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DEPRECIATION

Depreciation under Companies Act, 2013 – A
Practical Approach





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| Company Law
27 Jan 2015
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Reference sections: 123(2) and Schedule II
Schedule II to the Companies Act, 2013 requires depreciating the asset over its useful life unlike
Schedule XIV of the Companies Act, 1956 which specifies minimum rates of depreciation to be
provided by a company.
Normally, prescribed companies who have to follow the accounting standard prescribed under
the new act should depreciate the asset over the useful life as prescribed under the act but
there is no compulsion. They can use shorter life to depreciate the asset but the same should
be disclosed along with the reason of using such shorter life period in “Notes to Account”. Other
companies can also depreciate the asset over shorter useful life, but note that useful life cannot
exceed the life as prescribed under the act.
Before starting the analysis, let’s go through the Schedule II of the act:
PART ‘A’
1. Depreciation is the systematic allocation of the depreciable amount of an asset over
its useful life. The depreciable amount of an asset is the cost of an asset or other amount
substituted for cost, less its residual value. The useful life of an asset is the period over which
an 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.
2. For the purpose of this Schedule, the term depreciation includes amortisation.
3. Without prejudice to the foregoing provisions of paragraph 1,—
i. In case of such class of companies, as may be prescribed and whose financial statements
comply with the accounting standards prescribed for such class of companies under section 133
the useful life of an asset shall not normally be different from the useful life and the residual
value shall not be different from that as indicated in Part C, provided that if such a company
uses a useful life or residual value which is different from the useful life or residual value
indicated therein, it shall disclose the justification for the same.
ii. In respect of 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.
×

For intangible assets. the residual value of an asset is often insignificant but it should generally be not more than 5% of the original cost of the asset. or other amount substituted for cost. PART ‘B’ 1. 3. 7. godowns. The useful lives of assets working on shift basis have been specified in the Schedule based on their single shift working. “Factory buildings” does not include offices. ‘‘Continuous process plant’’ means a plant which is required and designed to operate for twenty-four hours a day. discarded. b. 5. Useful Life: life over which asset can be used subject to maximum as specified in the act. The useful life or residual value of any specific asset. Analysis: Firstly let us understand the concepts related to depreciation: i. the carrying amount of the asset as on that date— a. as applicable. or where any asset has been sold. demolished or destroyed. the depreciation will increase by 50% for that period and in case of the triple shift the depreciation shall be calculated on the basis of 100% for that period. The following information shall also be disclosed in the accounts. after retaining the residual value. if they are different from the life specified in the Schedule. and ii. namely:— i. depreciation methods used. as the case may be. if an asset is used for any time during the year for double shift. demolished or destroyed. From the date this Schedule comes into effect. up to the date on which such asset has been sold. useful life of that significant part shall be determined separately. 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. Notes 1. staff quarters. the depreciation on such assets shall be calculated on a pro rata basis from the date of such addition or. 4. 8. Depreciable Amount: Cost of Asset – Residual Value . less its residual value. any addition has been made to any asset. during any financial year. shall apply.iii. the provisions of the Accounting Standards mentioned under sub-para (i) or (ii). Where. ii. 6. 2. shall be recognised in the opening balance of retained earnings where the remaining useful life of an asset is nil. Useful life specified in Part C of the Schedule is for 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. Ordinarily. the useful lives of the assets for computing depreciation. Except for assets in respect of which no extra shift depreciation is permitted (indicated by NESD in Part C above). Depreciable amount is the cost of an asset. discarded. shall be depreciated over the remaining useful life of the asset as per this Schedule.

e. 1956) 4. Residual Value (1-4) 0 That means we are ignoring the residual value. Therefore. Carrying Amount: Not defined in the act. Original Cost 100 2. AS-28 defines carrying amount as the amount at which an asset is recognised in the Balance Sheet after deducting any accumulated Depreciation (amortization) and accumulated impairment losses thereon”.50/5) 10. Expired Life 10 years 6. Original Useful Life (Co Act. Note 7(b) of the schedule says to retain the residual value and transfer the rest to retained earnings.75 % 4. Original Cost 100 2. Residual value is not to be considered again while calculating depreciation under the new act i.50 3. 1956) 20 years 3. Accumulated Depreciation 47. Depreciation per year for next 5 years (52. New Useful Life (Co Act.50 4. Carrying Amount (1-6) 52. Original Useful Life (Co Act. New Useful Life (Co Act. 1956) 20 years 3. Depreciation rate (Co Act. the same concept must apply here.50*5) 52. it should be in this way: 1. So. Depreciation rate (Co Act. on which value the asset is to be depreciated – WDV or WDV less residual value?? Our Opinion: Many of the articles & notes we have gone through say carrying amount is WDV of the asset. 1956) 4. 2013) 15 years 5. At the end of the useful life.iii. Accumulated Depreciation under old act 47. 2013) 15 years 5. So. Original Cost 100 2. Total Depreciation (3+4) 100 5. (SLM method): 1.50 But if we depreciate without taking into account residual value: 1. value in balance sheet will be zero which is against the basic concept of the act.50 7. Depreciation for the next 5 years (10.50 8.75 years 4. Residual Value: Generally not more than 5% of original cost (Note 5 of Schedule II) iv. Issue: Problem which arises here is that note 7 of Schedule II of the act says the asset is to be depreciated over its carrying amount but AS-28 doesn’t give any reference of residual value. Expired Life 10 years .

Expired Life 5 years 6.00. Depreciation per year for next 5 years (47. Carrying Amount (1-6 –Residual Value [5%]) 47.000 : 0. Total Depreciation (6+9) 95 11. Calculating Depreciation under WDV method: 1. Residual Value (1-4) 5 We welcome suggestions on this aspect. 1956) 13. Remaining Useful Life (4-5) 10 years 7.50 7.000/1.71 Depreciation will not be calculated over 15 years.50 8. Depreciation for the next 5 years (9. New Useful Life (Co Act.6. Depreciation rate (Co Act. here 10 Add 1 Press (* =) 12 times After these. Accumulated Depreciation 47.7412 .50*5) 47. Original Cost 100 2. Formula to calculate WDV rate: We will like to discuss how to calculate such square root: First divide 5.50 9.91 % 4. Accumulated Depreciation 52.50 10.50/5) 9. kindly mail your opinions/suggestions at the email id given at the end. 1956) 20 years 3. Original Useful Life (Co Act. 2013) 15 years 5.05 Press under root button 12 times Subtract 1 Divide by factor. It will be calculated over 5 years only. amount 0.

This method can be applied.19 10 2.05 2 25. The problem which will arise here is that companies will have to calculate depreciation of each asset differently according to its useful life.7412 = . kindly brief us if more appropriate method can be used. then transfer the amount i. More appropriate method is welcomed. Carrying Amount – Residual Value (5% of original cost) to retained earnings (reserves) – Note 7b of the schedule. asset has served 15 years till now and Schedule II specifies useful life of 15 years only.98 3 19. 25.31 9 3.26 4 14. Carrying Amount = 100 – 52.58 6 7.e. 2013!! If say.84 7 5. Suggestions are welcomed.37 Though residual value is not 5% of the original cost.88 % Here. . Also.71 = 47.81 8 4. 1 – 0.e.29 Year Closing Balance 1 35.Now. its 5% of carrying cost. what if asset has served for than useful life as prescribed under Companies Act. Now.27 5 10.2588 i.