V Tanima Adak

V Anjan Panda
IIPM Kolkata
V Accountingstandard (AS) 6, depreciation
accounting was issued by the Institute of
Chartered Accountants of India (ICAI) in 1985
& in the companies act in 1988.
V repreciationis 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
& market changes
V Assets which are used during more than one
accounting period.

V Has a limited useful life.

V Enterprise holds it for the purpose of production.

V For rental to others.

V For administrative purposes.

V usage
V passage of time
V wear and tear,
V technological outdating
V obsolescence
V depletion
V other such factors.
V 1.Forest, plantations, regenerative natural
resources.
V 2.Wasting assets including expenditure on
the exploration for and extraction of
minerals, oils, natural gas and similar non
regenerative resources.
V 3.Expenditure on research and development.
V 4.Goodwill.
V 5.Life stock.
V 1.Straight-linedepreciation
V 2.Reducing-Balance Method
V 3.Activity depreciation
V 4.Sum-of-Years' rigits Method
V 5.Units-of-Production repreciation Method
V 6.Units of time depreciation
V 7.Group repreciation Method
V 8.Composite repreciation Method
V Type of asset

V Nature of the use of such asset

V Circumstances prevailing in the business

Assessment of depreciation & the amount to be
charged are usually based on the following 3
factors:

V Historical cost or other amount substituted

for the historical cost of the depreciable
asset when the asset has been revalued.
V Expected useful life of the depreciable asset.
V Estimated residual value of the depreciable
asset.
V The net book value of an asset is reduced by
the same amount each period. What this
means is that you take the total value and
divide it by some number of periods. This
amount is taken off the balance at the end of
each period.
 

   
  


  


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1 Rs. 17000 Rs. 3000 Rs. 3000 Rs. 14000

(Original cost)
2 Rs. 14000 Rs. 3000 Rs. 6000 Rs.11000
3 Rs.11000 Rs. 3000 Rs. 9000 Rs. 8000
4 Rs. 8000 Rs. 3000 Rs. 12000 Rs. 5000
5 Rs. 5000 Rs. 3000 Rs. 15000 Rs. 2000
(Scrap value)
V Thenet book value of an asset is reduced by
the same proportion each period. What this
means is that at the end of every period you
reduce the value by a fixed percentage. Each
period uses the previous period's balance to
work out the amount
 

   
    
  


  


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1 Rs.1,000 20% Rs. 180 Rs. 180 Rs. 820
(Original
Cost)
2 Rs.820 20% Rs. 164 Rs. 344 Rs. 656

3 Rs.656 20% Rs, 131.2 Rs. 475.2 Rs. 524.8

4 Rs.524.8 20% Rs. 104.96 Rs. 580.16 Rs. 419.84

5 Rs.419.84 Rs.419.84 ² Rs. 319.84 Rs. 900 Rs. 100

Rs. 100 (scrap value)
V Activitydepreciation methods are not based
on time, but on a level of activity. This could
be miles driven for a vehicle, or a cycle
count for a machine. When the asset is
acquired, its life is estimated in terms of this
level of activity.
V Sum-of-Years rigits is a depreciation method
that results in a more accelerated write-off
than straight line, but less than declining-
balance method. Under this method annual
depreciation is determined by multiplying
the repreciable Cost by a schedule of
fractions.
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1 Rs.1,000 Rs.900 5/15 Rs.300 Rs.300 Rs.700
(Original (Rs.900 *
Cost) 5/15)
2 Rs.700 Rs.900 4/15 Rs.240 Rs.540 Rs.460
(Rs.900 *
4/15)
3 Rs.460 Rs.900 3/15 Rs.180 Rs.720 Rs.280
(Rs.900 *
3/15)
4 Rs. 280 Rs.900 2/15 Rs.120 Rs.840 Rs.160
(Rs.900 *
2/15)
5 Rs. 160 Rs.900 1/15 Rs.60 Rs.900 Rs.100
(Rs.900 * (Scrap
1/15) Value)
V Under the Units-of-Production method,
useful life of the asset is expressed in terms
of the total number of units expected to be
produced. Annual depreciation is computed
in three steps.
V First, a   
  
 
V Second,   
    
 
V Third, annual depreciation, or   
 
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1 Rs.70,000 1000 Rs. 10 Rs. 10,000 Rs. 10,000 Rs. 60,000

(Original
Cost)
2 Rs. 60,000 1100 Rs. 10 Rs. 11,000 Rs. 21,000 Rs. 49,000
Rs. 49,000 1200 Rs. 10 Rs. 12,000 Rs. ,000 Rs. 7,000
4 Rs. 7,000 1 00 Rs. 10 Rs. 1 ,000 Rs. 46,000 Rs. 24,000
5 Rs. 24,000 1400 Rs. 10 Rs. 14,000 Rs. 60,000 Rs. 10,000
(scrap
value)
V Unitsof Time repreciation is similar to units
of production, and is used for depreciation
equipment used in mine or natural resource
exploration, or cases where the amount the
asset is used is not linear year to year.
V Group repreciation method is used for
depreciating multiple-asset accounts using
straight-line-depreciation method. Assets
must be similar in nature and have
approximately the same useful lives.
   $  
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&
    
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Computers Rs. 5,500 Rs. 500 Rs. 5,000 5 Rs. 1,000
V The composite method is applied to a
collection of assets that are not similar, and
have different service lives. For example,
computers and printers are not similar, but
both are part of the office equipment.
repreciation on all assets is determined by
using the straight-line-depreciation method.
   $  
 %
&
    
  '    
 
 &

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Computers Rs. 5,500 Rs. 500 Rs. 5,000 5 Rs. 1,000

Printers Rs. 1,000 Rs. 100 Rs.900 3 Rs. 300

Total Rs. 6,500 Rs. 600 Rs. 5,900 4.5 Rs. 1,300
V On 1.04.2001, ABC Ltd. Purchased plant and
machinery worth Rs. 20,00,000 useful life
being 8 years. Till the year ended 31.3.2004,
the amount of accumulated depreciation on
this plant and machinery was Rs. 8,00,000.
The remaining useful life of the plant and
machinery was reviewed during 2004-05,
which was estimated at 2 years due to wear
and tear. Calculate the amount of
depreciation to be charged from the year
2004-05 onwards.
V As per para 22 of AS-6 the useful life of a depreciable
asset should be estimated after considering the
following factors like expected physical wear and
tear, obsolescence, legal or other limits on the use of
the asset.
V As per para 23 of AS-6 the useful lives of the major
depreciable assets or classes of depreciable assets
may be reviewed periodically. Where there is a
revision of the estimated useful life of an asset, the
depreciable amount should be charged over the
revised remaining useful life.
V Here, in this case, the depreciable amount is Rs.
(20,00,000-8,00,000) = Rs. 12,00,000 and the revised
remaining useful life is 2 years. Therefore, the
amount of depreciation to be charged from the year
2004-05 onwards is Rs. 12,00,000/2 = Rs. 6,00,000
p.a.
V On1.04. 2003, the value of X Limited·s plant
and machinery was Rs. 1,000 lakhs. The
company provided depreciation @ 15% p.a.
under Reducing Balance Method. It was found
that about Rs. 150 lakhs of imported asset,
which is the component of plant and
machinery acquired on 1.4.2003, would be
obsolete in 3 years. Accordingly, X Limited
wants to write off this asset over 3 years.
Can the company do so as per AS-6?
V As per para 24 of AS-6, 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 may also be 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.
V Therefore, in this case, the company can write
off the asset in 3 years, since the asset has
independent useful life.
V the historical cost or other amount
substituted for historical cost of each class of
depreciable assets;
V total depreciation for the period for each
class of assets;
V the related accumulated depreciation;
V depreciation methods used;
V depreciation rates or the useful lives of the
assets, if they are different from the
principal rates specified in the statute
governing the enterprise.
V Mac Hotels Pvt. Ltd.

V Satish rhume & Co.