Accounting Standard 6

Depreciation Accounting

Q 1. Write a short note on depreciable assets as defined in AS-6.

(CA Final November 1998; 4 Marks)
OR
What are the assets to which Accounting Standard-6 is applicable?
Ans. Depreciable assets are assets, which are:
 Expected to be used during more than one accounting period; and
 Having a limited useful life, e.g., land does not has limited useful life; and
 Held by an enterprise for:
— Use in the production or supply of goods and services,
— Rental to others, or
— Administrative purposes and not for sale in the ordinary course of
business.
AS-6 deals with depreciation accounting and applies to all depreciable assets,
except the following items to which special considerations apply: —
 Regenerative natural resources like forests, plantations;
 Non-regenerative resources like wasting assets including expenditure on
the exploration for and extraction of minerals, oils, natural gas;
 Research and development;
 Goodwill;
 Livestock;
 Land unless having limited useful life, e.g., lease hold land

Q 2. What are the factors need to be considered while determining useful life?
Can useful life be reviewed?
Ans. Factors for considering useful life: The useful life of a depreciable asset
should be estimated after considering the following factors:
 Expected physical wear and tear;
AS-24 Depreciation Accounting AS 6

 Obsolescence;
 Legal or other limits on the use of the asset.
The useful life of a depreciable asset may be shorter than its physical life.
Determination of the useful life of a depreciable asset is a matter of estimation.
The statute governing an enterprise may provide the basis for computation of the
depreciation, e.g., the Companies Act, 1956. Where the management's estimate
of the useful life of an asset of the enterprise is shorter than that envisaged under
the relevant statute, the depreciation provision is appropriately computed by
applying a higher rate. If the management's estimate of the useful life of the asset
is longer than that envisaged under the statute, it is legally required to take the
useful life as envisaged under the statue.
Review of useful life: The useful lives of major depreciable assets or classes of
depreciable assets may be reviewed periodically. Where there is a revision of the
estimated useful life of an asset, the unamortised depreciable amount, i.e.,
written down book value minus estimated residual value, should be charged over
the revised remaining useful life. It may be pertinent to note here that review of
useful life is not required but permitted under AS-6.

Q 3. How do you deal with following as per Accounting Standard-6?

(i) Additions or Extensions
(ii) Change in historical Cost
(iii) Depreciation on Revalued Assets
(iv) Profit and loss on disposal
Ans.
(i) Additions or Extensions
Integral part of the existing asset:
 Any addition or extension, which becomes an integral part of the existing
asset, should be depreciated over the remaining useful life of that asset.
 Alternatively, the depreciation on such addition or extension may be
provided at the rate applied to the existing asset.
Separate identity:
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.
(ii) Change in historical Cost: Where the historical cost of a depreciable asset
has undergone a change due to increase or decrease in long term liability on
account of exchange fluctuations, price adjustments, changes in duties or similar
factors, the depreciation on the revised unamortised depreciable amount should
be provided prospectively over the residual useful life of the asset.
AS 6 Depreciation Accounting AS-25

(iii) Depreciation on Revalued Assets: Where the depreciable assets are

revalued, the provision for depreciation should be based on the revalued amount
and on the estimate of the remaining useful lives of such assets. In case the
revaluation has a material effect on the amount of depreciation, the same should
be disclosed separately in the year in which revaluation is carried out.
(iv) Profit and loss on disposal: If any depreciable asset is disposed of,
discarded, demolished or destroyed, the net surplus or deficiency, if material,
should be disclosed separately.

Q 4. Briefly explain the discloser requirement of Accounting Standard-6.

Ans. Discloser requirements: Following information should be disclosed in the
financial statements:
 Historical cost or revalued amount of each class of depreciable assets;
 Total depreciation for the period for each class of assets; and
 Accumulated depreciation
 Depreciation methods used; and
 Depreciation rates or useful lives, if different from rates specified in the
statute.
PRACTICAL PROBLEMS
P 1. A company has not provided depreciation on machinery on the plea that the
machinery has been maintained in excellent condition and is as good as new.
Give your comments and observations on the above.
(CA Inter November 2001; 5 Marks)
Ans. Non-Provision of Depreciation: The machinery is as good as new. The
plea of the management of the company not to provide for depreciation on its
assets in a particular year on account of the reason that the company has
maintained the machinery in an excellent was during the year is not acceptable
because as per the definition of depreciation given in AS-6 on "Depreciation
Accounting", "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". Thus, depreciation also
arises due to efflux of time and therefore, depreciation should be provided
irrespective of whether the assets were maintained very well during the year.
Hence, the mere fact that the assets have been maintained excellently during the
year is not an acceptable ground of the management not to provide for
depreciation.

P 2. No depreciation has been charged for the year ended 31st March 2001, in
respect of a spare Bus purchased during the year and kept ready by the
company for use as a stand-by on the ground that it was not used during the
year. State briefly the duty of an auditor with regard to above.
(CA Inter May 2001; 5 Marks)
AS-26 Depreciation Accounting AS 6

Ans. Depreciation on Stand-by Asset: As per AS-6, 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. Thus, depreciation has to be charged even in case of these
assets, which are not used at all during the year but by mere effluxion of time
provided such assets qualify as depreciable assets. When the spare bus was
kept ready for use as stand-by, it means it was intended to be used for the
purpose of business. Depreciation in respect of this bus ought to have been
provided in the accounts for the year ended 31st March, 2001. If there is an
intention to use an asset, though it may not have actually been used, it is a
'constructive' or 'passive' use and eligible for claim of depreciation.

P 3. The method of depreciation on plant and machinery is to be changed from

SLM basis to WDV basis from current year.
(CA Inter November 2000; 4 Marks)
Ans. Change in the method of depreciation: Normally speaking, the method of
depreciation is applied consistently to provide comparability of the results of the
operations of the enterprise from period to period. A change from one method of
providing depreciation to another is made only if the adoption of the new method
is required by any statute or for compliance with an accounting standard or if it is
considered that the changes would result in a more appropriate preparation or
presentation of the financial statements of the enterprise. Therefore, the auditor
must ensure that the change in method of depreciation on plant and machinery
form SLM to WDV basis from the current year is made in accordance with the
above. When such a change in the method of depreciation is made, depreciation
is recalculated in accordance with the new method from the date of the asset
coming into use. Further, it should be ensured that the deficiency (since change
is from SLM to WDV) arising is to e adjusted in the year of change by way of a
charge to the profit and loss account. Further, he may ascertain that the change
in the method and the effect thereof on the profits of the entity is quantified and
disclosed. If it is not done by the management, the auditor has to bring it to the
notice of the shareholders through a qualification in the audit report.

P 4. X Co. Ltd. charged depreciation on its assets on SLM basis. For the year
ended 31-03-2003 it changed to WDV basis. The impact of the change when
computed from the date of the asset coming to use amounts to ` 20 lakhs being
additional charge.
Decide how it must be disclosed in Profit and Loss Account. Also, discuss, when
such changes in method of depreciation can be adopted by an enterprise as per
AS-6. (May 2003, 4 marks)
Ans.
(a) The company should disclose the change in method of depreciation adopted
for the accounting year. The impact on depreciation charge due to change in
method must be quantified and reported by the enterprise.
AS 6 Depreciation Accounting AS-27

Following aspects may be noted in this regard as per AS 6 on Depreciation

Accounting.
(a) The depreciation method selected should be applied consistently from
period to period,
(b) 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 if it is considered that the
change would result in a more appropriate preparation or presentation of
the financial statements of the enterprise,
(c) 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 re-computation 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,
(d) In case the change in the method results in deficiency in depreciation in
respect of past years, the deficiency should be charged in the statement
of profit and loss.
(e) In case the change in the method results in surplus, the surplus should
be credited to the statement of profit and loss. Such a change should be
treated as a change in accounting policy and its effect should be
quantified and disclosed.

P 5. A Limited Company charged depreciation on its assets on the basis of

W.D.V. method from the date of assets coming to use till date amounts to ` 32.23
lakhs. Now the company decides to switch over to Straight Line method of
providing for depreciation. The amount of depreciation computed on the basis of
S.L.M. from the date of assets coming to use till the date of change of method
amounts to ` 20 lakhs.
Discuss as per AS-6, when such changes in method of can be adopted by the
company and what would be the accounting treatment and disclosure
requirement. (November 2003, 4 marks)
Ans. Paragraph 21 of Accounting Standard 6 on Depreciation Accounting
says, "The depreciation method selected should be applied consistently from
period to period. 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."
AS-28 Depreciation Accounting AS 6

The paragraph also mentions the procedure to be "followed when such a change
in the method of depreciation is made by an enterprise. As per the said
paragraph, depreciation should be recalculated in accordance with the new
method from the date of the asset coming to use. The difference in the amount,
being deficiency or surplus from retrospective re-computation should be adjusted
in the profit and loss account in the year such change is effected. Since such a
change amounts to a change in the accounting policy, it should be properly
quantified and disclosed. In the question given, the surplus arising out of
retrospective re-computation of depreciation as per the straight line method is `
12.23 lakhs (` 32.23 lakhs – ` 20 lakhs). This should be written back to Profit and
Loss Account and should be disclosed accordingly.

P 6. A plant was depreciated under two different methods as under:

————————————————————————————————————
Year SLM W.D.V.
(` in lakh) (` in lakh)
————————————————————————————————————
1 7.80 21.38
2 7.80 15.80
3 7.80 11.68
4 7.80 8.64
——— ———
31.20 57.50
——— ———
5 7.80 6.38
————————————————————————————————————
What should be the amount of resultant surplus/deficiency, if the company
decides to switch over from W.D.V. method to SLM method for first four years?
Also state, how will you treat the same in Accounts. (May 2004, 4 marks)
Ans. As per para 21 of AS 6 on Depreciation Accounting, when 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 re-computation of depreciation in
accordance with the new method should be adjusted in the accounts in the year
in which the method of depreciation is charged. In the given case, there is a
surplus of ` 26.30 lakhs on account of change in method of depreciation, which
will be credited to Profit and Loss Account. Such a change should be treated as a
change in accounting policy and its effect should be quantified and disclosed.

P 7. Ram Co. (P) Ltd. furnishes you the following information for the year ended
31.3.2005:
Depreciation for the year ended 31.3.2005 ` 100 lakhs
(under straight line method)
Depreciation for the year ended 31.3.2005 ` 200 lakhs
(under written down value method)
Depreciation for the earlier years combined
in written down value method and its
excess to straight line method ` 500 lakhs
AS 6 Depreciation Accounting AS-29

The Company wants to change its method of claiming depreciation from straight
line method to written down value method.
Decide, how the depreciation should be disclosed in the Financial Statement for
the year ended 31.3.2005. (November 2005, 4 marks)

P 8. As an auditor comment on the following situations/statements:

No depreciation provided on a machinery costing ` 50 lakhs imported three years
back, since it is yet to be put into use. (May 2003, Audit 3 marks)
Ans. Non-provision of depreciation: As per AS-6 on "Depreciation
Accounting", 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. Thus, depreciation has
to be charged even in case of these assets which are not used at all during the
year but by mere effluxion of time provided such assets qualify as depreciation
assets. When the machinery has been imported by one entity, it means it was
intended to be used for the purpose of business. Depreciation in respect of this
machinery ought to have been provided in the accounts for all the previous
years. If there is an intention to use an asset, though it may not have actually
been used, it is a 'constructive' or 'passive' use and eligible for claim of
depreciation. Further Part-II of Schedule VI to the Companies Act requires that if
no provision is made for depreciation, the fact that no provision has been made
and quantum of arrears of depreciation computed in accordance with Section
205(2) of the Companies Act should be disclosed. Provision of depreciation is
essential to show a true and fair picture of financial statement. Thus, the auditor
should ensure compliance with all these requirements.

P 9. Write short note on purpose of providing depreciation.

(November 2003, Audit 4 marks)
Ans. Purpose of Providing Depreciation: According to AS – 6 on Depreciation
Accounting, depreciation may be defined as, "a measure of the wearing out,
consumption or other loss of value of a depreciable asset arising from use,
effluxion of time or obsolescence loss through technology and market changes.
Depreciation is allocated so as to charge a fair proportion of the depreciable
amount in each accounting period during the expected useful life of the asset.
Depreciation includes amortization of assets whose useful life is predetermined".
This is a measure of the exhaustion of the useful life of an asset during the
accounting period. Depreciation is charged in each accounting period by
reference to the extent of the depreciable amount irrespective of and increase in
the market value of fixed assets. The principal objective of depreciation on fixed
assets is to allocation as an expenses, the related depreciation amount on a year
to year basis. Depreciation has a significant effect in determining and presenting
the financial position and results of operations of an enterprise. The main
purpose of providing depreciation are as under:
AS-30 Depreciation Accounting AS 6

(i) To keep intact the capital invested in fixed assets – This is accomplished
by retaining the amount of depreciation charged in the profit and loss
account in the business.
(ii) To ascertain the true cost of production – As the value of fixed assets
depletes gradually by consumption during the process of production, it is
necessary that such consumption of value be charged in the accounts for
determination of the true cost of production.
(iii) To determine the profit or loss for the year – Depreciation being an
expense represented by the loss in value of fixed assets arising on use,
it is charged to the profit and loss account for determining the profit or
loss during a year;
(iv) To present a true and faire value of entity's assets in the balance sheet,
since the original cost of fixed assets gradually decreases due to use
and other factors, it is improper to continue to carry such assets at
original costs. There, the amount of depreciation charged in the profit
and loss account representing the loss in value of the assets is deducted
from the original cost on a cumulative basis so as to reflect in the
balance sheet a true and fair value of the fixed assets.

P 10. As an auditor, comment on the following situations/statements:

The method of depreciation on Plant and Machinery is to be changed from SLM
basis to WDV basis from the current year. (May 2004, Audit 4 marks)
Ans. Change in the method of Depreciation: Normally speaking, the method of
description is applied consistently to provide comparability of the result of the
enterprise from one accounting period to another over a period of time. A change
from one method of providing depreciation to another is made only if adoption of
the new method is required by any statute or for compliance with an accounting
standard or it is considered that the change would result in a more appropriate
preparation of the financial statements of the enterprises. Therefore, the auditor
must ensure that the change in method of depreciation of plant & machinery from
SLM to WDA basis from the current year is made in according with the above.
When such a change in the method takes places, depreciation is recalculated in
accordance with the new method from the date of assets coming in the use.
Further, it should be ensured that the deficiency (since change from SLM to
WDA) is adjusted in the year of change by way of a charge to the profit and the
loss account .Finally, it is to be insured that the change in method is an
accounting policy and its effect quantified and disclosed .if it is not done by
management, the auditor has to bring it to the notice of the shareholders through
a qualification in the audit report.

P 11. 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 Accounting Standard-6?
AS 6 Depreciation Accounting AS-31

Ans. As per paragraph 20 of AS 6 'Depreciation Accounting', 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. In the given case, the
depreciation amount can be calculated as follows:
`
Cost of machinery 10,00,000
Less: Scrap value at the end of useful life 1,00,000
Amount to be written off during useful life of machinery 9,00,000
Useful life of the asset 5 years
Depreciation to be provided each year (` 9,00,000/5 years) `1,80,000

P 12. Mention four Assets, where AS 6 (revised) is not applicable.

(PCC November 2008, Marks 2)

P 13. The economic life of an enterprise is artificially split into periodic intervals in
accordance with the going concern assumptions. Is the statement true or false?
P 14. Heera Ltd. has two divisions. It provides depreciation for both divisions on
straight line basis as per rates prescribed by Schedule XIV to the Companies
Act. While finalizing the accounts for the year ended 31-3-2007, it however wants
to change the method to Written Down Value method for one of its divisions
since in the opinion of the management the assets of the said division suffer
faster wear and tear. Please advise the company on the above and also whether
the change should be prospective or retrospective.
P 15. A company acquired a machine on 1-4-2006 for ` 5,00,000. The company
charged depreciation upto 2008-09 on straight-line basis with estimated working
life of 10 years and scrap value of ` 50,000. From 2009-10, the company decided
to change depreciation method at 20% on reducing balance method. Compute
the amount of depreciation to be debited to Profits and Loss A/c for the year
2009-10.
(IPCC, May 2010; 2 Marks)
P 16. A Machinery costing ` 20 lakhs has useful life for 5 years. At the end of 5
years its scrap value would be ` 2 lakhs. How much depreciation is to be
charged in the books of the company as per Accounting Standard-6?
(PCC, May 2010; 2 Marks)
P 17. A company installed a plant at a cost of ` 20 lacs with estimated useful life
of 10 years and decided to depreciate on straight line method. In the fifth year
company decided to switch over from straight line method to written down value
method. Compute the resultant surplus/deficiency if any, and state how will you
treat the same in the accounts.
(November 2010, 4 marks)
Ans: Table showing depreciation under Straight line method (SLM) and
depreciation under Written Down Value Method (WDV)
AS-32 Depreciation Accounting AS 6

` in lacs
Depreciation
Year SLM WDV
I 2.001 2.002
II 2.00 1.80
III 2.00 1.62
IV 2.00 1.463
——— ———
Total 8.00 6.88
——— ———
Resultant surplus on change in method of depreciation from SLM to WDV = (8.00
- 6.88) ` 1.12 lakhs.
As per para 21 of AS 6 ‘Depreciation Accounting’. When a change in the method
of depreciation in made, depreciation should be re-calculated in accordance with
the new method from the date of the asset put to use. The deficiency or surplus
arising from retrospective re-computation 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. In the given case, surplus amounting ` 1.12 lakhs
(8.00 - 6.88) should be credited to profit and loss statement in the fifth year. Such
a change should be treated as a change in accounting policy and its effect
should be quantified and disclosed as per AS 5. “Net Profit loss for the period.
Prior period items and changes in Accounting Polices.)
P 18. M/s Progressive Company Limited has not charged depreciation for the
year ended on 31st March, 2012, in respect of a spare bus purchased during the
financial year 2011-12 and kept ready by the company for use as a stand-by, on
the ground that, it was not actually used during the year. State your views with
reference to Accounting Standard 6 "Depreciation Accounting".
Further during the year company made additions to its factory by using its own
workforce, at a cost of `4,50,000 as wages and materials. The lowest estimate
from an outside contractor to carry out the same work was `6,00,000. The
directors contend that, since they are fully entitled to employ an outside
contractor, it is reasonable to debit the Factory Building Account with `6,00,000.
Comment whether the directors' contention is right in view of the provisions of
Accounting Standard 10 "Accounting for Fixed Assets"?
(5 Marks, May 2012) (AAS6SA18)
P 19. A computer costing ` 60,000 is depreciated on straight line basis, assuming
10 years working life and Nil residual value, for three years. The estimate of
remaining useful life after third year was reassessed at 5 years. Calculate
depreciation as per the provisions of Accounting Standard 6 "Depreciation
Accounting".
(May 2012, 4 marks) (AAS6SA19)

1 Depreciation as per SLM ` 20 lakhs/10 years = ` 2 lakhs.

2 Depreciation rate under SLM is 10% (2,00,000/20,00,000 × 100). It is assumed that
depreciation rate will remain same under WDV method also.
3 Rounded off up to two decimals.
AS 6 Depreciation Accounting AS-33

Appendix 1
Accounting Standard (AS) 6:
Depreciation Accounting

(This Accounting Standard includes paragraphs set in bold italic type and plain
type, which have equal authority. Paragraphs in bold italic type indicate the main
principles. This Accounting Standard should be read in the context of the General
Instructions contained in Part A of the Annexure to the Notification)
Introduction
1. This Standard deals with depreciation accounting and applies to all
depreciable assets, except the following items to which special considerations
apply:—
(i) forests, plantations and similar regenerative natural resources;
(ii) wasting assets including expenditure on the exploration for and
extraction of minerals, oils, natural gas and similar non-regenerative
resources;
(iii) expenditure on research and development;
(iv) goodwill and other intangible assets;
(v) live stock.
This Standard also does not apply to land unless it has a limited useful life for the
enterprise.
2. Different accounting policies for depreciation are adopted by different
enterprises. Disclosure of accounting policies for depreciation followed by an
enterprise is necessary to appreciate the view presented in the financial
statements of the enterprise.
Definitions
3. The following terms are used in this Standard with the meanings
specified:
3.1 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. Depreciation is
allocated so as to charge a fair proportion of the depreciable amount in
each accounting period during the expected useful life of the asset.
Depreciation includes amortisation of assets whose useful life is
predetermined.
AS-34 Depreciation Accounting AS 6

3.2 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.
3.3 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.
3.4 Depreciable amount of a depreciable asset is its historical cost, or other
amount substituted for historical cost 4 in the financial statements, less the
estimated residual value.
Explanation
4. Depreciation has a significant effect in determining and presenting the financial
position and results of operations of an enterprise. Depreciation is charged in
each accounting period by reference to the extent of the depreciable amount,
irrespective of an increase in the market value of the assets.
5. Assessment of depreciation and the amount to be charged in respect thereof
in an accounting period are usually based on the following three factors:
(i) historical cost or other amount substituted for the historical cost of the
depreciable asset when the asset has been revalued;
(ii) expected useful life of the depreciable asset; and
(iii) estimated residual value of the depreciable asset.
6. Historical cost of a depreciable asset represents its money outlay or its
equivalent in connection with its acquisition, installation and commissioning as
well as for additions to or improvement thereof. The historical cost of a
depreciable asset may undergo subsequent changes arising as a result of
increase or decrease in long-term liability on account of exchange fluctuations,
price adjustments, changes in duties or similar factors.
7. The useful life of a depreciable asset is shorter than its physical life and is:
(i) pre-determined by legal or contractual limits, such as the expiry dates of
related leases;
(ii) directly governed by extraction or consumption;

4 This Standard does not deal with the treatment of the revaluation difference which may arise
when historical costs are substituted by revaluations.
AS 6 Depreciation Accounting AS-35

(iii) dependent on the extent of use and physical deterioration on account of

wear and tear which again depends on operational factors, such as, the
number of shifts for which the asset is to be used, repair and
maintenance policy of the enterprise etc.; and
(iv) reduced by obsolescence arising from such factors as:
(a) technological changes;
(b) improvement in production methods;
(c) change in market demand for the product or service output of the
asset; or
(d) legal or other restrictions.
8. Determination of the useful life of a depreciable asset is a matter of estimation
and is normally based on various factors including experience with similar types
of assets. Such estimation is more difficult for an asset using new technology or
used in the production of a new product or in the provision of a new service but is
nevertheless required on some reasonable basis.
9. Any addition or extension to an existing asset which is of a capital nature and
which becomes an integral part of the existing asset is depreciated over the
remaining useful life of that asset. As a practical measure, however, depreciation
is sometimes provided on such addition or extension at the rate which is applied
to an existing asset. Any addition or extension which retains a separate identity
and is capable of being used after the existing asset is disposed of, is
depreciated independently on the basis of an estimate of its own useful life.
10. Determination of residual value of an asset is normally a difficult matter. If
such value is considered as insignificant, it is normally regarded as nil. On the
contrary, if the residual value is likely to be significant, it is estimated at the time
of acquisition/ installation, or at the time of subsequent revaluation of the asset.
One of the bases for determining the residual value would be the realisable value
of similar assets which have reached the end of their useful lives and have
operated under conditions similar to those in which the asset will be used.
11. The quantum of depreciation to be provided in an accounting period involves
the exercise of judgment by management in the light of technical, commercial,
accounting and legal requirements and accordingly may need periodical review.
If it is considered that the original estimate of useful life of an asset requires any
revision, the unamortised depreciable amount of the asset is charged to revenue
over the revised remaining useful life.
12. There are several methods of allocating depreciation over the useful life of
the assets. Those most commonly employed in industrial and commercial
enterprises are the straightline method and the reducing balance method. The
management of a business selects the most appropriate method(s) based on
various important factors e.g., (i) type of asset, (ii) the nature of the use of such
asset and (iii) circumstances prevailing in the business. A combination of more
than one method is sometimes used. In respect of depreciable assets which do
not have material value, depreciation is often allocated fully in the accounting
period in which they are acquired.
AS-36 Depreciation Accounting AS 6

13. The statute governing an enterprise may provide the basis for computation of
the depreciation. For example, the Companies Act, 1956 lays down the rates of
depreciation in respect of various assets. Where the management's estimate of
the useful life of an asset of the enterprise is shorter than that envisaged under
the provisions of the relevant statute, the depreciation provision is appropriately
computed by applying a higher rate. If the management's estimate of the useful
life of the asset is longer than that envisaged under the statute, depreciation rate
lower than that envisaged by the statute can be applied only in accordance with
requirements of the statute.
14. Where depreciable assets are disposed of, discarded, demolished or
destroyed, the net surplus or deficiency, if material, is disclosed separately.
15. The method of depreciation is applied consistently to provide comparability of
the results of the operations of the enterprise from period to period. A change
from one method of providing depreciation to another is 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. When
such a change in the method of depreciation is made, depreciation is
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 is adjusted in
the accounts in the year in which the method of depreciation is changed. In case
the change in the method results in deficiency in depreciation in respect of past
years, the deficiency is charged in the statement of profit and loss. In case the
change in the method results in surplus, the surplus is credited to the statement
of profit and loss. Such a change is treated as a change in accounting policy and
its effect is quantified and disclosed.
16. Where the historical cost of an asset has undergone a change due to
circumstances specified in para 6 above, the depreciation on the revised
unamortised depreciable amount is provided prospectively over the residual
useful life of the asset.
Disclosure
17. The depreciation methods used, the total depreciation for the period for each
class of assets, the gross amount of each class of depreciable assets and the
related accumulated depreciation are disclosed in the financial statements
alongwith the disclosure of other accounting policies. The depreciation rates or
the useful lives of the assets are disclosed only if they are different from the
principal rates specified in the statute governing the enterprise.
18. In case the depreciable assets are revalued, the provision for depreciation is
based on the revalued amount on the estimate of the remaining useful life of
such assets. In case the revaluation has a material effect on the amount of
depreciation, the same is disclosed separately in the year in which revaluation is
carried out.
AS 6 Depreciation Accounting AS-37

19. A change in the method of depreciation is treated as a change in an

accounting policy and is disclosed accordingly.5
Main Principles
20. 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.
21. The depreciation method selected should be applied consistently from
period to period. 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. 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. In case the change in the method results in deficiency in
depreciation in respect of past years, the deficiency should be charged in
the statement of profit and loss. In case the change in the method results in
surplus, the surplus should be credited to the statement of profit and loss.
Such a change should be treated as a change in accounting policy and its
effect should be quantified and disclosed.
22. The useful life of a depreciable asset should be estimated after
considering the following factors:
(i) expected physical wear and tear;
(ii) obsolescence;
(iii) legal or other limits on the use of the asset.
23. The useful lives of major depreciable assets or classes of depreciable
assets may be reviewed periodically. Where there is a revision of the
estimated useful life of an asset, the unamortised depreciable amount
should be charged over the revised remaining useful life.
24. 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 may also be
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.
25. Where the historical cost of a depreciable asset has undergone a
change due to increase or decrease in long-term liability on account of
exchange fluctuations, price adjustments, changes in duties or similar

5 Refer to AS 5.
AS-38 Depreciation Accounting AS 6

factors, the depreciation on the revised unamortised depreciable amount

should be provided prospectively over the residual useful life of the asset.
26. Where the depreciable assets are revalued, the provision for
depreciation should be based on the revalued amount and on the estimate
of the remaining useful lives of such assets. In case the revaluation has a
material effect on the amount of depreciation, the same should be
disclosed separately in the year in which revaluation is carried out.
27. If any depreciable asset is disposed of, discarded, demolished or
destroyed, the net surplus or deficiency, if material, should be disclosed
separately.
28. The following information should be disclosed in the financial
statements:
(i) the historical cost or other amount substituted for historical cost of
each class of depreciable assets;
(ii) total depreciation for the period for each class of assets; and
(iii) the related accumulated depreciation.
29. The following information should also be disclosed in the financial
statements alongwith 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.