
11.29%
[NSED]
12
13
(ix)
2
(x)
Other Equipments
15 Years 6.33%18.10%
Reactors
Distillation Columns
Drying equipments /
20 Years
4.75%
13.91%
20 Years
4.75%
13.91%
4.75%
13.91%
4.75%
13.91%
Decanters
(xi)
20 Years
12 Years
7.92%
22.09%
20 Years
4.75%
13.91%
15 Years
6.33%
18.10%
10 Years
9.50%
25.89%
[NESD]
4
Earth-moving equipments
Years
10.56%
28.31%
12 Years
7.92%
22.09%
15 Years
6.33%
18.10%
Useful
Rate
Rate
Life
[SLM]
[WDV]
10 Years
9.50%
25.89%
8 Years
11.88%
31.23%
10 Years
9.50%
25.89%
Years
15.83%
39.30%
Years
11.88%
31.23%
Years
11.88%
31.23%
Years
11.88%
31.23%
(b) Motor buses, motor lorries, motor cars and motor taxies
used in a business of running them on hire
(c) Motor buses, motor lorries, motor cars and motor taxies
other than those used in a business of running them on
25 Years
3.80%
11.29%
(ii)
20 Years
4.75%
13.91%
25 Years
3.80%
11.29%
20 Years
4.75%
13.91%
(iv)
30 Years
3.17%
9.50%
(v)
30 Years
3.17%
9.50%
30 Years
3.17%
9.50%
(vii)
20 Years
4.75%
13.91%
(viii)
20 Years
4.75%
13.91%
ships or boats
(ix)
Drill ships
25 Years
3.80%
11.29%
(x)
Hovercrafts
15 Years
6.33%
18.10%
(xi)
10 Years
9.50%
25.89%
(xii)
14 Years
6.79%
19.26%
Speed boats
13 Years
7.31%
20.58%
(ii)
Other vessels
28 Years
3.39%
10.15%
Useful
Rate
Rate
20
Life
Years
[SLM]
4.75%
[WDV]
13.91%
IX
15
Years
6.33%
18.10%
XI
15
5
Years
Years
6.33%
19.00%
18.10%
45.07%
XII
Years
15.83%
39.30%
Years
31.67%
63.16%
10
Years
9.50%
25.89%
Years
Years
19.00%
9.50%
45.07%
25.89%
Years
6.33%
18.10%
5
10
XV
15