Depreciation Accounting
Schedule IICompanies Act, 2013
Presented By:-
Deepak [email protected]+91 8377 838 738
Applicable from 01-04-2014MCA notification no S.O.902(E) dated 26-03-2014
© No Copyrights03-July-2015
Overview
• Companies Act, 1956 v Companies
Act, 2013
• Definition of Depreciation
• Depreciable Assets
• Methods of Depreciation
• Component based Accounting
• Transition
Companies Act, 1956 v 2013
Particulars Schedule IICompanies Act, 2013
Schedule XIVCompanies Act, 1956
Definitions
Depreciation Depreciable Amount Useful Life
(Same as AS-6)
Not given
Basis of Depreciation Useful life regime Rate regime
Intangible AssetsAS-26Except for BOT Assets using Revenue model
No mentionExcept for BOT Assets using Revenue model
Companies Act, 1956 v 2013
Particulars Schedule IICompanies Act, 2013
Schedule XIVCompanies Act, 1956
Shift Based Depreciation
Double Shift – Excess 50% Dep.Triple Shift – Excess 100% Dep.
Separate rates
Component Accounting Mandatory Optional
Assets costing less than Rs. 5,000/- No such Concept Depreciation at 100%
Depreciation on revalued Assets
Entire charge to Statement of Profit & Loss
Depreciation to be provided considering the original cost of the asset
Definition : Depreciation
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
Depreciation includes amortisation.
cost of an asset or other amount
substituted for cost, less its residual value
period over which asset is expected to be available for use,
or number of
production units expected to be
obtained
Depreciable Amount
Useful LifeInd As-16 : Economic Life
The definition as per Accounting Standard - 6 is same as above.
Part - A Clause - 1Part - A Clause - 2
Depreciable Assets
Assets which:i. Are expected to be used for more than
one accounting yearii. Have limited useful lifeiii.Are held to be used in production of
goods / services, i.e. not held for sale in normal course
Useful Life
Determination of the useful life of a depreciable asset is a matter of estimation.
As a general principle, the following factors shall be considered in determining the useful life of an asset :i. expected usage of the asset. ii. expected physical wear and tear, which depends on operational
factors iii. technical or commercial obsolescence arising from changes or
improvements in production, or from a change in the market demand for the product or service output of the asset
iv. legal or similar limits on the use of the asset, such as the expiry dates of related leases.
The estimation of the useful life of the asset is a matter of judgement based on the experience of the entity with similar assets.
Residual Value
AS - 6
Determination of residual value of an asset is normally a difficult matter. If such value is considered as insignificant, it is normally regarded as nil.
One of the bases for determining the residual value would be the realisable value of similar assets which have reached the end of their useful lives and have operated under conditions similar to those in which the asset will be used after allowing for the effect of any anticipated developments such as significant technological changes
Intangible Assets
The provisions of the accounting standards applicable for the time being in force shall apply, i.e. AS - 26.
Revenue based amortization for BOT assets (same as
S-XIV 1956 Act)
For amortization of other intangible assets, AS 26 needs to be applied.
AmendmentMarch 31, 2014
Amortisation of intangible assets (Toll Roads) created under• Build, Operate and Transfer (BOT)• Build, Own, Operate and Transfer (BOOT) or • any other form of Public Private Partnership (PPP)
route in case of road projects.
Amortisation of BOT Assets
The amortisation amount or rate should ensure that the whole of the cost of the intangible asset is amortised over the concession period. Revenue shall be reviewed at the end of each financial year and projected revenue shall be adjusted to reflect such changes, if any, in the estimates as will lead to the actual collection at the end of the concession period.
Cost of Intangible Assets Cost incurred by the company in accordance with the accounting standards
Actual Revenue for the year Actual revenue (Toll Charges) received during the accounting year
Projected Revenue from Intangible Asset Total projected revenue from the Intangible Assets as provided to the project lender at the time of financial closure / agreement.
Part - A Clause - 3
Methods of Depreciation
C
lass
• Companies applying Ind-AS
• Can choose alternative useful life and Residual Value
• Disclose Justification
C
lass
• Accounting policies defined by any act if parliament
• use depreciation rates/useful lives and residual values prescribed by the relevant authority
C
lass
• Other Companies
• Strictly follow Schedule - II
March 27, 2014
Methods of Depreciation
• Useful life – not ordinarily different
• Residual value – not more than 5%
• Proviso:• Can choose alternative
useful life and Residual Value
• Disclose Justification supported by technical advise
• Accounting policies defined by any act if parliament
• use depreciation rates/useful lives and residual values prescribed by the relevant authority
AmendmentMarch 31, 2014
Part - BPart - A Clause - 3
Transition
From 1 April 2014, the carrying amount of the asset as on that date shall be depreciated over the remaining useful life of the asset.
Remaining Useful life - Nil
• After retaining the residual value
• Transfer book value to Retained Earnings
(i.e. General Reserve), or Statement of Profit &
Loss
Remaining Useful life - Exists
• Depreciate over remaining useful life
• Whether WDV or SLM basis or Production basis
Part - C Note - 7
Transition Remaining Useful life of Asset
as per Companies Act 2013 as on 01-04-2014
N I L
Net Carrying Amount –Residual Value
Debit :Retained Earnings
E x i s t s
Depreciate overremaining useful life
Debit :Profit & Loss A/c
Part - C Note - 7
Calculation of rate of depreciation
Where
R = Rate of Depreciation (in %)
n = Remaining useful life of the asset (in years)
s = Scrap value at the end of useful life of the asset
C = Cost of the asset/Written down value of the asset
R = x 100
SLM
R = x 100
WDV
Transition Let’s take an example :
Calculate Depreciation for 5 corresponding years
Fixed Asset Plant & Machinery (Refinery) [ Part C - 5(IV)(e)(1) ]
Original Cost ` 10,00,000/-
Expired Life 5 years as on 01-04-2014
Solution :
Schedule
Useful Life
WDV Rate
XIV - 13.91%
II25
Remaining :
20
Let us calculate WDV at 01-04-2014 :
Year Opening Bal Depreciation Rate
Depreciation Closing Bal
2009-10 10,00,000 13.91% 1,39,100 8,60,900
2010-11 8,60,900 13.91% 1,19,751 7,41,149
2011-12 7,41,149 13.91% 1,03,094 6,38,055
2012-13 6,38,055 13.91% 88,753 5,49,302
2013-14 5,49,302 13.91% 76,408 4,72,894
WDV : ` 4,72,894/-
Transition Let’s take an example :
Calculate Depreciation for 5 corresponding years
Fixed Asset Plant & Machinery (Refinery) [ Part C - 5(IV)(e)(1) ]
Original Cost ` 10,00,000/-
Expired Life 5 years as on 01-04-2014
Solution :
Schedule
Useful Life
WDV Rate
XIV - 13.91%
II25
Remaining :
20
WDV : ` 4,72,894/-
Let us calculate WDV rate as per Schedule II := x 100
= x 100
=
= { 1 - 0.8938} x 100 =
10.62%
10.62%
Transition Let’s take an example :
Calculate Depreciation for 5 corresponding years
Fixed Asset Plant & Machinery (Refinery) [ Part C - 5(IV)(e)(1) ]
Original Cost ` 10,00,000/-
Expired Life 5 years as on 01-04-2014
Solution :
Schedule
Useful Life
WDV Rate
XIV - 13.91%
II25
Remaining :
20
WDV : ` 4,72,894/-
10.62%
Hence, Depreciation as per Schedule II for corresponding 5 years :
Year Opening Bal Depreciation Rate
Depreciation Closing Bal
2014-15 4,72,894 10.62% 50,230 4,22,664
2015-16 4,22,664 10.62% 44,895 3,77,769
2016-17 3,77,769 10.62% 40,126 3,37,643
2017-18 3,37,643 10.62% 35,864 3,01,780
2033-34 55,997 10.62% 5,948 50,049
Methods of Depreciation
Accounting Standard (AS) - 6 : Depreciation AccountingStates that the statute governing an enterprise may provide the
basis for computation of the depreciation, and depreciation rates prescribed under the statute are
minimum• Apply higher depreciation
rate• i.e. use lower useful life
Management’s estimate of useful life is
lower than Schedule -II
• Use either of the rates Management’s estimate of useful life is
higher than Schedule -II
Methods of Depreciation
Example
Schedule - II Management’s Estimate AS - 6
Useful
Life(year
s)
Rate of Depreciation
Useful Life
(years)
Rate of Depreciation
Rate of Depreciation Useful
Life(years)
SLM WDV SLM WDV SLM WDV
15 6.33% 18.10% 10 9.5% 25.89% 9.5% 25.89
%10
20 4.75% 13.91% 25 3.8% 10.62% either
Jaggery Ltd. purchased a machinery. Both Schedule-II & Management estimates are of 5% residual value.
Methods of Depreciation
Example Jaggery Ltd. purchased a machinery. Both Schedule-II & AS-6 prescribe 10 years as useful life
Schedule - II Management’s Estimate AS - 6
Disclosure RequirementResidual Value
(% of cost)Residual Value
(% of cost)Residual Value
(% of cost)
5% 2% 2% Not required
5% 10% either Justification if10% applied
Component Accounting
Where cost of a part of the asset is significant to total cost 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 shall be determined separately and hence, depreciation.
Ind AS - 16 Component based accounting is mandatory.
AmendmentMarch 31, 2014
Component based accounting is optional for F.Y. 2014-15 and mandatory from F.Y. 2015-16
Part - C Note - 4
Double / Triple shift working
Under Schedule II to the 2013 Act, no separate useful lives are prescribed for extra shift working.
Rather, it states that for the period of time, an asset is used in double / triple shift depreciation will increase.
Double Shift Depreciation shall be 150% of actual depreciation.
Triple Shift Depreciation shall be 200% of actual depreciation.
NESD : Not Eligible for Shift Depreciation
Part - C Note - 6
Addition / Deletion during the F.Y.
Where during any financial year, any of the following is made to the fixed asset :
Addition, or Sale, or Demolishment, or Disbandment
In such case,
Depreciation shall be calculated on pro-rata basis.
Part - C Note - 2
Disclosure Requirement
AS - 6 Details of Depreciation charged, accumulated
depreciation
Useful life or rates of depreciation adopted
Part - C Note - 3
Schedule - II Depreciation methods used
Useful lives of assets for computing depreciation, if
they are different from the life specified in the
schedule.