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AS – 6: Depreciation Accounting

What is Depreciation?
A company has purchased a machine for 10 lakhs and used it for 2 years.
Now it wants to sell the machine for 10 lakhs. Can it do so?
Definitely not, because the machine is used one. It can find a lot of buyers if
the price is less than 10 lakhs. So, there is a loss in the value of asset by usage,
passage of time, wear and tear etc,
As per the principles of accounting, this loss has to be provided by debiting
P&L A/C. This provision for loss is known as “Depreciation”

So, Depreciation has to be provided (i.e. provision for loss) on “Depreciable assets”

If depreciable asset is Disposed off

Destroyed, then
Surplus or deficiency is credited or charged to P&L A/C.
The estimation of useful life of depreciable asset is a matter of judgment based in
the experience of the enterprise with similar assets. There may be conflict
between the estimate of useful life by the management and that specified in the
statute (Companies Act).

When management estimate of useful life is

Longer than specified in statue Shorter than specified in

(i.e. Schedule XIV) statue (i.e. Schedule XIV)

Means that the company is Means that the company is charging a higher rate,
charging a lower rate, it is allowed to charge a higher rate than Schedule
it is not allowed to charge a lower XIV, provided the BOD concluded after taking
rate than Schedule XIV into account commercial and technical factors,
since the financial statements must reflect a true
and fair view.

Can a company adopt different methods of depreciation for different types of

As per ICAI guidance note, a company may adopt or follow different
methods of depreciation, for different types of assets, provided the same methods
are consistently adopted every year.

A change in depreciation method is permissible in the following situations:

1. Compliance with the statute
2. Compliance with Accounting Standards
3. More appropriate presentation of financial statements

Change in depreciation method is treated as change in accounting policy.

The following procedure has to be followed when there is a change in depreciation

 Aggregate the depreciation under the old method, from the beginning to the
period of change in depreciation method. (A)
 Calculate the depreciation in accordance with the new method from the
beginning (i.e. Date of asset coming into use) to the period of change in
depreciation method. (B)
 If the result (A-B) is surplus, the company has charged greater amount of
depreciation under old method, which has to be reduced now. So, the surplus
is credited to P&L A/C.
 If the result (A-B) is deficit, the company has charged lesser amount of
depreciation under old method, which has to be increased now. So, the
deficit is charged to P&L A/C.
 In other words retrospective effect has to be given to change in
depreciation method.

Treatment in case of

Change in Historical cost Change in Estimated useful life

Due to
O/S depreciable amount of asset
Exchange variation Revaluation should be allocated over the
revised useful life of an asset

1. Increase or decrease, Depreciation on revalued

added/deducted from the amount
2. Depreciation on Revised
WDV provided

Depreciation In case of addition or Extension to an Existing Asset:

Addition or Extension to an Existing Asset

Retains a separate identity and it is Becomes integral part of the

capable of being used even if existing asset.
existing asset is disposed off.

Depreciated at the rate of existing

Depreciated independently based on asset.
the useful life of additions or
Problems on AS – 6:
1. A machinery costing 10 lakhs has useful life of 5 years. After the end of
5 years, its scrap value would be 1 lakh. How much depreciation is to be
charged in the books of the company as per AS-6.

2. Samantha Ltd has an asset purchased 3 years ago for 9,70,000. The
residual value of the asset was estimated to be 10,000 after an estimated
useful life of 8 years. The company charges straight line method of
depreciation. Due to change in technology, the company estimates that the
asset will become obsolete in another 3 years time from now. How should
depreciation be treated in view of revision in useful life?

3. Chandrika Ltd has an equipment purchased 2 years ago for 3,80,000. The
residual value of asset was estimated to be 20,000. The total useful life of
the asset when purchased was 12 years. The company charges SLM. Due to
price adjustment, the cost of asset is now increased by 30,000. What is the
treatment for increase in the historical cost? Advise.

4. P ltd. purchased a machinery for 15,34,500 on 1st April of a financial

year. The company spent 35,500 towards cost of consultancy in relation with
installation of asset. Commissioning expenses came to 41,000. The useful life
of the asset was considered to be 10 years, at the end of which the scrap
value is estimated to be 1,11,000. Two years later the company has made a
significant addition to this machinery for 1,96,000 in respect of which the
estimated life is 10 years. The company adopts SLM for depreciation. Explain
the alternative treatments for the addition of 1,96,000.

5. BB ltd. depreciated its plant and machinery under two different methods as
Year 1 2 3 4 5
SLM 7.8 7.8 7.8 7.8 7.8
WDV 21.38 15.8 11.68 8.64 6.38
What would be the amount of resultant surplus/deficiency, if the company
decides to switch over from WDV method to SLM for first four years? Also
state how you will treat the same in accounts?

6. B Ltd. Purchased certain plant and machinery for Rs.50 lakhs. 20% of the
cost net of CENVAT credit is the subsidy component to be realized from a
State Government for establishing industry in a backward district. Cost
includes excise Rs. 8 lakhs against which CENVAT credit can be claimed.
Compute depreciable amount.
The relevant IAS/IFRS and its material departure from AS – 6 is as follows:
IAS 16 – Property, plant and Equipment
 A change in the depreciation method is treated as change in accounting
estimate and the effect should be given prospectively as per IAS – 16. But
according to AS – 6, change in method of depreciation is accounted as
change in accounting policy and accounted retrospectively.
 As per IAS 16, component approach of depreciation is applicable. An entity
is required to depreciate separately the significant parts of property, plant
and equipment if they have different useful lives. As per AS 6, Component
approach is permitted upon satisfying certain conditions.

The relevant US GAAP and its material departure from AS – 6 is as follows:

 A change in the depreciation method is treated as change in accounting
 US GAAP generally does not require a component approach for depreciation.