Depreciation Accounting Depreciation Accounting Accounting Standard 6 Accounting Standard 6

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Depreciation Accounting Depreciation Accounting

Accounting Standard 6 Accounting Standard 6

Presented by Presented by : :

CA. Rajeev Bansal CA. Rajeev Bansal

ACA, D.I.S.A.(ICA) B. Com.

M/s Rajeev Lakshmi Bansal & Co.

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Applicability Applicability



This Statement applies to all depreciable This Statement applies to all depreciable assets, except :—

assets, except :—

– (i) forests, plantations ;(i) forests, plantations ;

– (ii) wasting assets, Minerals and Natural Gas;(ii) wasting assets, Minerals and Natural Gas;

– (iii)expenditure on research and development;(iii)expenditure on research and development;

– (iv) goodwill;(iv) goodwill;

– (v) live stock – Cattle, Animal Husbandry.(v) live stock – Cattle, Animal Husbandry.



This statement also does not apply to land This statement also does not apply to land unless it has a limited useful life for the unless it has a limited useful life for the

enterprise.

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concept of Depreciation concept of Depreciation



Depreciation is a measure of the wearing Depreciation is a measure of the wearing out, consumption or other loss of value of out, consumption or other loss of value of

a depreciable asset arising from a depreciable asset arising from

–

use, use,

–

effluxion of time or effluxion of time or

–

obsolescence through technology and market obsolescence through technology and market changes.

changes.

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

Depreciable assets Depreciable assets are assets which are assets which

–

(i) are expected to be used during more than (i) are expected to be used during more than one accounting period; and

one accounting period; and

–

(ii) have a limited useful life; and (ii) have a limited useful life; and

–

(iii) are held by an enterprise for use in the (iii) are held by an enterprise for use in the production or supply of goods and services, for production or supply of goods and services, for rental to others, or for administrative purposes rental to others, or for administrative purposes and not for the purpose of sale in the ordinary and not for the purpose of sale in the ordinary

course of business

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

Useful life is either



(i) the period over which a depreciable asset is expected to be used by the

enterprise; or



(ii) the number of production or Similar

units expected to be obtained from the use

of the asset by the enterprise.

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Useful life of a depreciable asset should be estimated

based on :



Expected physical wear & tear;



Obsolescence;



Legal & other limits on the use of assets.

The useful life of a depreciable assets is shorter than its physical life. This is due to:



Legal & contractual limits, such as the expiry of related leases;



Extent of use & physical deterioration;



Obsolescence arising from technological changes, change in market demands, legal & other

restriction

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Depreciable Amount Depreciable Amount

 Depreciable amount means historical cost Depreciable amount means historical cost less estimated residual value. E.g.

less estimated residual value. E.g.

– Cost of Asset is Rs. 5,00,000, ERV is Rs. 25,000. Cost of Asset is Rs. 5,00,000, ERV is Rs. 25,000.

Then, The Depreciable Amount will be Rs.

5,00,000 – Rs. 25,000 i.e. Rs. 4.75,000.

 The depreciable amount of a depreciable The depreciable amount of a depreciable asset should be allocated on a systematic asset should be allocated on a systematic basis to each accounting period during the basis to each accounting period during the

useful life of the asset.

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Dep. on Addition/Extensions Dep. on Addition/Extensions

 Any addition or extension which Any addition or extension which becomes an becomes an integral part

integral part of the existing asset should be of the existing asset should be depreciated over the remaining useful life of that depreciated over the remaining useful life of that asset. The depreciation on such addition or asset. The depreciation on such addition or extension provided at the rate applied to the extension provided at the rate applied to the

existing asset.

 Where an addition or extension Where an addition or extension retains a separate retains a separate identity

identity and is capable of being used after the and is capable of being used after the existing asset is disposed of, depreciation should existing asset is disposed of, depreciation should be provided independently on the basis of an be provided independently on the basis of an

estimate of its own useful life.

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Method of Charging of Depreciation Method of Charging of Depreciation



There are several method of depreciation: There are several method of depreciation:

–

Straight Line Method (SLM) Straight Line Method (SLM)

–

Written Down Method (WDV) Written Down Method (WDV)

–

Sum of year Digits Method Sum of year Digits Method

–

Annuity Method Annuity Method

–

Machine Hour Method Machine Hour Method

–

Production Hour Method Production Hour Method

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Chance in Method of Depreciation Chance in Method of Depreciation

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A change from one method of providing A change from one method of providing depreciation to another should be made only if the depreciation to another should be made only if the

adoption of the new method is required by adoption of the new method is required by

– statute orstatute or

– for compliance with an accounting standard orfor compliance with an accounting standard or

– if it is considered that the change would result in if it is considered that the change would result in a more appropriate preparation or presentation a more appropriate preparation or presentation

of the financial statements of the enterprise.

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Chance in Method of Chance in Method of

Depreciation Depreciation

 When such a change in the method of When such a change in the method of depreciation is made, depreciation should be depreciation is made, depreciation should be recalculated in accordance with the new method recalculated in accordance with the new method

from the date of the asset coming into use.

 The deficiency or surplus arising from The deficiency or surplus arising from retrospective recomputation of depreciation in retrospective recomputation of depreciation in accordance with the new method should be accordance with the new method should be adjusted in the accounts in the year in which the adjusted in the accounts in the year in which the

method of depreciation is changed.

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Disclosures Disclosures



If any depreciable asset is disposed of, If any depreciable asset is disposed of, discarded, demolished or destroyed, the net discarded, demolished or destroyed, the net surplus or deficiency, if material, should be surplus or deficiency, if material, should be

disclosed separately.



The following information should be disclosed The following information should be disclosed in the financial statements:

in the financial statements:

– (i) the historical cost or other amount substituted (i) the historical cost or other amount substituted for historical cost (i.e. revalued amount) of each for historical cost (i.e. revalued amount) of each class of depreciable assets;

class of depreciable assets;

– (ii) total depreciation for the period for each class (ii) total depreciation for the period for each class of assets; and

of assets; and

– (iii) the related accumulated depreciation.(iii) the related accumulated depreciation.

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Disclosures Disclosures



The following information should also be The following information should also be disclosed in the financial statements along disclosed in the financial statements along with the disclosure of other accounting with the disclosure of other accounting

policies:

– (i) depreciation methods used; and(i) depreciation methods used; and

– (ii) depreciation rates or the useful lives of the (ii) depreciation rates or the useful lives of the assets, if they are different from the principal rates assets, if they are different from the principal rates specified in the statute governing the enterprise.

specified in the statute governing the enterprise.

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

Change in depreciation amount due to Change in depreciation amount due to change in method is to be given change in method is to be given

retrospective effect

retrospective effect but in all other cases but in all other cases (like Change in Cost, Life, Revaluation (like Change in Cost, Life, Revaluation etc.) Change in depreciation is given etc.) Change in depreciation is given

prospective effect

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Minimum Depreciation Minimum Depreciation



The Department of Company Affairs has clarified that The Department of Company Affairs has clarified that the rates contained in Schedule XIV to the Company the rates contained in Schedule XIV to the Company Act, 1956 should be viewed as the minimum rates, Act, 1956 should be viewed as the minimum rates, and, therefore, company cannot charge depreciation and, therefore, company cannot charge depreciation at rates lower than specified in the Schedule in at rates lower than specified in the Schedule in relation to the assets. However, if on technical relation to the assets. However, if on technical evaluation, higher rate of depreciation are justified, evaluation, higher rate of depreciation are justified,

the higher rates should be applied.



Where rates other than Schedule XIV rates are Where rates other than Schedule XIV rates are

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Depreciation on Items Below Depreciation on Items Below

Rs. 5000 Rs. 5000



As per Schedule XIV of the Companies Act, individual As per Schedule XIV of the Companies Act, individual items of fixed assets below Rs. 5000/- should be items of fixed assets below Rs. 5000/- should be

depreciated at 100%.

For Exp,



An item of furniture such as a chair or table is An item of furniture such as a chair or table is capable of being used independently, therefore each capable of being used independently, therefore each chair or table will have to be provided 100%

chair or table will have to be provided 100%

depreciation if its individual value does not exceed depreciation if its individual value does not exceed Rs. 5000. The 100% provision cannot be avoided by Rs. 5000. The 100% provision cannot be avoided by arguing that the furniture can be used only as a set, arguing that the furniture can be used only as a set, i.e. a set of chairs, which in aggregate cost more i.e. a set of chairs, which in aggregate cost more

than Rs. 5000.

^CONTIN……^CONTIN……

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

In case of Plant and Machinery: In case of Plant and Machinery:

–

Where the aggregate actual cost of individual Where the aggregate actual cost of individual items of plant and machinery costing Rs.

items of plant and machinery costing Rs.

5000 or less constitutes more than 10% of 5000 or less constitutes more than 10% of

total actual cost of plant and machinery, total actual cost of plant and machinery,

normal Schedule XIV rates should be used.

(Note number 8 of Schedule XIV of the (Note number 8 of Schedule XIV of the

Companied Act, 1956)

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Query Query

 Info ltd. Has acquired on a 999 year lease a huge Info ltd. Has acquired on a 999 year lease a huge piece of land for Rs. 999 lakhs from the piece of land for Rs. 999 lakhs from the Government. The land along with any Government. The land along with any construction thereon will revert to the construction thereon will revert to the Government after 999 years. Since the said period Government after 999 years. Since the said period is very long and is akin to owning the land, Info is very long and is akin to owning the land, Info Ltd does not wish to amortise the consideration.

Ltd does not wish to amortise the consideration.

Is that acceptable under Indian GAAP Is that acceptable under Indian GAAP