Critical issues relating to Depreciation Accounting

37 Pages·2015·0.55 MB·English

by  Akash Agarwal

Critical issues relating to
Depreciation Accounting

Companies Act 2013 - Schedule II
(Updated for MCA/ ICAI Clarifications to date)

Presented by:
CA Akash K. Agarwal

Confidential and Privileged
April 9, 2015
Key Provisions
What’s New
Particulars Schedule II to the Schedule XIV to the
Companies Act, 2013 Companies Act, 1956
Definitions DEPRECIATION - systematic allocation Not Defined *
of the depreciable amount of an asset
over its useful life. Depreciation includes
amortisation.

DEPRECIABLE AMOUNT - the cost or
other amount substituted for cost less its
residual value.

USEFUL LIFE - Period over which an
asset is expected to be available for use
by an entity, or the number of production
or similar units expected to be obtained
from the asset by the entity.
* The corresponding provisions in Accounting Standard (AS) 6 – Depreciation Accounting
are applicable which are similar to the provisions of the 2013 Act.
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Key Provisions
What’s New
Particulars Schedule II to the Schedule XIV to the
Companies Act, 2013 Companies Act, 1956
Model of Useful life regime Rate regime
depreciation
Intangible The provisions of the accounting Intangible assets (Toll Roads)
Assets standards applicable for the time created under public private
being in force shall apply, except partnership requires
in case of intangible assets (Toll amortisation using a revenue
Roads) created under ‘Build, model.
Operate and Transfer’, ‘Build,
Own, Operate and Transfer’ or No mention regarding
any other form of public private applicability of AS for other
partnership route in case of road intangible assets.
projects, which can continue to be
amortised based on the expected However, other intangible
revenue from operating such assets would be covered
assets. under the provisions of the
AS.
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Key Provisions
What’s New
Particulars Schedule II to the Schedule XIV to the
Companies Act, 2013 Companies Act, 1956
Shift based Useful lives have been Separate rates provided for
depreciation determined on the basis of single single, double and triple shift in
shift. respect of specified assets.

For assets working on double The calculation of the extra
shift, depreciation will increase by depreciation for double and
50 percent and in case of triple triple shifts working is to be
shift working by 100 percent in made separately in the
respect of specified assets. proportion which the number of
days for which the concerned
assets worked double or triple
shift, as the case may be,
bears to the normal number of
working days during the year.

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Key Provisions
What’s New
Particulars Schedule II to the Schedule XIV to the
Companies Act, 2013 Companies Act, 1956
Assets No such concept Depreciation at the rate of 100
costing less per cent.
than
Rs.5,000
Depreciation Entire charge to the Statement Depreciation to be provided
on revalued of Profit and Loss. considering the original cost of
assets the asset.

Incremental deprecation on
revalued portion could be
adjusted against revaluation
reserve by transfer of an
equivalent amount to the
Statement of Profit and Loss
based on the Guidance Note of
the ICAI.
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Key Provisions
What’s New
• COMPONENTISATION of assets
‒ Separate capitalisation and depreciation of a part of an asset if its cost is
significant to the total cost of the asset and its useful life is different from
the remaining asset.
‒ Voluntary for financial statements in respect of FY commending on or after
April 1, 2014. Mandatory for financial statements in respect of FY
commencing on or after April 1 2015.
‒ Retrospective implementation
‒ Companies would be required to formulate componentisation policy, keeping
reasonable value thresholds in mind, commensurate with size of the Company
and industry to which it relates.
‒ Identification of significant components of an asset requires a careful
assessment of the facts and circumstances and involves use of professional
judgment.

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Key Provisions
Depreciation - Illustration
Significant change in depreciation of commonly used assets as compared to
Schedule XIV rates under the 1956 Act **
Nature of asset - selective The Companies Act, The Increase / %
2013 Companies (decrease) change

Deemed Act, 1956

Useful Life rate
(SLM) (SLM)
General Plant and Machinery other
15 6.33% 4.75% 1.58% 33.33%
than continuous process plant

Continuous process plant (CPP) 25 3.80% 5.28% (1.48)% (28.03)%
General furniture and fittings 10 9.50% 6.33% 3.17% 50.08%
Office equipment 5 19.00% 4.75% 14.25% 300.00%

Desktops, laptops, etc. 3 31.67% 16.21% 15.46% 95.35%
Electrical Installations and
10 9.50% 4.75% 4.75% 100.00%
Equipment
** The useful life or residual value of any specific asset, as notified for accounting purposes by a
Regulatory Authority constituted under an Act of Parliament or by the Central Government shall be
applied in calculating the depreciation to be provided for such asset irrespective of the requirements
of this Schedule [Schedule II – Part B]
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Key Provisions
Depreciation Accounting (AS 6)
Para 3.4 of AS 6 states
‘Depreciable amount of a depreciable asset is its historical cost, or other amount
substituted for historical cost in the financial statements, less the estimated residual
value.’ (‘This standard does not deal with the treatment of the revaluation
difference which may arise when historical costs are substituted by revaluations.’)

Para 13 of AS 6 states
‘The statute governing an enterprise may provide the basis for computation of the
depreciation. For example, the Companies Act, 1956 lays down the rates of
depreciation in respect of various assets. Where the management’s estimate of the
useful life of an asset of the enterprise is shorter than that envisaged under the
provisions of the relevant statute, the depreciation provision is appropriately
computed by applying a higher rate. If the management’s estimate of the useful life
of the asset is longer than that envisaged under the statute, depreciation rate
lower than that envisaged by the statute can be applied only in accordance
with requirements of the statute.’

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Key Provisions
Schedule II – Part A
The MCA vide Notification dated 29 August, 2014 has amended Schedule II -
Paragraph 3 (i) of Part A as below:

• “The useful life of an asset shall not ordinarily be different from the useful life
specified in Part ‘C’ and the residual value of an asset shall not be more than
five per cent. of the original cost of the asset:

• Provided that where a company adopts a useful life different from what is
specified in Part C or uses a residual value different from the limit specified
above, the financial statements shall disclose such difference and provide
justification in this behalf duly supported by technical advice.”

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Key Provisions
Schedule II – Part A
• Section 205 of the Companies Act, 1956 (‘the 1956 Act’) read with
Section 350 of the said Act, when specifying the requirements relating
to depreciation for determination of profits for purposes of dividend,
inter alia, required a company to provide depreciation (at least) at the
rate specified in Schedule XIV to the 1956 Act.

• Sub-Section (2) of Section 123 of the Companies Act, 2013 (‘the 2013
Act’) which deals with the similar issue under the 2013 Act states “For
the purposes of clause (a) of sub-Section (1), depreciation shall be
provided in accordance with the provisions of Schedule II.”
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