Depreciation under Companies Act 2013

Depreciation under Companies Act 2013

Section 123 of the Companies Act 2013 deals with declaration of dividend and such dividend shall be paid out of profits of the company after providing for depreciation. 

Sub-section (2) of section 123 provides provisions for calculation of depreciation on various fixed assets, which is enumerated in Schedule II to the Act.

What is a depreciable amount of an asset?

Depreciable amount of an asset is the cost of an asset or any other amount substituted for the cost less its residual value.

For example, cost of an asset is Rs.1,00,000/- and its residual value is Rs.5000/-, then the depreciable amount would be Rs.95,000/-. Depreciation is calculated on the depreciable amount i.e. Rs.95,000/-.

What is depreciation?

It is a systematic apportionment of depreciable amount of an asset over its useful life.

For example, the useful life of an asset is 10 years, then the depreciable amount of Rs.95,000/- will be apportioned over a period of 10 years at Rs.9500/- every year.

What is meant by  useful life?

Part C of the Schedule II to the Companies Act 2013 prescribes useful lives for various tangible assets. It means every asset has a span of life from the date of its purchase.  It is a period during which an asset would be useful to a company’s operations.

What is residual value?

After useful life of an asset, the asset could be having a value which is residual in nature and such residual value should not be more than 5% of the total cost of the asset, as prescribed under note 5 of Part C to the Schedule II.

  

How assets are classified?

For the purpose of depreciation, assets are classified under 15 major heads as tabulated below;

Sl. No.	Major heads	Sl. No.	Major heads
1	Buildings	9	Railways sidings, locomotives, rolling stocks, tramways and railways used by concerns, excluding railway concerns
2	Bridges, culverts, bunders, etc.	10	Ropeway structures
3	Roads	11	Office equipment
4	Plant and Machinery	12	Computers and data processing units
5	Furniture and fittings	13	Laboratory equipment
6	Motor Vehicles	14	Electrical installations and equipment
7	Ships	15	Hydraulic works, pipelines and sluices
8	Aircrafts or Helicopters

What is meant by NESD?

NESD means No Extra Shift Depreciation. For certain assets there are no extra shift depreciation is allowable except its normal depreciation as given under Part-C to the Schedule II by means of useful lives.

A list of NESD assets and its useful lives is given below;

Sl. No.		NESD assets	Useful lives
1	Buildings	Buildings (other than factory buildings) RCC frame structure	60 yrs.
2		Buildings (other than factory buildings) other than RCC frame structure	30 yrs.
3		Factory buildings	30 yrs.
4		Fences, wells, tube wells	5 yrs.
5		Others (including temporary structure, etc.)	3 years
6		Bridges, culverts, bunders, etc.	30 yrs.
7	Roads	Carpeted roads – RCC	10 yrs.
8		Carpeted roads – non RCC	5 yrs.
9		Non carpeted roads	3 yrs.
10	P & M	Continuous process plant for which no special rate has been prescribed under (ii) of 5(IV) of Part-C	8 yrs.
11		Plant and machinery used in glass manufacturing except direct fire glass melting furnaces	8 yrs.
12		Float glass melting furnaces	10 yrs.

Sl. No.		NESD assets	Useful lives
13	Plant & Machinery	Plant and machinery used in mines and quarries – portable underground machinery and earth moving machinery used in open and cast mining	8 yrs.
		Plant and machinery used in telecommunications
14		Towers	18 yrs.
15		Telecom transceivers, switching centres, transmission and other network equipment	13 yrs.
16		Telecom – ducts, cables and optical fibre	18 yrs.
17		Satellites	18 yrs.
		Plant and machinery used in exploration, production and refining oil and gas
18		Refineries	25 yrs.
19		Oil and gas assets (including wells), processing plant and facilities	25 yrs.
20		Petrochemical plant	25 yrs.
21		Storage tanks and related equipment	25 yrs.
22		Pipelines	30 yrs.
23		Drilling rig	30 yrs.
24		Field operations (above ground) portable boilers, drilling tools, well-head tanks, etc.	8 yrs.
25		Loggers	8 yrs.
		Plant and machinery used in generation, transmission and distribution of power
26		Thermal/gas/combined cycle power generation plant	40 yrs.
27		Hydro power generation plant	40 yrs.
28		Nuclear power generation plant	40 yrs.
29		Transmission lines, cables and other network assets	40 yrs.
30		Wind power generation plant	22 yrs.
31		Electric distribution plant	35 yrs.
32		Gas storage and distribution plant	30 yrs.
33		Water distribution plant including pipelines	30 yrs.
		Plant and machinery used in manufacture of non-ferrous metals
34		Metal pot line	40 yrs.
35		Bauxite crushing and grinding section	40 yrs.
36		Digester section	40 yrs.
37		Turbine	40 yrs.

  

Sl. No.		NESD assets	Useful lives
38	Plant and Machinery	Equipment for calcination	40 yrs.
39		Copper smelter	40 yrs.
40		Equipments for scalping slitting, etc.	30 yrs.
41		Copper refining plant	25 yrs.
		Plant and machinery used in medical and surgical operations
42		Electrical machinery, x-ray and electrotherapeutic apparatus and accessories thereto, medical, diagnostic equipments, namely, cat-scan, ultrasound machines, ECG monitors, etc.	13 yrs.
43		Other equipments	15 yrs.
		Plant and machinery used in manufacture of pharmaceuticals and chemicals
44		Reactors	20 yrs.
45		Distillation columns	20 yrs.
46		Drying equipments/centrifuges and decanters	20 yrs.
47		Vessel/storage tanks	20 yrs.
		Plant and machinery used in civil construction
48		Transmission line, tunnelling equipments	10 yrs.
49		Others including material handling/pipeline/welding equipments	12 yrs.
50		Plant and machinery used in salt works	15 yrs.
		Furniture and fittings
51		General furniture and fittings	10 yrs
52		Furniture and fittings used in hotels, restaurants and boarding houses, schools, colleges and other educational institutions, libraries; welfare centres; meeting halls, cinema houses, theatres and circuses; and furniture and fittings let out on hire for use on the occasion of marriages and similar functions.	8 yrs.
		Motor vehicles
53		Motor cycles, scooter and other mopeds	10 yrs.
54		Motor buses, motor lorries, motor cars and motor taxies used in a business of running them on hire	6 yrs.
55		Motor buses, motor lorries and motor cars other than those used in a business of running them on hire	8 yrs.
56		Motor tractors, harvesting combines and heavy vehicles	8 yrs.
57		Electrically operated  vehicles including battery powered or fuel cell powered vehicles	8 yrs.
		Ships
58		Ocean going ships
59		Bulk carriers and liner vessels	25 yrs.
60		Crude tankers, product carriers and easy chemical carriers with or without conventional tank coatings	20 yrs.

Sl. No.		NESD assets	Useful lives
	Plant and Machinery	Chemicals and acid carriers – with stainless steel tanks	25 yrs.
		Chemicals and acid carriers – with other tanks	20 yrs.
		Liquefied gas carries	30 yrs.
		Conventional large passenger vessels which are used for cruise purpose also	30 yrs.
		Coastal service ships of all categories	30 yrs.
		Offshore supply and support vessels	20 yrs.
		Catamarans and other high speed passenger for ships or boats	20 yrs.
		Drill ships	25 yrs.
		Hovercrafts	15 yrs.
		Fishing vessels with wooden hull	10 yrs.
		Dredgers, tugs, barges, survey launches and other similar ships used mainly for dredging purposes	14 yrs.
		Vessels ordinarily operating on inland waters – speed boats	13 yrs.
		Vessels ordinarily operating on inland waters – other vessels	28 yrs.
		Aircrafts or helicopters	20 yrs.
		Railways sidings, locomotives, rolling stocks, tramways and railways used by concerns, excluding railway concerns	15 yrs.
		Ropeway structures	15 yrs.
		Office equipment	5 yrs.
		Computer and data processing units Servers and networks End user devices, such as desktops, laptops, etc.	6 yrs 3 yrs.
		Laboratory equipment General laboratory equipment Laboratory equipments used in educational institutions	10 yrs. 5 yrs.
		Electrical installations and equipment	10 yrs.
		Hydraulic works, pipelines and sluices	15 yrs.

What is meant by non-NESD?

A non-NESD asset is an asset for which extra shift depreciation is allowed.  If such asset is used for any time during the year for double shift or triple shift, then depreciation will be calculated as follows;

Non-NESD asset	Double shift	Triple shift
An asset is used for any time during the year	Depreciation will increase by 50% for that period	Depreciation will increase by 100% for that period

A list of non-NESD assets and its useful lives is given below;

Sl. No.		Non-NESD assets	Useful lives
1		Plant and machinery other than continuous process plant not covered under specific industries	15 yrs.
2		Plant and machinery related to production and exhibition of motion picture films	13 yrs.
3		Plant and machinery except direct fire glass melting furnaces – recuperative and regenerative glass melting furnaces	13 yrs.
4		Plant and machinery used in manufacture of steel – sinter plant / blast furnace / coke ovens/rolling mill in steel plant	20 yrs.
5		Plant and machinery  used in manufacture of non-ferrous metals Roll grinder Soaking pit / annealing furnace / rolling mills Surface miner, ripper dozer, etc. used in mines	40 yrs. 30 yrs. 25 yrs.
		Plant and machinery used in civil construction
6		Concreting, crushing, piling equipments and road making equipments	12 yrs.
7		Heavy lift equipments – crane with capacity of more than 100 tons	20 yrs.
8		Heavy lift equipments – crane with capacity of less than 100 tons	15 yrs.
9		Earth moving equipments	9 yrs.

Company is required to disclose in the accounts, the depreciation methods used and the useful lives of the assets for computing depreciation, if they are different from the life specified in the schedule II.

This deprecation methodology is applicable effective from 1^st April 2014 onwards and therefore, the carrying amount of the asset as on that date, shall be depreciated over the remaining useful life of the asset as per the Schedule II. 

Further, the carrying amount of the asset as on that date, 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.

Amortisation -  Depreciation includes amortisation.

CS G Balaji

Company Secretary