Prepared by: CA. Rishi Khanna Depreciation as per Schedule II
of Companies Act 2013
Slide 2
Paradigm Shift Overview Definition Useful Life Residual Value
Transitional provisions Extra Shift Depreciation Depreciation on
Intangible Assets Disclosures Other Important Issues Component
Accounting Continuous Process Plant Revaluation of Assets
Slide 3
Paradigm shift COMPANIES ACT 1956COMPANIES ACT 2013 Minimum
Rate of depreciation prescribed in the Schedule XIV of the Act
Useful Life of Asset prescribed in Schedule II of the Act Minimum
Rates were defined and accordingly higher rates could be used with
disclosure Useful Life has been defined and it is possible to use
higher or lower useful life with justification and disclosure
Depreciation on Low Value items i.e < Rs 5000 was at 100% No
such threshold has been prescribed for low value items Component
Accounting not thereComponent Accounting is mandatory if applicable
Separate rates provided for Double Shift and Triple Shift No
separate Rates/ Useful life provided. However extra depreciation of
50%/100% to be applied Concept of Residual Value not explicitly
defined Residual Value defined as a value not more than 5% of the
Original cost of Asset In case of Revaluation depreciation to
charged on Original cost of Asset only In case of Revaluation
depreciation to charged on revalued cost of asset
Slide 4
Overview AS-6 on Depreciation Accounting lays down the General
Principles of accounting for depreciation applicable to all
entities. The Standard is also applicable to all companies where
there is no specific requirement under the Companies Act. It also
provides that the statute governing the enterprise may provide the
basis for computation of depreciation ICAI has issued Guidance Note
on Accounting for Depreciation in Companies and Guidance Note on
some important issues arising from the amendment to schedule XIV to
the Companies Act 1956. These will continue to be apply to the
extent applicable post implementation of Schedule II to the
Companies Act 2013
Slide 5
Overview Depreciation provisions are governed by Section 123
sub section (2) of the Companies Act 2013 (the Act) The section
merely directs you to Schedule II to the Act, which was notified
vide MCA notification dated 27/03/2014. Schedule II is applicable
to all companies which have financial year commencing on or after
01 st April 2014 The schedule is divided into 3 parts viz.: Part A:
gives definition of depreciation and applicability Part B:
exception for adopting useful life and residual value Part C:
Provides Useful Lives of various Tangible Assets
Slide 6
Definition Part A of the Schedule II of the Act states that
Depreciation is the systematic allocation of the depreciable amount
of an asset over its useful life. Systematic Allocation: methods of
allocation generally followed are Straight Line Method, Diminishing
Balance Method and Units of production method Depreciable Amount of
an asset is the cost of an asset or other amount substituted for
cost, less its residual value. Useful Life of an asset is the
period over which the 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
Slide 7
Useful Life: New Concept It is a subjective concept and is
based on management estimate of how long will that asset be
available to an entity. Factors to be considered while estimating
Useful Life: Expected Usage Expected Wear and Tear Technical or
commercial obsolescence Legal or similar limits on the use of asset
Financial Statements to disclose any deviation where the company
adopts a different useful life or residual value from prescribed
useful life or residual value and provide justification supported
by technical advice [vide Notification no. G.S.R. 627(E) dated 29th
August, 2014] Accounting Standard -6 states that depreciation rates
provided by the statute are the Minimum rates, if management
estimate of useful life is shorter than Schedule II then
depreciation has to be computed at Higher Rate.
Slide 8
Useful Life Cont. SCENARIO - 1SCENARIO - 2 Useful Life estimate
of Management : 12 yearsUseful Life estimate of Management : 10
years Useful Life as per Schedule II: 10 yearsUseful Life as per
Schedule II: 12 years Management has the OPTION to depreciate the
asset over 10 years or 12 years useful life As per AS-6, Management
has to MANDATORILY depreciate the asset over 10 years useful life
If useful life of 12 years is selected then disclosure in financial
statements of Justification for selecting higher useful life along
with technical advice As per Schedule II disclosure in financial
statements of Justification for selecting lower useful life along
with technical advice
Slide 9
Useful Life Cont. Query: Whether it is necessary to review
Useful Life Every Year? Response as per Application Guide issued by
ICAI Para 23 of AS 6 says that, the useful lives of major
depreciable assets or classes of depreciable assets may be reviewed
periodically. Where there is a revision of the estimated useful
life of an asset, the unamortized depreciable amount should be
charged over the revised remaining useful life. Para 21 of AS 5
says that, an estimate may have to be revised if changes occur
regarding the circumstances on which the estimate was based, or as
a result of new information, more experience or subsequent
developments. The revision of the estimate, by its nature, does not
bring the adjustment within the definitions of an extraordinary
item or a prior period item.
Slide 10
Residual value As per notes to Part C of the Schedule II,
Residual Value of an asset is often insignificant but it should
generally not be more than 5% of the original cost of Asset. Key
Points Residual Value will be 5% of the ORIGINAL COST and not
Carrying Value It can be upto 5% i.e if residual value is less than
5% then no justification is required, however if it is more than 5%
then justification for higher residual value supported with
technical advice. Position with regard to Management estimate of
residual value is similar to Useful life as AS-6 prescribes Minimum
threshold for depreciation.
Slide 11
Part B of Schedule II 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. For example: The
MCA had issued a General Circular dated 31 May 2011, which states
that for companies engaged in generation/supply of electricity,
rates of depreciation prevail over the Schedule XIV to the
Companies Act. Accordingly, in accordance with Part B of the
schedule II, electricity companies will still continue to charge
depreciation in accordance with the Electricity Act.
Slide 12
Transitional Provisions From the date Schedule II comes into
effect i.e. 1 April 2014, the carrying amount of the asset as on
that date: (a) Shall be depreciated over the remaining useful life
of the asset. (b) After retaining the residual value, may be
recognized in the opening balance of retained earnings or may be
charged off to Profit and Loss account where the remaining useful
life of an asset is nil. Hence the company will have to reassess
the useful life of its existing fixed assets in accordance with
Schedule II. Where useful remaining life exists, however the
residual WDV at the time of the first application of the Schedule,
falls below the residual value calculated @ 5% of the original cost
of the asset, depreciation charged during the year should be NIL.
The remaining WDV shall be removed from the books when the assets
is sold, demolished or discarded.
Slide 13
Transitional Provisions : Examples Example: Useful Life of
Computers has been reduced from 6 years to 3 years. Consider the
below scenarios for different age of a piece of Computer on the
date of applicability of Schedule II Scenario -1 : The Computer is
1 years old The remaining WDV of the computer shall be depreciated
over the remaining 2 years. Scenario -2: The Computer is 4 years
old Company has an option of charging the remaining WDV of the
computer to the retained earnings of the company or charging the
same to the statement of profit and loss. If the Company opts to
adjust the carrying amount of the assets to the retained earnings
in accordance with the transitional provisions of the Schedule II,
the tax effect of the same has to be also adjusted directly against
the retained earnings in accordance with the ICAI announcement Tax
effect of expenses/income adjusted directly against the reserves
and/ or Securities Premium Account..
Slide 14
Methods of Depreciation The depreciation method used shall
reflect the pattern of consumption of the asset. The depreciable
amount of an asset can be allocated on a systematic basis over its
useful life through: A. Straight-line Method (SLM) B. Diminishing
Balance Method C. Units of production method In SLM, the amount of
annual depreciation remains uniform. The amount of annual
depreciation is calculated as: Capitalized Cost-Estimated Residual
Value Estimated Useful Life In diminishing balance method the
amount of annual depreciation is calculated as: 1- n Estimated
Residual Value Capitalized Cost Where n= useful life (in years) For
first implementation for assets as on 01/04/2014, capitalized cost
will be substituted by WDV as on 01/04/2014 and estimated useful
life with remaining useful life.
Slide 15
Practical Example Asset Class Plant and Machinery Date of
Acquisition 01/04/2010 Original Cost Rs 1,250,000 Rate of
depreciation under CA 1956 13.91% Carrying Cost as on 31/03/2014 Rs
686,627 Useful Life under CA 2013 15 years Remaining Useful Life on
01/04/2014 11 years Residual Value 5% Method of Depreciation
WDV
Slide 16
Example Contd. Rate of Depreciation will have to be recomputed
using the formula as under: 1- ((1250000*5% )/ 686627) ^ (1/11) =
19.58% YearOpening Carry AmountDepreciationClosing Carrying Amount
2014-15 686,627 134,424 552,203 2015-16 552,203 108,107 444,096
2016-17 444,096 86,942 357,154 2017-18 357,154 69,921 287,232
2018-19 287,232 56,233 231,000 2019-20 231,000 45,224 185,776
2020-21 185,776 36,370 149,406 2021-22 149,406 29,250 120,156
2022-23 120,156 23,523 96,633 2023-24 96,633 18,918 77,714 2024-25
77,714 15,214 62,500
Slide 17
Change in Method of Depreciation Method chosen to be applied
consistently from period to period unless there is a change in the
expected pattern of consumption of those future economic benefits.
QUERY: If a company was calculating depreciation charge as per WDV
method till 31st March 2014 under the provision of Companies Act,
1956 and wants to shift 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 the Companies Act, 2013?
RESPONSE: No, such cases will not be covered by transitional
provision of Schedule II. It will be considered as change of
accounting policy as per AS 5. However, if the company wants to
change its method of depreciation from WDV to SLM, it needs to
first calculate the impact on account of change in the method and
difference in the WDV needs to be accounted through statement of
profit and loss
Slide 18
Extra shift depreciation No separate lives/rates for double/
triple shift depreciation under schedule II The period of time for
which asset is used for double shift the depreciation will increase
by 50% and by 100% in case of triple shift working The Useful life
given in Schedule II is to be treated as based on single shift
operations
Slide 19
Intangible Assets As per AS-26, An intangible asset is an
identifiable non-monetary asset, without physical substance, held
for use in the production or supply of goods or services, for
rental to others, or for administrative purposes. eg: software,
patents, goodwill, licences etc. The amendment in Schedule II dated
31st March 2014 reads as follows For intangible assets, the
provisions of the accounting standards applicable for the time
being in force shall apply except in case of intangible assets
(Toll roads) created under BOT, BOOT or any other form of public
private partnership route in case of road projects. No useful life
prescribed for Intangible Assets For all intangible assets other
than those created under BOT model, AS-26 will be followed. The
amendment clearly suggests that revenue based amortization applies
to BOT Assets only
Slide 20
BOT Assets Mode of amortization for BOT Assets (Toll Roads)
Amortization Rate = Amortization Amount * 100 Cost of Intangible
Assets (A) Amortization Amount = Actual Revenue for the year (B)*
Cost of Intangible Asset (A) Projected Revenue from Intangible
Asset (till the end of the concession period) (C) Where, Cost of
Intangible Assets (A) = Cost incurred by the company in accordance
with the accounting standards Actual Revenue for the year (B) =
Actual revenue (Toll Charges) received during the accounting year
Projected Revenue from Intangible Asset (C) = Total projected
revenue from the Intangible Assets as provided to the project
lender at the time of financial closure / agreement
Slide 21
Disclosure As per Note 3 to Part C of Schedule II following
disclosure to be made in the Financial Statement: Depreciation
Method Used and Useful Lives of the Assets for computing
depreciation if they are different from the life specified in the
schedule Additional Disclosure- It is suggested that following
disclosure be also made if applicable: Disclosure of Residual Value
if the % considered is more than 5% Justification for different
useful life with reference to technical advice
Slide 22
Disclosure As per Accounting Standard -6 following disclosure
will continued to be made in the financial statements: (i) the
historical cost or other amount substituted for historical cost of
each class of depreciable assets; (ii) total depreciation for the
period for each class of assets; and (iii) the related accumulated
depreciation
Slide 23
OTHER IMPORTANT ISSUES
Slide 24
Component Accounting As per Note 4 of Schedule II Useful Life
specified in Part C of the Schedule is for whole of the asset.
Where cost of a part of asset is significant to total cost of asset
and the useful life of that part is different from useful life
remaining asset, then useful life of that part will be separately
determined. As per MCA notification dated 29 th August 2014 the
application of component accounting will be Voluntary for year
starting 01 st April 2014 onwards and Mandatory for year starting
01 st April 2015. Component Accounting has to be applied to Entire
Block of assets existing on 01/04/2014 or 01/04/2015 as the case
may be.
Slide 25
Component Accounting Contd. A Company needs to identify
material/ significant components only keeping following in mind:
The Company may consider 10% of original cost of the asset as the
threshold for identifying significant components A company may
consider impact on current year profits and future year profits to
assess materiality If the useful life of a component is lower than
useful life of the principal asset then it should be depreciated
over such lower life If useful life of a component is higher than
useful life of principal asset then the company has a choice of
depreciating it over either. However higher useful life should be
selected only if company plans to use the component after expiry of
principal asset
Slide 26
The application of component accounting is likely to cause
significant change in the measurement of depreciation and
accounting for replacement costs. Currently, companies need to
expense replacement costs in the year of incurrence. Under
component accounting, companies will capitalize these costs as a
separate component of the asset, with consequent expensing of net
carrying value of the replaced part. In order to determine the cost
of such component following criteria can be used: (a) Break up cost
provided by the vendor (b) Cost break up given by internal/external
technical expert (c) Current replacement cost of component of the
related asset and applying the same basis on the historical cost of
asset Component Accounting Contd.
Slide 27
Continuous Process Plant Continuous Process Plant is a plant
which is required and designed to operate 24 hours a day. The words
required and designed should be interpreted with regard to inherent
technical nature of the plant. Which means the design of the plant
is such that it is required to operate continuously 24 hours a day
There are plants that run for 24 hours a day but are not designed
to do so eg: textile weaving mills Repetitive process plants /
assembly line plants are different from continuous process plants.
Eg: Automobile plants The guidance note issued by ICAI issued under
Companies Act 1956 regime will continue to be applicable
Slide 28
Depreciation in case of Revaluation Under Companies Act 1956
depreciation was to be provided on Original Cost of Asset and
consequently a Revaluation reserve was created Schedule II requires
depreciation to be charges on Historical Cost or amount substituted
for historical cost. Therefore in case of revaluation of assets
depreciation will be charged on revalued amount ICAI guidance note
which allows transfer of equivalent amount from revaluation reserve
will not apply Now, as per AS-10 a company may transfer whole
amount of revaluation reserve to general reserve on disposal of
retirement of asset
