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Depreciation Accounting Accounting Standard 6 Presented by : CA. Rajeev Bansal ACA, D.I.S.A.(ICA) B. Com. M/s Rajeev Lakshmi Bansal & Co. Chartered Accountants. Applicability. This Statement applies to all depreciable assets, except :— ( i ) forests, plantations ;
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Depreciation Accounting Accounting Standard 6 Presented by : CA. Rajeev Bansal ACA, D.I.S.A.(ICA) B. Com. M/s Rajeev Lakshmi Bansal & Co. Chartered Accountants
Applicability • This Statement applies to all depreciable assets, except :— • (i) forests, plantations ; • (ii) wasting assets, Minerals and Natural Gas; • (iii)expenditure on research and development; • (iv) goodwill; • (v) live stock – Cattle, Animal Husbandry. • This statement also does not apply to land unless it has a limited useful life for the enterprise.
concept of Depreciation • Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from • use, • effluxion of time or • obsolescence through technology and market changes.
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
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.
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
Depreciable Amount • Depreciable amount means historical cost less estimated residual value. E.g. • 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 asset should be allocated on a systematic basis to each accounting period during the useful life of the asset.
Dep. on Addition/Extensions • Any addition or extension which becomes an integral part of the existing asset should be depreciated over the remaining useful life of that asset. The depreciation on such addition or extension provided at the rate applied to the existing 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.
Method of Charging of Depreciation • There are several method of depreciation: • Straight Line Method (SLM) • Written Down Method (WDV) • Sum of year Digits Method • Annuity Method • Machine Hour Method • Production Hour Method
Chance in Method of Depreciation A change from one method of providing depreciation to another should be made only if the adoption of the new method is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise.
Chance in Method of Depreciation • When such a change in the method of depreciation is made, depreciation should be recalculated in accordance with the new method from the date of the asset coming into use. • The deficiency or surplus arising from retrospective recomputation of depreciation in accordance with the new method should be adjusted in the accounts in the year in which the method of depreciation is changed.
Disclosures • If any depreciable asset is disposed of, discarded, demolished or destroyed, the net surplus or deficiency, if material, should be disclosed separately. • The following information should be disclosed in the financial statements: • (i) the historical cost or other amount substituted for historical cost (i.e. revalued amount) of each class of depreciable assets; • (ii) total depreciation for the period for each class of assets; and • (iii) the related accumulated depreciation.
Disclosures • The following information should also be disclosed in the financial statements along with the disclosure of other accounting policies: • (i) depreciation methods used; and • (ii) depreciation rates or the useful lives of the assets, if they are different from the principal rates specified in the statute governing the enterprise.
Change in depreciation amount due to change in method is to be given retrospective effect but in all other cases (like Change in Cost, Life, Revaluation etc.) Change in depreciation is given prospective effect
Minimum Depreciation • The Department of Company Affairs has clarified that the rates contained in Schedule XIV to the Company Act, 1956 should be viewed as the minimum rates, and, therefore, company cannot charge depreciation at rates lower than specified in the Schedule in relation to the assets. However, if on technical evaluation, higher rate of depreciation are justified, the higher rates should be applied. • Where rates other than Schedule XIV rates are applied, Appropriate disclosers in the notes to the accounts would be required
Depreciation on Items Below Rs. 5000 • As per Schedule XIV of the Companies Act, individual 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 capable of being used independently, therefore each chair or table will have to be provided 100% depreciation if its individual value does not exceed Rs. 5000. The 100% provision cannot be avoided by arguing that the furniture can be used only as a set, i.e. a set of chairs, which in aggregate cost more than Rs. 5000. CONTIN……
In case of Plant and Machinery: • Where the aggregate actual cost of individual items of plant and machinery costing Rs. 5000 or less constitutes more than 10% of total actual cost of plant and machinery, normal Schedule XIV rates should be used. (Note number 8 of Schedule XIV of the Companied Act, 1956)
Query • Info ltd. Has acquired on a 999 year lease a huge piece of land for Rs. 999 lakhs from the Government. The land along with any construction thereon will revert to the Government after 999 years. Since the said period is very long and is akin to owning the land, Info Ltd does not wish to amortise the consideration. Is that acceptable under Indian GAAP ?
Response • AS- 19 “Leases” does not apply to lease agreement to use lands. AS 6 ‘ Depreciation Accounting”, does not apply to land unless it has a limited useful life for the enterprise. In other words, if the life of land is limited than AS 6 would apply. In the given case, 999 years though very long is still limited. Therefore, AS 6 would apply. Therefore each year Info Ltd will have to charge Rs. 1 lakh to the income statement as amortization expenses.
