Depreciation under Companies Act 2013

• Section 123 of 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.

Schedule II also defines depreciation, depreciable amount and useful life as under:

• 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.
• It does not define the term ‘residual value’. AS-6 on Depreciation in para 10 states as under:
• 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.”
• AS 6 on ‘Depreciation Accounting’ lays down general principles of accounting for depreciation applicable to all entities.
• 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.
• 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.

Key changes in Schedule II as compared to Schedule XIV

• In old Act, SLM and WDV rates were prescribed, while in new Act, useful life of assets have been prescribed as basis for depreciation.
• As per companies Act 2013 Depreciation has to be calculated on the basis of useful Lives of Assets Instead of rates of Depreciation as specified in Companies Act 1956.
• In old Act, assets were grouped according to the rates prescribed, in new Act, the assets have been grouped according to its nature and industry.
• In old Act, there was no mention in case a company wishes to apply higher or lower rates than given in the Schedule. However, the Accounting Standard has stated that company may choose to apply higher rate but it cannot be lower than the rates given in the Act.
• As per Companies Act 2013, The Useful Lives based on single shift working appear as minimum, but, they can, in practice, be different from what is given in the Schedule.
• Companies are allowed to follow different useful lives/residual value if an appropriate justification is given supported by technical advice.
• Residual value is prescribed at 5% of the original cost as the maximum quantum. 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.

Different Useful life/Residual Value:

 Where a company adopts:

• 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.

Comparison with Schedule XIV of the Companies Act, 1956

Companies other than regulated entities		Companies Act, 2013	Companies Act, 1956
Useful Life	Can it be higher	Yes	No
	Can it be lower	Yes	Yes
Residual Value	Can it be higher	Yes	No such provision*
	Can it be lower	Yes	No such provision*

*Residual value was inbuilt in depreciation rates prescribed under Schedule XIV.

Useful life or residual value governed by other regulatory authority

• Part B of the schedule II states that 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.
• Accordingly, in accordance with Part B of the schedule II, electricity companies will still continue to charge depreciation in accordance with the Electricity Act.

Depreciation on Intangible assets

• The Companies Act, 1956 had dealt with only depreciation of tangible assets. Now, the new Act provides specifically for depreciation of intangible assets which are to be governed as per Accounting Standards (AS-26).
• Schedule II states that for intangible assets, the provisions of the accounting standards applicable for the time being in force shall apply.
• Amendments dated March 31, 2104 provides a manner in which amortisation of intangible assets (Toll Roads) created under BOT/BOOT or any other form of Public Private Partnership (PPP) route in case of road projects.
• In such cases, a company may use revenue based amortization for BOT assets. For amortization of other intangible assets, AS 26 needs to be applied.

Depreciation-Extra shift working

• Under Schedule II, no separate rates/ lives are prescribed for extra shift working. Rather, it states that for the period of time, an asset is used in double shift depreciation will increase by 50% and by 100% in case of triple shift working.
• For determining depreciation charge for assets used in double/triple shift operations, the useful life as given in Schedule II is to be treated as based on single shift operations.
• When an asset is used for double/ triple shift operations, the useful life of the asset will not change.

Depreciation-Extra shift working

• As provided in Schedule II, the depreciation rate will increase by 50%/100% for double/triple shift operations, as the case may be.
• If a company uses its assets for single, double or triple shifts in a financial year/accounting period, the depreciation charge for no. of days operated for double/triple shift has to be increased by 50%/100%, as the case may be.

Transitional provisions under Schedule II

• From the date Schedule II comes into effect i.e. 1 April 2014, the carrying amount of the asset as on that date Shall be depreciated over the remaining useful life of the asset .

Where the remaining useful life of an asset is nil

Then the carrying amount of the asset as on 1^st April 2014 after retaining the residual value, may be

• Recognised in the opening balance of retained earnings

            or

• May be charged off to Profit and Loss account

Example

• Useful Life of General Furniture and Fittings has been reduced from 15 years to 10 years. Consider the below scenarios for different age of a piece of furniture on the date of applicability of Schedule II–
• The furniture is 8 years old – The remaining WDV of the furniture shall be depreciated over the remaining 2 years.
• The furniture is 12 years old – Company has an option of charging the remaining WDV of the furniture to the retained earnings of the company or charging the same to the statement of profit and loss.

Depreciation- Impact of Change

• With the change in concept, in the first of year of change i.e. the current year each company will have to work out the useful life of each of the asset, whether it is more or less as given in Schedule II, the remaining of the useful life, carrying amount as on the last day of the previous year.
• The rate of the depreciation to be applied to each of the assets depending upon its remaining useful life will be required to be worked out.
• 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.
• 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.
• 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. Any change by the company in the method of calculating depreciation will amount to change in accounting policy as per AS-5. 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
• Charging depreciation is mandatory if the company wants to declare dividend or for payment of managerial remuneration. Charging depreciation is also mandatory as per the applicable accounting standards in order to give a true & fair view.
• No specific provision for 100 % rate on assets below Rs. 5,000 However as per ICAI guidance note, if the value of the asset is upto Rs. 5000/- then it can be fully depreciated.

Continuous process plants

• Continuous process plants for which no special rates have been prescribed can be depreciated over a period of 25 years (NESD).

Additions/Sale/discard:

• The schedule requires providing depreciation in respect of any addition, sale, discard, demolition or destruction of any asset, on a pro-rata basis from the date of such addition, sale, discard, demolition or destruction.
• AS-6 requires that any addition or extension which becomes an integral part of the existing asset should be depreciated over the remaining useful life of that 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.

Component based Depreciation

• Schedule II also suggest to provide depreciation in respect of a ‘component of an asset’ separately.
• As per the amendment dated August 29, 2014 notified by the MCA, the said requirement shall be voluntary in respect for the financial year commencing on or after the April 1, 2104 and mandatory for forfinancial years commencing on or after April 1, 2015.
• It provides that 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.

Calculation of Depreciation rate -WDV Method

R= 1 – ((s/c)^(1/n))                                                     

Where

R = Rate of Depreciation

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

Calculation of Depreciation Amount -WDV Method

Dep = DB(Cost,Salvage,Life,Period)

Where

Dep = Amount of depreciation

life = Remaining useful life of the asset (in years)

salvage = Scrap value at the end of useful life of the asset

Cost= Cost of the asset or WDV of asset as on 1-04-2014

Period= Yrs for which dep is being calculated

DB is the Exel Function under financial function category

Depreciation in Case of Revaluation of Assets

• Schedule II to Companies Act, 2013 Act requires depreciation to be provided on historical cost or the amount substituted for the historical cost.
• Therefore, in case of revaluation, a company needs to charge depreciation based on the revalued amount.
• Consequently, the ICAI Guidance Note, which allows an amount equivalent to the additional depreciation on account of upward revaluation to be recouped from the revaluation reserve, may not apply.
• AS 10 allows amount standing to the credit of revaluation reserve to be transferred directly to the general reserve on retirement or disposal of revalued asset.
• A company may transfer the whole of the reserve when the asset is sold or disposed of.However, some of the surplus may be transferred as the asset is used by a Company.
• In such a case, the amount of the surplus transferred would be the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on its original cost.
• Transfers from revaluation surplus to the general reserve are not made through the statement of profit and loss.

Disclosures

The following information need to be disclosed in the accounts:

• Depreciation method used
• Useful lives of the assets if they are different from the life specified in the Schedule.

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.

Three Depreciation Methods Explained Simply

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