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Depreciation Accounting Accounting Standard 6 Presented by :
Depreciation Accounting
Accounting Standard 6
Presented by :
CA. Rajeev Bansal ACA, D.I.S.A.(ICA) B. Com. M/s Rajeev Lakshmi Bansal & Co. Chartered Accountants
CA. Rajeev Bansal
ACA, D.I.S.A.(ICA) B. Com.
M/s Rajeev Lakshmi Bansal & Co.
Chartered Accountants

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Applicability  This Statement applies to all depreciable assets, except :— – (i) forests, plantations ;
Applicability
This Statement applies to all depreciable
assets, except :—
– (i) forests, plantations ;
– (ii) wasting assets, Minerals and Natural Gas;
– (iii)expenditure on research and development;
– (iv) goodwill;
– (v) live stock – Cattle, Animal Husbandry.
This statement also does not apply to land
unless it has
a limited
useful
life for
the
enterprise.

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concept of Depreciation

concept of Depreciation  Depreciation is a measure of the wearing out, consumption or other loss
 Depreciation is a measure of the wearing out, consumption or other loss of value of
 Depreciation is a measure of the wearing
out, consumption or other loss of value of
a depreciable asset arising from
– use,
– effluxion of time or
– obsolescence through technology and market
changes.

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 Depreciable assets are assets which – (i) are expected to be used during more than
Depreciable assets are assets which
– (i) are expected to be used during more than
one accounting period; and
– (ii) have a limited useful life; and
– (iii) are held by an enterprise for use in the
production or supply of goods and services, for
rental to others, or for administrative purposes
and not for the purpose of sale in the ordinary
course of business

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Useful life is either

(i) the period over which a depreciable asset is expected to be used by the enterprise; or

(ii) the number of

production or Similar

units expected to be obtained from the use

 Useful life is either  (i) the period over which a depreciable asset is expected

of the asset by the enterprise.

Useful life of a depreciable asset should be estimated based on :

  • Expected physical wear & tear;

  • Obsolescence;

  • Legal & other limits on the use of assets.

The useful life of a depreciable assets is shorter than its physical life. This is due to:

  • Legal & contractual limits, such as the expiry of related leases;

  • Extent of use & physical deterioration;

  • Obsolescence arising from technological changes, change in market demands, legal & other restriction

Depreciable Amount
Depreciable Amount
 Depreciable amount means historical cost less estimated residual value. E.g. – Cost of Asset is
 Depreciable amount means historical cost
less estimated residual value. E.g.
– Cost of Asset is Rs. 5,00,000, ERV is Rs. 25,000.
Then,
The
Depreciable Amount will be Rs.
5,00,000 – Rs. 25,000 i.e. Rs. 4.75,000.
 The depreciable amount of a depreciable
asset should be allocated on a systematic
basis to each accounting period during the
useful life of the asset.
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Dep. on Addition/Extensions
Dep. on Addition/Extensions
 Any addition or extension which becomes an integral part of the existing asset should be
Any addition or extension which becomes an
integral part of the existing asset should
be
depreciated over the remaining useful life of that
asset. The depreciation on such addition or
extension provided at the rate applied to the
existing asset.
Where an addition or extension retains a separate
identity and is capable of being used after the
existing asset is disposed of, depreciation should
be provided independently on the basis of an
estimate of its own useful life.
Method of Charging of Depreciation
Method of Charging of Depreciation
 There are several method of depreciation: – Straight Line Method (SLM) – Written Down Method
There are several method of depreciation:
– Straight Line Method (SLM)
– Written Down Method (WDV)
– Sum of year Digits Method
– Annuity Method
– Machine Hour Method
– Production Hour Method

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Chance in Method of Depreciation
Chance in Method of Depreciation
 A change from one method of providing depreciation to another should be made only if
 A
change
from
one
method
of
providing
depreciation to another should be made only if the
adoption of the new method is required by
– statute or
– for compliance with an accounting standard or
– if it is considered that the change would result in
a more appropriate preparation or presentation
of the financial statements of the enterprise.

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Chance in Method of Depreciation

 When such a change in the method of depreciation is made, depreciation should be recalculated
 When
such
a
change
in
the
method
of
depreciation is made, depreciation should be
recalculated in accordance with the new method
from the date of the asset coming into use.
The
deficiency
or
surplus arising from
retrospective recomputation of depreciation in
accordance with the new method should be
adjusted in the accounts in the year in which the
method of depreciation is changed.
Disclosures  If any depreciable asset is disposed of, discarded, demolished or destroyed, the net surplus
Disclosures
 If
any
depreciable
asset
is
disposed of,
discarded, demolished or destroyed, the net
surplus or deficiency, if material, should be
disclosed separately.
The following information should be disclosed
in the financial statements:
– (i) the historical cost or other amount substituted
for historical cost (i.e. revalued amount) of each
class of depreciable assets;
– (ii) total depreciation for the period for each class
of assets; and
– (iii) the related accumulated depreciation.
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Disclosures
Disclosures
 The following information should also be disclosed in the financial statements along with the disclosure
 The
following
information
should
also
be
disclosed in the financial statements along
with the disclosure of other accounting
policies:
– (i) depreciation methods used; and
– (ii) depreciation rates or the useful lives of the
assets, if they are different from the principal rates
specified in the statute governing the enterprise.

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 Change change in depreciation amount due to in method is to be given retrospective effect
 Change
change
in
depreciation
amount
due
to
in
method
is
to
be
given
retrospective effect but in all other cases
(like Change in Cost, Life, Revaluation
etc.)
Change
in
depreciation
is
given
prospective effect
Minimum Depreciation  The Department of Company Affairs has clarified that the rates contained in Schedule
Minimum Depreciation
The Department of Company Affairs has clarified
that the rates contained in Schedule XIV to the
Company Act, 1956 should be viewed as the
minimum rates, and, therefore, company cannot
charge depreciation at rates lower than specified in
the Schedule in relation to the assets. However, if on
technical evaluation, higher rate of depreciation are
justified, the higher rates should be applied.
Where
rates
other than Schedule
XIV rates
are
applied, Appropriate disclosers in the notes to the
accounts would be required
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Depreciation on Items Below Rs. 5000  As per Schedule XIV of the Companies Act, individual
Depreciation on Items Below
Rs. 5000
As per Schedule XIV of the Companies Act, individual
items of fixed assets below Rs. 5000/- should be
depreciated at 100%. For Exp,
An
item
of furniture
such
as
a
chair
or table
is
capable of being used independently, therefore each
chair
or
table
will
have
to
be
provided
100%
depreciation if its individual value does not exceed
Rs. 5000. The 100% provision cannot be avoided by
arguing that the furniture can be used only as a set,
i.e.
a set
of chairs, which in aggregate cost more
than Rs. 5000.
CONTIN……
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 In case of Plant and Machinery: – Where the aggregate actual cost of individual items
 In case of Plant and Machinery:
– Where the aggregate actual cost of individual
items of plant and machinery costing Rs.
5000 or less constitutes more than 10% of
total actual cost of plant and machinery,
normal Schedule XIV rates should be used.
(Note number 8 of Schedule XIV of the
Companied Act, 1956)

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Query  Info ltd. Has acquired on a 999 year lease a huge piece of land
Query
Info ltd. Has acquired on a 999 year lease a huge
piece
of
land
for
Rs.
999
lakhs
from
the
Government. The
land
along
with
any
construction
thereon
will
revert
to
the
Government
after
999
years.
Since
the
said
period is
very
long
and
is
akin
to owning
the
land,
Info
Ltd does
not
wish
to
amortise
the
consideration. Is that acceptable under Indian
GAAP

?

Query  Info ltd. Has acquired on a 999 year lease a huge piece of land

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Response  AS- 19 “Leases” does not apply to lease agreement to use lands. AS 6
Response
 AS-
19
“Leases”
does
not
apply
to
lease
agreement to use lands. AS 6 „ Depreciation
Accounting”, does not apply to land unless it has
a limited useful life for the enterprise. In other
words,
if
the
life
of land
the
is limited
given case,
than AS
999 years
6
would apply.
In
though very long is still limited. Therefore, AS 6
would apply. Therefore each year
Info
Ltd will
have to charge Rs. 1 lakh to the income
statement as amortization expenses.
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T H A N K Y O U
T H A N K
Y O U