AS 6: Depreciation

Accounting

IPCC Paper 1: Accounting Chapter 1 Unit 2

Depreciation - AS 6

CA. Yagnesh Desai

Introduction

This statement deals with depreciation

accounting and applies to all
depreciable assets;

Depreciation is allocated so as to
charge a fair proportion of depreciable
amount in each accounting period
during the expected useful life of asset.

Applicability

AS – 10 Fixed Asset

This standard was introduced in 1984

Revised later in the year 1994.

It is applicable to corporates as well all non

corporate entities since 1995

This standard is inextricably connected with

another standard ? Guess which ?

Scoped Out – Not

applicable to

Forests, Plantations and similar regenerative natural resources

Wasting Assets including-

• Mineral rights, Expenditure on the Exploration for and Extraction of Minerals,

Oil, Natural Gas and similar non- regenerative resources.

Expenditure on Research & Development;

Goodwill

Livestock

Land- unless it has limited life

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Learning Objectives

At What rate should Fixed Assets be

depreciated ?

What is the concept of Useful life. ?

Can An Enterprise Change rates of

depreciation ?

If yes, How changes are dealt with ?

Retrospectively or Prospectively. ?

What is Depreciation ?

Para 3. Depreciation is a measure of the wearing out,

consumption or other loss of value of a depreciable asset
arising from use, effluxtion of time or obsolescence
through technology and market changes.

Depreciation includes amortisation of assets whose

useful life is predetermined. Amortisation is phrase used
for Intangible Assets.

Definition – Depreciable
Assets

Are assets expected to be used during more

than one accounting period;

Have a limited useful life; and

Are held by an enterprise for use in the production

or supply of good and services, for rentals to others,
or for administrative purposes & NOT for sale in the
ordinary course of business.

Definitions – Useful Life

Is either the period over which a

depreciable asset is expected
to be used by the enterprise; or

The number of production or

similar units expected to be
obtained from the use of the
asset by the enterprise

Definitions –
Depreciable Amount

Of a depreciable asset is
its historical cost, or
other amount substituted
for historical cost in the
financial statement,
LESS the estimated
residual value .

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Depreciable
Amount

Historical Cost
or Other
Amount
substituted for
HC

Residual
Value

Useful Life
(Years )

Depreciable
Amount

Amount of
Depreciation

Usually following three factors help assess

Depreciation

Historical Cost

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•Historical Cost includes any money

outlay or equivalent in connection with:

1.Acquisition,
2.Installation,
3.Commissioning,
4.Additions and
5.Improvement
In other words – Initial Cost at which a
asset is recognized and measured.

Historical Cost- When

can it Change ? ?
 Subsequent Changes may occur
as a result of Long term liability
due to:
I. price adjustments,
II.changes in duties & similar
factors.

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Useful Life

Useful life of a depreciable asset is

estimated based on following factors:

Expected Physical wear and tear;

• Obsolescence;
• Legal or other limits on the use of the asset.

Periodic review of the useful life of major

depreciable assets may be required.

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Useful Life

Of a depreciable asset is shorter than the

physical life.

Some times pre-determined by legal or

contractual limits. Assets under Finance Lease.

Depends of the extent of use & physical

deterioration-Repairs and maintenance policy

Determination of useful life is a matter of

estimation.

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Useful Life gets reduced by

obsolescence

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(a)
technological
changes;
(b)
improvement
in production
methods;

(c) change in
market demand
for the product
or service
output of the
asset; or

(d) legal or
other
restrictions.

Changes in Estimated Useful

Life

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If it is considered that the original

estimate of useful life of an asset
requires any revision.

The unamortised depreciable amount of

the asset is charged to revenue over
the revised remaining useful life.

Thus , the effect is Prospective and

NOT Retrospective

Residual Value

If likely to be insignificant then considered NIL;

If likely to be significant then estimated at the time of

acquisition / subsequent revaluation of the asset.

One of the basis of the estimation would be realisable

value of similar assets which have reached the end of

their lives, and have operated under similar conditions.

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Method of Depreciation

Commonly employed
methods in industry and
commercial enterprise
are:

Straight-line
method (SLM),
and
Reducing Balance
method.

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A combination of more than one method is

sometimes used.

Basis for Selection of

Method.

Management selects most appropriate method

based on important factors such as:

1. Type of Asset,
2. The nature and use of asset, and
3. Circumstances prevailing in the business.

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Basic Accounting Entry

20

An allowance account is created for

Accumulated Depreciation

Viz. Accumulated Depreciation

This account is contra to Fixed Assets

Meaning to arrive at Net Book Value

Materiality

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 Depreciation fully allocated in same

accounting period when the asset does
not have a material value. !!!

 This in other words , remaining net

book value is fully charged as
Depreciation. The asset is effectively
de-recognised.

Can Depreciation
Method be
Changed ?

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Change in Method of
Depreciation
• Method of depreciation once selected is
consistently applied.

• Change from one method to another made

only if:

1. Its required by a Statute, or

2. For compliance with an accounting std.,
3. Considered that such a change would result
in more appropriate preparation or
presentation of the financial statements.

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Change in Accounting
Policy OR Change in
Estimates

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 A Change in Method of Depreciation is

treated as a Change in …??
A change in accounting policy , and changes
in accounting policy is accounted for
retrospectively

How Change in Method is

accounted for ? Retrospectively.

There arises either a surplus or

deficiency when such recalculation
is made.

In case of Surplus: Its credited to

the Statement of profit and loss

In case of Deficiency: Its charged

to the Statement of profit and loss.

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Depreciation is Re-calculated in accordance with

the new method

Change in other factors

1. Change in Historical Cost

• Depreciation is calculated prospectively over Residual

useful life

2. Revision in Useful life

• Unamortised depreciation charged over REVISED
remaining useful life

3. Addition or extension in the asset

- Calculate depreciation at the same rate over

remaining useful life

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Rate of Depreciation !!!

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The Statute governing an enterprise may provide

for Depreciation rates

Example:
 Companies Act 1956 provides for Depreciation rates in
Schedule XIV for various assets.

 Income tax Act provides rates of Depreciation for the Block

of assets .

 The Moot Question – Which Rate to apply ?

Rate of Depreciation !!!

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As per
managem
ent

Rate of
Depreciati
on -SLM

As per
Statue
Rate of
Depreciati
on- SLM

Can
managem
ent apply
rate based
on its
estimate

The Rate
of
Depreciati
on will be
20 Years 05% 10 Years 10% No 10%

Useful Life as per management ‘s estimate is higher

than the statue
This means lower rate of Depreciation need to
be applied
This is NOT Permissible

Rate of Depreciation !!!

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As per
managem
ent

Rate of
Depreciati
on -SLM

As per
Statue
Rate of
Depreciati
on- SLM

Can
managem
ent apply
rate based
on its
estimate

The Rate
of
Depreciati
on will be
10 Years 10 % 20 Years 5 % Yes 10%

Useful Life as per management ‘s estimate is shorter than

the statue.
This means higher rate of Depreciation need to be applied

This is permissible

Conclusion
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Enterprise can not depreciate asset at rate

lower than the one prescribed under the
Companies Act,1956
To put in other words
The rates of depreciation may ideally be as
per useful life but not lower than the rates
prescribed under the Companies Act 1956.

Component Accounting

• Optional NOT compulsory to

implement

• Airline companies follow this method

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Extract –para 8.3 of AS

10

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• 8.3. In certain circumstances, the accounting for an

item of fixed asset may be improved if the total
expenditure thereon is allocated to its component
parts, provided they are in practice separable, and
estimates are made of the useful lives of these
components.
• For example, rather than treat an aircraft and its
engines as one unit, it may be better to treat the
engines as a separate unit if it is likely that their
useful life is shorter than that of the aircraft as a
whole.

Component Accounting –
Example: Air Craft

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Description

Useful
Life
Dep.
Rate
Rate at
which
should have
been Dep.

Impact
Landing
Gear

5 10% 20%

Under
Depreciated

Frame 20 10% 5%

Over
Depreciated

Engine 10 10% 10%

Adequately
Depreciated

Depreciation and
Disposal

• In case of Disposal / Destruction/ Demolition/

or when assets are discarded :

 Any Material Net Surplus or Deficiency are

disclosed

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Presentation in Financial
Statement – Balance Sheet

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Reduced from the Gross Book Value

Description Amount
Fixed Assets – Gross Book
Value
25,00,000
Less : Accumulated
Depreciation
5,00,000
Net Book Value 20,00,000

Presentation in Financial
Statement – Statement of Profit &
Loss

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Depreciation Expenses is
presented on the debit side of the
Statement of Profit & Loss

Debit Profit & Loss Account / Depreciation Exp.

Credit Accumulated Depreciated
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Disclosures

The related accumulated depreciation.

Total depreciation for the period of each

class of assets,

Historical cost or other amount substituted

for Historical cost of each class of

depreciable assets;

Additional disclosures

Note: Audio for this slide will be updated shortly

Following information should also be disclosed along

with disclosures of other accounting policies:

• Depreciation methods used, and

• Depreciation rates or useful lives of the assets

(if they are different from the principal rates specified in the
statute governing the enterprise e.g: Companies Act, 1956)

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Disclosures – Revalued Assets

Note: Audio for this slide will be updated shortly

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• If the depreciable assets are revalued, the provision

for depreciation is based on the revalued amount on
the estimate of the remaining useful life of such
assets.

• In case the revaluation has a material effect on the

amount of depreciation, the same is disclosed
separately in the year in which revaluation is carried
out.

Thank You

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