Treatment of Depreciation under Companies Act,2013-An analysis

                                                                                                                -  CS M.Kurthalanathan

Useful lives to Compute Depreciation: -–Schedule-II.{(Sec.123(2)}

Schedule II of the Companies Act 2013 deals with Depreciation. Let us discuss some of the important points covered in this Schedule.

Depreciation:

Depreciable amount of an asset = Cost of an asset/other amount substituted for cost (-)                                                                 Residual value        (Residual value should not be more than 5 % of the original cost of the asset)

Useful life:

‘Useful life’ may be considered as a period over which an asset is available for use or as the number of production or similar units expected to be obtained from the asset by the entity.

Applicability

The Companies Act, 2013 states that Schedule II will be applicable as follows:

·         For a prescribed class of companies, whose financial statements are required to comply with AS prescribed under the 2013 Act, the useful lives should normally be in accordance with the Schedule. However, if a prescribed company uses a different useful life, it should disclose a justification for doing so;

·         For Government companies,useful life or residual value of any specified asset, as notified by the relevant Regulatory Authority shall be applied in calculating the depreciation, irrespective of the requirements of this Schedule.

·         For other Companies, the useful life of an asset shall not be longer than the useful life and the residual value shall not be higher than that prescribed in Part C.

Other Points:

1. The following information shall be disclosed in the accounts namely;

·         Depreciation method used &

·         Useful lives of the assets for computing depreciation, if they are different from the life specified in the schedule.

2. Factory Buildings does not include offices, godowns, staff quarters.

3. During any financial year, if any addition has been made to any asset or where any asset has been sold, discarded, demolished or destroyed, the depreciation on such assets shall be calculated on a pro rata basis from the date of such addition or, as the case may be, up to the date on which such asset has been sold, discarded, demolished or destroyed.

4. Useful life specified in Part C of the Schedule is for the whole of the asset. 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.

5. Transitional Provisions:

 From the date this Schedule comes into effect, the carrying amount of the asset as on that date—

(a) shall be depreciated over the remaining useful life of the asset as per this Schedule;

(b) after retaining the residual value, shall be recognised in the opening balance of retained earnings where the remaining useful life of an asset is NIL.

6. ‘‘Continuous process plant’’ means a plant which is required and designed to operate for 24 hours a day.

Schedule XIV Vs Schedule II :

Companies Act,1956 – Sch.XIV	Companies Act,2013- Sch.II
It deals with only depreciation of tangible assets.	It deals with the amortization of intangible assets also.
It contained rates of depreciation of tangible assets.	It contains only useful lives of tangible assets and does not prescribe depreciation rates.
100% Depreciation shall be charged on assets whose actual cost does not exceed Rs.5,000/-	Omits the provision for 100% Depreciation on immaterial items i.e, assets whose actual cost does not exceed Rs.5,000/-
Extra Shift Depreciation (ESD) not applicable to ·         Items marked NESD in the schedule           Specified items of P&M to which general rate of Depreciation was applicable.	Extra Shift Depreciation (ESD) not applicable to ·         Items marked NESD in  the schedule. ·         ESD will apply to P&M items subject to general rate i.e., useful life of 15 years.
Unit of production method of depreciation not permissible as per ‘MCA Circular’	Unit of production method of depreciation permitted
Component approach optional (read with AS-10)	Component approach mandatory
ESD for double shift and triple shift was to be made separately in proportion with No.of days for which concern worked second shift or triple shift bears to normal No.of working days in a year. For Seasonal factory: Greater of actuals and 180 days. Other cases: Greater of actual and 240 days.	ESD working simplified by the 2013 act- For Double shift: 50% more depreciation for that period for which asset used. For Triple shift: 100% more depreciation for that period for which asset used.

Practical Issues:

The new Schedule II and its treatment of Depreciation throws some interesting questions and practical problems; some of them are discussed below:

o   How the rates of depreciation will be arrived at for each class of asset under WDV method as per Schedule II, when each asset is capitalized at different dates in a year?

o   Whether there will be any retrospective impact if company changes its existing depreciation policy (from WDV to SLM and Vice versa) under Companies Act, 2013 and charge depreciation as per useful life provided in Schedule II?

o   What will be the treatment of the balance depreciable value of the asset in case when useful life of such asset has already expired as per new schedule II of 2013 Act?

For example remaining carrying value of the asset is 50% of the original cost and the remaining useful life is zero as per Schedule II, then what will be treatment of the 50% remaining value? Should it be charged to reserves?

o   Under block of assets method when different plant and machineries under the same block are purchased in different years then in that case there will be different rates of depreciation for each year for each new machinery purchased.

o   Transitional provision requires carrying value to be depreciated over remaining useful life which will result in very cruel outcomes.