CORPORATE AND PROFESSIONAL UPDATE JULY 10, 2015

CORPORATE AND PROFESSIONAL UPDATE JULY 10, 2015

All about Depreciation &Key changes in the Schedule II to the Companies Act, 2103

Depreciation is systematic allocation of the depreciable amount of an asset over its useful life.

The depreciable amount of an asset is the cost of an asset or other amount substituted for cost, less its residual value. 

Useful life is the 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 provisions governing charge of depreciation in the erstwhile Schedule XIV to the Companies Act, 1956 have been replaced with Schedule II to the Companies Act 2013.

AS 6 on ‘Depreciation Accounting’ lays down general principles of accounting for depreciation applicable to all entities.

such, the Standard is also applicable to companies in all matters where there are no specific requirements under the Companies Act.

AS 6 also provides that the statute governing an enterprise may provide the basis for computation of depreciation.

In AS 6 defines Depreciable assets as follows:  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.

The Companies Act, 2013 requires companies to compute the depreciation in accordance with the Schedule II to the Companies Act which provides useful lives to compute the depreciation.

Accordingly, provisions governing charge of depreciation in the erstwhile Schedule XIV to the Companies Act, 1956 have been replaced with Schedule II to the Companies Act, 2013.

Key changes in the Schedule II to the Companies Act, 2103 as compared to Schedule XIV to the Companies Act, 1956:-

1. The Companies Act, 1956 had dealt with only depreciation of tangible assets.
2. Now, the new Act provides specifically for depreciation of intangible assets which are to be governed as per Accounting Standards.
3. In fact, intangible assets are amortized and not depreciated, though these words and their actions have same effect on the P & L Account.

2. Instead of method and rates of Depreciation (whether WDV method or Straight line Method and Single shift or double shift or triple shift) useful Lives of Assets have been prescribed.
3. These Useful Lives based on single shift working appear minimum, but, they can, in practice, be different from what is given in the Schedule.

3. Companies are allowed to follow different useful lives/residual value if an appropriate justification is given supported by technical advice.

4. Residual value is prescribed at 5% of the original cost as the maximum quantum.
5. Earlier, there was no fixed Residual Value, but, while prescribing the rates; it had factored‐in only 95% of the cost of the assets, thereby leaving only 5% as Residual Value.

5. List of Assets has become more exhaustive and specific.

6. Issues relating to computation of depreciation prorate are more accounting oriented as contained in Accounting Standards AS‐6 and AS‐10 and not company‐law oriented.

7. The new Act provides for the concept of componentization of assets.
8. 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.

8. Date of purchase is most important to calculate the remaining useful life of the asset as on 01.04.2014. Carrying Amount of Existing assets are to be depreciated over the remaining useful lives as on 01.04.2014.

9. Date of purchase can be found in the fixed asset register or the depreciation chart of the company and can also be available in the tax audit report of the Company for various years.

10. If the life of the asset as on 01.04.2014 is already more than useful life as prescribed in Schedule II, then no depreciation can be charged after 01.04.2014.
11. However, an amount equal to the (WDV-Residual value) has to be written off from either the P&L A/c or from the retained earnings of the Company in the FY 2014-15.

11. During the transitional year i.e. FY 2014-15, The Company cannot change its method of calculating depreciation from WDV to SLM or vice-versa.
12. Any change by the company in the method of calculating depreciation will amount to change in accounting policy as per AS-5.
13. The calculation of the impact of such change on the Statement of Profit & Loss has to be disclosed by the company in its financial statements.

12. No separate rate for double/ triple shift; depreciation to be increased based on the double shift/triple shift use of the assets.
13. The rate of depreciation becomes 1.5 times & 2 times of the normal rates in case of double shifts and triple shifts respectively.

13. A Charging depreciation is mandatory if the company wants to declare dividend or for payment of managerial remuneration.
14. Charging depreciation is also mandatory as per the applicable accounting standards in order to give a true & fair view.

14. As per ICAI guidance note, if the value of the asset is uptoRs. 5000/- then it can be fully depreciated.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Hope the information will assist you in your Professional endeavors. For query or help, contact: singh@carajput.com or call at 9555555480