Depreciation Provisions under the Companies Act, · PDF fileDepreciation Provisions under the Companies Act, 2013 CA. Mohan Mittal (9811024242, [email protected])

Depreciation Provisions underthe Companies Act, 2013

CA. Mohan Mittal(9811024242, [email protected])

Overview of some of the key changes inthe Schedule II as compared to erstwhileSchedule XIV• Schedule II prescribes indicative useful lives of

various assets instead of:Straight Line Method (SLM)Written Down Value (WDV)

• For tangible assets only• No life prescribed for intangible assets.

Accounting standard-26 to govern the same• Depreciation is systematic allocation of the

depreciable amount of an asset over its usefullife.

• Schedule II prescribes indicative useful lives ofvarious assets instead of:Straight Line Method (SLM)Written Down Value (WDV)

• For tangible assets only• No life prescribed for intangible assets.

Accounting standard-26 to govern the same• Depreciation is systematic allocation of the

depreciable amount of an asset over its usefullife.

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• The depreciable amount of an assets is the cost of an asset orother amount substituted for cost, less its residual value

• Useful life is the period over which an asset is expected to beavailable for use by an entity, or the number of production orsimilar units expected to be obtained from the asset by the entity.Schedule XIV of Companies Act, 1956 does not include suchrequirement.

• Companies are allowed to follow different useful lives/residualvalue if an appropriate justification is given supported by technicaladvice.

• Component accounting and useful life of a significant part of anasset to be determined separately

• No separate rate for double/ triple shift; depreciation to beincreased based on the double shift/triple shift use of the assets

• Useful lives of fixed assets prescribed under schedule II are differentfrom those envisaged under Schedule XIV of the Companies Act,1956.

• No reference to depreciation on low value assets.

• The depreciable amount of an assets is the cost of an asset orother amount substituted for cost, less its residual value

• Useful life is the period over which an asset is expected to beavailable for use by an entity, or the number of production orsimilar units expected to be obtained from the asset by the entity.Schedule XIV of Companies Act, 1956 does not include suchrequirement.

• Companies are allowed to follow different useful lives/residualvalue if an appropriate justification is given supported by technicaladvice.

• Component accounting and useful life of a significant part of anasset to be determined separately

• No separate rate for double/ triple shift; depreciation to beincreased based on the double shift/triple shift use of the assets

• Useful lives of fixed assets prescribed under schedule II are differentfrom those envisaged under Schedule XIV of the Companies Act,1956.

• No reference to depreciation on low value assets.

Is it mandatory to providedepreciation every year?

• Even if the company is not declaring dividendunder section 123?

• Even if it is a private company to which section198 is not applicable?

• Answer is “YES”.

• Even if the company is not declaring dividendunder section 123?

• Even if it is a private company to which section198 is not applicable?

• Answer is “YES”.

Overview• Section 123- Declaration of dividend.

• Section 198- computation of net profit for the purpose of calculation ofoverall maximum managerial remuneration under section 197.

• AS 6 - Depreciation accounting.

• AS-26- Intangible assets.

• Schedule II old Schedule is XIV

• Section 123- Declaration of dividend.

• Section 198- computation of net profit for the purpose of calculation ofoverall maximum managerial remuneration under section 197.

• AS 6 - Depreciation accounting.

• AS-26- Intangible assets.

• Schedule II old Schedule is XIV

Section 123- Declaration of dividend

• Sec 123. (1) No dividend shall be declared or paidby a company for any financial year except—– (a) out of the profits of the company for that year

arrived at after providing for depreciation inaccordance with the provisions of sub-section (2), orout of the profits of the company for any previousfinancial year or years arrived at after providing fordepreciation in accordance with the provisions of thatsub-section and remaining undistributed, or out ofboth; or…

• Sec 123. (1) No dividend shall be declared or paidby a company for any financial year except—– (a) out of the profits of the company for that year

arrived at after providing for depreciation inaccordance with the provisions of sub-section (2), orout of the profits of the company for any previousfinancial year or years arrived at after providing fordepreciation in accordance with the provisions of thatsub-section and remaining undistributed, or out ofboth; or…

Section 123- Declaration of dividend

• 123 (2): For the purposes of clause (a) of sub-section (1), depreciation shall be provided inaccordance with the provisions of Schedule II.

Sec 197- Managerial Remuneration

• 197. (1) The total managerial remunerationpayable by a public company, to its directors,including managing director and whole-timedirector, and its manager in respect of anyfinancial year shall not exceed eleven per cent ofthe net profits of that company for that financialyear computed in the manner laid down insection 198 except that the remuneration of thedirectors shall not be deducted from the grossprofits.

• 197. (1) The total managerial remunerationpayable by a public company, to its directors,including managing director and whole-timedirector, and its manager in respect of anyfinancial year shall not exceed eleven per cent ofthe net profits of that company for that financialyear computed in the manner laid down insection 198 except that the remuneration of thedirectors shall not be deducted from the grossprofits.

Sec 198- computation of net profits

• 198. (1) In computing the net profits of acompany in any financial year for the purposeof section 197….

• (4) In making the computation aforesaid, thefollowing sums shall be deducted, namely…– (k) depreciation to the extent specified in section

123;

• 198. (1) In computing the net profits of acompany in any financial year for the purposeof section 197….

• (4) In making the computation aforesaid, thefollowing sums shall be deducted, namely…– (k) depreciation to the extent specified in section

123;

Schedule II- Useful Lives to Compute Depreciation

• Part A-• Depreciation is a systematic allocation of the

depreciable amount of an asset over its usefullife. Useful life is the period over which an asset isexpected to be available for use by an entity orthe number of production units expected to beobtained from the asset by the entity.

• The useful life of an asset shall not be longer thanthe useful life specified in Part C.

• Residual value shall be 5% of the original cost ofthe asset.

• Part A-• Depreciation is a systematic allocation of the

depreciable amount of an asset over its usefullife. Useful life is the period over which an asset isexpected to be available for use by an entity orthe number of production units expected to beobtained from the asset by the entity.

• The useful life of an asset shall not be longer thanthe useful life specified in Part C.

• Residual value shall be 5% of the original cost ofthe asset.


• Part A-

• Where a company uses a useful life which isdifferent from the limits in Part C, justificationfor the difference shall be disclosed in itsfinancial statement.

• Part A-

• Where a company uses a useful life which isdifferent from the limits in Part C, justificationfor the difference shall be disclosed in itsfinancial statement.


• Part A-

• For intangible assets, the provision ofaccounting standards applicable for the timebeing in force shall apply except for toll roadsfor which method is prescribed in theSchedule.

• Part A-

• For intangible assets, the provision ofaccounting standards applicable for the timebeing in force shall apply except for toll roadsfor which method is prescribed in theSchedule.


• Part B-

• The useful life and residual value of anyspecific asset, as notified for accountingpurposes by a Regulatory Authorityconstituted under an Act of Parliament or theCentral government shall be applied incalculating the depreciation to be provided forsuch asset irrespective of the requirement ofthis Schedule.

• Part B-

• The useful life and residual value of anyspecific asset, as notified for accountingpurposes by a Regulatory Authorityconstituted under an Act of Parliament or theCentral government shall be applied incalculating the depreciation to be provided forsuch asset irrespective of the requirement ofthis Schedule.


• Part C-

• Nature of asset and their useful life

• No extra shift depreciation of certain assets.

• For double shift- 50% more for no. of daysworked

• For triple shift – 100% more

• Part C-

• Nature of asset and their useful life

• No extra shift depreciation of certain assets.

• For double shift- 50% more for no. of daysworked

• For triple shift – 100% more

Comparative rates- Factory building

Schedule II

• Useful life - 30 Years

• SLM rate – 3.17 %

• WDV rate - 9.5 %

• Rate of Dep=[1-nth root ofR/C}\]*100

• N useful Life. Residual. Cost

Schedule XIV

• WDV rate - 10 %

• SLM rate - 4.34%

• Useful life - 23 years


• SLM rate – 3.17 %

• WDV rate - 9.5 %

• Rate of Dep=[1-nth root ofR/C}\]*100

• N useful Life. Residual. Cost

• WDV rate - 10 %

• SLM rate - 4.34%


Comparative rates- other than factory building

Schedule II


• SLM rate - 1.58 %

• WDV rate - 4.87 %

Schedule XIV

• WDV rate - 5%

• SLM rate - 1.63%



• SLM rate - 1.58 %

• WDV rate - 4.87 %

• WDV rate - 5%

• SLM rate - 1.63%


Comparative rates- temporary structure

Schedule II


• SLM rate - 31.67%

• WDV rate - 63 %

Schedule XIV

• SLM rate - 100%

• WDV rate - 100%

• Useful life - 0 year


• SLM rate - 31.67%

• WDV rate - 63 %

• SLM rate - 100%

• WDV rate - 100%

• Useful life - 0 year

Comparative rates- P & M (General rate)

Schedule II


• SLM rate - 6.33%

• WDV rate - 18.10%

Schedule XIV

• SLM rate - 4.75%

• WDV rate - 13.91%



• SLM rate - 6.33%

• WDV rate - 18.10%

• SLM rate - 4.75%

• WDV rate - 13.91%


Comparative rates- P & M (Continuous process)

Schedule II


• SLM rate - 3.80%

• WDV rate - 11.29%

Schedule XIV

• SLM rate - 5.28%

• WDV rate - 15.33%



• SLM rate - 3.80%

• WDV rate - 11.29%

• SLM rate - 5.28%

• WDV rate - 15.33%


Comparative rates- Furniture & Fixtures

Schedule II


• SLM rate - 9.5%

• WDV rate - 25.89%

Schedule XIV

• SLM rate - 6.33%

• WDV rate - 18.10%



• SLM rate - 9.5%

• WDV rate - 25.89%

• SLM rate - 6.33%

• WDV rate - 18.10%


Comparative rates- Motor vehicle

Schedule II


• SLM rate - 9.5%

• WDV rate - 25.89%

Schedule XIV

• SLM rate - 9.5%

• WDV rate - 25.89%



• SLM rate - 9.5%

• WDV rate - 25.89%

• SLM rate - 9.5%

• WDV rate - 25.89%


SEC. 123 – SCHEDULE –II – PART C OF COMPANIES ACT, 2013USEFUL LIFE OF VARIOUS ASSETS & RATES OF DEPRECIATION UNDER

SLM & WDV CALCULATED TAKING 5% AS RESIDUAL VALUE

GeneralRates Double Shift Triple Shift

Nature ofAssets UsefulLifeInYears

SLMRate

WDVRate

SLMRate

WDVRate

SLMRate

WDVRate

I BUILDINGS [NESD]I BUILDINGS [NESD]

(a) Buildings (other than factory buildings)RCC FrameStructure

601.58% 4.87% - - - -

(b) Buildings (other than factory buildings)other than RCC Frame Structure

303.17% 9.50% - - - -

(c) Factory buildings 303.17% 9.50% - - - -

(d) Fences, wells, tube wells 519.00% 45.07% - - - -

(e) Others (including temporary structure,etc.) 331.67% 63.16% - - - -

II

BRIDGES, CULVERTS, BUNDERS,ETC. [NESD]

303.17% 9.50%

III

ROADS [NESD]

(a) Carpeted roads

(i) Carpeted Roads-RCC 109.50% 25.89% - - - -(i) Carpeted Roads-RCC 109.50% 25.89% - - - -

(ii) Carpeted Roads-other than RCC

519.00%

45.07% - - - -

(b) Non-carpeted roads 331.67%

63.16% - - - -

IV

PLANT AND MACHINERY

General rate applicable toplant andmachinery not coveredunder specialplant and machinery

(a) Plant and Machinery other thancontinuous process plant not covered under specific industries

156.33% 18.10%9.50% 27.16%

12.66%

36.21%

Plant and Machinery other thancontinuous process plant not covered under specific industries

27.16%

12.66%

36.21%

(b) continuous process plant forwhich no specialrate has been prescribed under(ii) below [NESD]

253.80% 11.29% -


• Part C-

• From the date this schedule comes into effect,the carrying amount of asset on that date:– shall be depreciated over the remaining useful life

of the asset as per this schedule.

– after retaining the residual value, may(replacedfrom ‘shall’) be recognised in the opening balanceof retained earning where the remaining usefullife of an asset is nil.

• Part C-

• From the date this schedule comes into effect,the carrying amount of asset on that date:– shall be depreciated over the remaining useful life

of the asset as per this schedule.

– after retaining the residual value, may(replacedfrom ‘shall’) be recognised in the opening balanceof retained earning where the remaining usefullife of an asset is nil.

Revision of depreciation rates• Useful life of machinery (under Sch XIV) -20 yrs• Useful life of machinery (under Sch II( - 15 yrs• Cost of machinery (installed on 1.4.2009)- Rs. 5,00,000• Depreciation applied under Sch. XIV- SLM 4.75%• Per year depreciation Rs. 23,750• WDV as on 1/4/2014 Rs.3,81,250• [5,00,000-(5x23,750=118750)=3,81,250]• Remaining useful life under Sch II as on 1.4.2014 - 10 yrs• Dep. rate for remaining useful life –SLM 10%• [100-5=95-(4.75x5=23.75)=71.25 for 10years• Per year depreciation Rs. 35,625• 381250-25000=356250. 10% for 10 years

• Useful life of machinery (under Sch XIV) -20 yrs• Useful life of machinery (under Sch II( - 15 yrs• Cost of machinery (installed on 1.4.2009)- Rs. 5,00,000• Depreciation applied under Sch. XIV- SLM 4.75%• Per year depreciation Rs. 23,750• WDV as on 1/4/2014 Rs.3,81,250• [5,00,000-(5x23,750=118750)=3,81,250]• Remaining useful life under Sch II as on 1.4.2014 - 10 yrs• Dep. rate for remaining useful life –SLM 10%• [100-5=95-(4.75x5=23.75)=71.25 for 10years• Per year depreciation Rs. 35,625• 381250-25000=356250. 10% for 10 years

Effect of change in useful life• Useful life of machinery (under Sch XIV) -20 yrs

• Useful life of machinery (under Sch II( - 15 yrs

• Cost of machinery (installed on 1.4.1996)- Rs. 5,00,000

• Depreciation applied under Sch. XIV- SLM 4.75%

• Per year depreciation Rs. 23,750

• WDV as on 1/4/2014 (after 18 yrs) Rs. 72,500

• Remaining useful life under Sch II as on 1.4.2014 – Nil

• Residual Value 5% of Rs.500000 Rs. 25000

• Amount to be debited to opening balance

of surplus account or Debited to P&L A/c -Rs. 47,500

• Useful life of machinery (under Sch XIV) -20 yrs

• Useful life of machinery (under Sch II( - 15 yrs

• Cost of machinery (installed on 1.4.1996)- Rs. 5,00,000

• Depreciation applied under Sch. XIV- SLM 4.75%

• Per year depreciation Rs. 23,750

• WDV as on 1/4/2014 (after 18 yrs) Rs. 72,500

• Remaining useful life under Sch II as on 1.4.2014 – Nil

• Residual Value 5% of Rs.500000 Rs. 25000

• Amount to be debited to opening balance

of surplus account or Debited to P&L A/c -Rs. 47,500

1. ABC Limited had considered the minimum rates mentioned in theSchedule XIV of the Companies Act, 1956 for the depreciating all its fixedassets till March 31, 2014. Based on the rates mentioned for SLM and WDVin the Schedule XIV, ABC Limited has derived the useful life for the assetsand considered the same useful life for its assets.Schedule II of the Companies Act, 2013 is now applicable to ABC Limitedw.e.f. April 1, 2014. Whether ABC Limited needs to follow the useful livesmentioned in the Schedule II or derived useful lives considered till March 31,2014 can be considered?Responsew.e.f. April 1, 2014, ABC limited should follow the useful lives mentioned inthe Schedule II for the purpose of calculating depreciation. There is norelevance of the derived useful life as per schedule XIV of the CompaniesAct, 1956. However, if it follows a different useful life as compared toschedule II, in financial statements it shall disclose such difference andprovide justification in this behalf duly supported by technical advice. e.g.ABC Limited was following 4.75% depreciation for single shift under SLMmethod for its Plant and machinery and accordingly the useful life of the plant andmachinery was considered to be 20 years. In accordance with theSchedule II, general plant and machinery needs be depreciated over a periodof 15 years. Hence, ABC Limited has two options available either it canfollow 15 years as useful life or it can also follow 20 years. If the Companydecides to follow 20 years, it needs to disclose it in its financial statementsand justification for the same supported by the technical advice.

Responsew.e.f. April 1, 2014, ABC limited should follow the useful lives mentioned inthe Schedule II for the purpose of calculating depreciation. There is norelevance of the derived useful life as per schedule XIV of the CompaniesAct, 1956. However, if it follows a different useful life as compared toschedule II, in financial statements it shall disclose such difference andprovide justification in this behalf duly supported by technical advice. e.g.ABC Limited was following 4.75% depreciation for single shift under SLMmethod for its Plant and machinery and accordingly the useful life of the plant andmachinery was considered to be 20 years. In accordance with theSchedule II, general plant and machinery needs be depreciated over a periodof 15 years. Hence, ABC Limited has two options available either it canfollow 15 years as useful life or it can also follow 20 years. If the Companydecides to follow 20 years, it needs to disclose it in its financial statementsand justification for the same supported by the technical advice.

2. PQR Limited has followed Schedule XIV rates for depreciation of aplant and machinery under WDV method by following rate of 13.91% as itruns under single shift. Date of acquisition is April 1, 2010 and cost incurredis ` 12,50,000 and accordingly WDV as at March 31, 2014 is ` 686,627. Ontransition to Schedule II, how same will be accounted in the books of accountof PQR Limited.

Response:In accordance with the transitional provision of Schedule II, if there is abalance useful life on the date of transition, the remaining WDV needs to bedepreciated over the balance useful life period. If the Company follows thelife provided in the Schedule II, the life of the assets will be 15 years andhence remaining useful life is 11 years. Hence, the balance WDV of `686,627 needs to be depreciated over the period of 11 years.Since the Company follows WDV method for depreciation, the WDV needs tobe depreciated by following the WDV method over the balance useful life.Hence, the Company needs to calculate the WDV rate for the depreciation.Considering residual value of 5%, the revised WDV rate would be 20%. Hence thedepreciation charge for the year 2014-15 would be ` 134,424.

Response:In accordance with the transitional provision of Schedule II, if there is abalance useful life on the date of transition, the remaining WDV needs to bedepreciated over the balance useful life period. If the Company follows thelife provided in the Schedule II, the life of the assets will be 15 years andhence remaining useful life is 11 years. Hence, the balance WDV of `686,627 needs to be depreciated over the period of 11 years.Since the Company follows WDV method for depreciation, the WDV needs tobe depreciated by following the WDV method over the balance useful life.Hence, the Company needs to calculate the WDV rate for the depreciation.Considering residual value of 5%, the revised WDV rate would be 20%. Hence thedepreciation charge for the year 2014-15 would be ` 134,424.

3. Whether it is necessary to review useful life every year?

Response:Para 23 of AS 6 says that, the useful lives of major depreciable assets orclasses of depreciable assets may be reviewed periodically. Where there is arevision of the estimated useful life of an asset, the unamortized depreciableamount should be charged over the revised remaining useful life.Para 21 of AS 5 says that, an estimate may have to be revised if changesoccur regarding the circumstances on which the estimate was based, or as aresult of new information, more experience or subsequent developments.The revision of the estimate, by its nature, does not bring the adjustmentwithin the definitions of an extraordinary item or a prior period item.Ind-AS 16 Para 51 says that, the residual value and the useful life of anasset shall be reviewed at least at each financial year-end and, ifexpectations differ from previous estimates, the change(s) shall beaccounted for as a change in an accounting estimate in accordance with Ind-AS 8 Accounting Policies, Changes in Accounting Estimates and Errors.The entity preparing its financial statement applying Ind-AS should complywith the requirement of the Ind-AS 16.The entity preparing its financial statement in accordance with Indian GAAPshould frame and implement a policy of periodical review of the useful life ofassets.

Response:Para 23 of AS 6 says that, the useful lives of major depreciable assets orclasses of depreciable assets may be reviewed periodically. Where there is arevision of the estimated useful life of an asset, the unamortized depreciableamount should be charged over the revised remaining useful life.Para 21 of AS 5 says that, an estimate may have to be revised if changesoccur regarding the circumstances on which the estimate was based, or as aresult of new information, more experience or subsequent developments.The revision of the estimate, by its nature, does not bring the adjustmentwithin the definitions of an extraordinary item or a prior period item.Ind-AS 16 Para 51 says that, the residual value and the useful life of anasset shall be reviewed at least at each financial year-end and, ifexpectations differ from previous estimates, the change(s) shall beaccounted for as a change in an accounting estimate in accordance with Ind-AS 8 Accounting Policies, Changes in Accounting Estimates and Errors.The entity preparing its financial statement applying Ind-AS should complywith the requirement of the Ind-AS 16.The entity preparing its financial statement in accordance with Indian GAAPshould frame and implement a policy of periodical review of the useful life ofassets.

4. Can a company still have a policy to fully depreciate 100% of costof asset below certain amount?

Response:The provisions of Schedule XIV to the companies act 1956 allowed 100%depreciation of the cost of an asset having individual value of ` 5000/- orless was based on practices followed by the companies based on themateriality of the financial impact of such charge.Life of the asset is a matter of estimation, therefore the materiality of impactof such charge should be considered with reference to the cost of asset. Thesize of the company will also be a factor to be considered for such policy.Accordingly, a company may have a policy to fully depreciate assets uptocertain threshold limits considering materiality aspect in the year ofacquisition.

Response:The provisions of Schedule XIV to the companies act 1956 allowed 100%depreciation of the cost of an asset having individual value of ` 5000/- orless was based on practices followed by the companies based on themateriality of the financial impact of such charge.Life of the asset is a matter of estimation, therefore the materiality of impactof such charge should be considered with reference to the cost of asset. Thesize of the company will also be a factor to be considered for such policy.Accordingly, a company may have a policy to fully depreciate assets uptocertain threshold limits considering materiality aspect in the year ofacquisition.

5. How to work out Charging of depreciation on pro-rata basis?

Response:Para 24 of the existing guidance note on depreciation accounting of ICAI providesthat “where during any financial year, any addition has been made to any asset, orwhere any asset has been sold, discarded, demolished ordestroyed, the depreciation on such assets shall be calculated on a pro ratabasis from the date of such addition or, as the case may be, up to the dateon which such asset has been sold, discarded, demolished or destroyed.Also, a company may group additions and disposals in appropriate timeperiod(s), e.g. 15 days, a month, a quarter etc., for the purpose of chargingpro rata depreciation in respect of additions and disposals of its assetkeeping in view the materiality of the amount involved.

Response:Para 24 of the existing guidance note on depreciation accounting of ICAI providesthat “where during any financial year, any addition has been made to any asset, orwhere any asset has been sold, discarded, demolished ordestroyed, the depreciation on such assets shall be calculated on a pro ratabasis from the date of such addition or, as the case may be, up to the dateon which such asset has been sold, discarded, demolished or destroyed.Also, a company may group additions and disposals in appropriate timeperiod(s), e.g. 15 days, a month, a quarter etc., for the purpose of chargingpro rata depreciation in respect of additions and disposals of its assetkeeping in view the materiality of the amount involved.

6. XYZ Limited a listed company follows December 31 as itsfinancial year. Whether the requirements of the Schedule II areapplicable for the year ending December 31, 2014?

Response:Schedule II of the Companies Act, 2013 came into force with effect from the1st April, 2014 and was amended (with effect from 1st April 1, 2014) videnotification number S.O. 237 (E), dated the 31st March, 2014. Further, MCAhas also issues notification dated 29th August, 2014 whereby therequirements of component accounting have been made voluntary in respectof the financial year commencing on or after the 1st April, 2014 andmandatory for financial statements in respect of financial years commencingon or after 1st April, 2015.For XYZ Limited, requirements of Schedule II other than componentaccounting will be applicable for the year ending December 31, 2015 and therequirements of the Component accounting will be applicable mandatorily forthe year ending December 31, 2016. Hence, in respect of the financial yearfor the year ending December 31, 2014, requirements of the Schedule XIV ofthe Companies Act, 1956 will be applicable.

Response:Schedule II of the Companies Act, 2013 came into force with effect from the1st April, 2014 and was amended (with effect from 1st April 1, 2014) videnotification number S.O. 237 (E), dated the 31st March, 2014. Further, MCAhas also issues notification dated 29th August, 2014 whereby therequirements of component accounting have been made voluntary in respectof the financial year commencing on or after the 1st April, 2014 andmandatory for financial statements in respect of financial years commencingon or after 1st April, 2015.For XYZ Limited, requirements of Schedule II other than componentaccounting will be applicable for the year ending December 31, 2015 and therequirements of the Component accounting will be applicable mandatorily forthe year ending December 31, 2016. Hence, in respect of the financial yearfor the year ending December 31, 2014, requirements of the Schedule XIV ofthe Companies Act, 1956 will be applicable.

7. DEF Limited is a manufacturing company and it uses its plant andmachinery either in single, double shift or triple shift depending upon itsproduction requirements. In accordance with the Schedule II, the useful lifeof the plant and machinery is15 years. The Company intends to follows thesame useful life for the purpose of the depreciating its plant and machineries.How depreciation should be worked out by the Company for the purpose ofits financial reporting?

Response:As per Schedule II, useful life of plant and machinery is 15 years consideringit is used in a single shift and if the company uses the asset on triple shiftbasis during any subsequent year, depreciation so computed will beincreased by 100%. In case of double shift, depreciation will be increased by50%. Accordingly, DEF limited has to increase the charge by 50% and 100%for the period in which it is using the plant and machinery in double or tripleshift.

Response:As per Schedule II, useful life of plant and machinery is 15 years consideringit is used in a single shift and if the company uses the asset on triple shiftbasis during any subsequent year, depreciation so computed will beincreased by 100%. In case of double shift, depreciation will be increased by50%. Accordingly, DEF limited has to increase the charge by 50% and 100%for the period in which it is using the plant and machinery in double or tripleshift.

8. If a company was calculating depreciation charge as per WDV methodtill 31st March 2014 under the provision of Companies Act, 1956 and wants toshift to SLM method w.e.f 1st April 2014 (or vice versa) whether the same will

be covered under transitional provisions as provided in Schedule II of theCompanies Act, 2013??

99

However, if the company wants to change its method of depreciation fromWDV to SLM, it needs to first calculate the impact on account of change inthe method and difference in the WDV needs to be accounted throughstatement of profit and loss. Hence, revised WDV as at March 31, 2014would be ` 7,62,500 by applying 4.75% SLM rate for five years (` 10,00,000– ((` 10,00,000*4.75%)*5)). Difference between revised WDV as at March31, 2014 based on SLM rate and carrying amount in the books at March 31,2014 i.e. ` 289,606 (` 762,500 – ` 472,894) needs to be credited to thestatement of profit and loss.Further, by applying the transitional provisions of Schedule II, balance WDVof ` 762,500 needs to be depreciated over the balance useful life of 10 yearsconsidering the residual value of 5%. Hence, depreciation for the year 2014-15 and yearly depreciation for next ten years would be Rs. 71,250.

R={1-(s/c)^1/n}*100s=50,000 , c=472,894 , n=10

R={1-(50000/472894)^1/10}*100R={1-(0.105)^1/10}*100R={1-0.798}*100R= 20.2% or say 20%

However, if the company wants to change its method of depreciation fromWDV to SLM, it needs to first calculate the impact on account of change inthe method and difference in the WDV needs to be accounted throughstatement of profit and loss. Hence, revised WDV as at March 31, 2014would be ` 7,62,500 by applying 4.75% SLM rate for five years (` 10,00,000– ((` 10,00,000*4.75%)*5)). Difference between revised WDV as at March31, 2014 based on SLM rate and carrying amount in the books at March 31,2014 i.e. ` 289,606 (` 762,500 – ` 472,894) needs to be credited to thestatement of profit and loss.Further, by applying the transitional provisions of Schedule II, balance WDVof ` 762,500 needs to be depreciated over the balance useful life of 10 yearsconsidering the residual value of 5%. Hence, depreciation for the year 2014-15 and yearly depreciation for next ten years would be Rs. 71,250.

R={1-(s/c)^1/n}*100s=50,000 , c=472,894 , n=10

R={1-(50000/472894)^1/10}*100R={1-(0.105)^1/10}*100R={1-0.798}*100R= 20.2% or say 20%

AS 6- Depreciation Accounting

• Para 3.1Definition of depreciation:– …Depreciation is allocated so as to charge a fair

proportion of the depreciable amount in eachaccounting period during the expected useful lifeof the asset.

• Para 29- Main Principles:– The depreciable amount of a depreciable asset

should be allocated on systematic basis to eachaccounting period during the useful life of theasset.

• Para 3.1Definition of depreciation:– …Depreciation is allocated so as to charge a fair

proportion of the depreciable amount in eachaccounting period during the expected useful lifeof the asset.

• Para 29- Main Principles:– The depreciable amount of a depreciable asset

should be allocated on systematic basis to eachaccounting period during the useful life of theasset.

As- 26- Intangible assets

63. The depreciable amount of an intangibleasset should be allocated on a systematic basisover the best estimate of its useful life.• There is a rebuttable presumption that the

useful life of an intangible asset will notexceed ten years from the date when theasset is available for use.

• Amortisation should commence when theasset is available for use.

63. The depreciable amount of an intangibleasset should be allocated on a systematic basisover the best estimate of its useful life.• There is a rebuttable presumption that the

useful life of an intangible asset will notexceed ten years from the date when theasset is available for use.

• Amortisation should commence when theasset is available for use.

AS-26- Intangible Asset

72. The amortisation method used should reflectthe pattern in which the asset's economic benefitsare consumed by the enterprise.

• If that pattern cannot be determined reliably, thestraight-line method should be used.

• The amortisation charge for each period shouldbe recognised as an expense unless anotherAccounting Standard permits or requires it to beincluded in the carrying amount of another asset.

72. The amortisation method used should reflectthe pattern in which the asset's economic benefitsare consumed by the enterprise.

• If that pattern cannot be determined reliably, thestraight-line method should be used.

• The amortisation charge for each period shouldbe recognised as an expense unless anotherAccounting Standard permits or requires it to beincluded in the carrying amount of another asset.

The following are the useful lives ofvarious tangible assets:

THANK YOU

Contact me at:9811024242

[email protected]

THANK YOU

Contact me at:9811024242

[email protected]

Wednesday, May 06, 2015



Documents

Depreciation Provisions under the Companies Act, · PDF fileDepreciation Provisions under the Companies Act, 2013 CA. Mohan Mittal (9811024242, [email protected])