ACCOUNTING

STANDARD - 6
DEPRECIATION ACCOUNTING
OUTLINE
Main Principles and
Introduction Applicability
Introduction, Meaning, Explanation, Disclosure
Features and Causes of Procedures, and the
Depreciation Applicability of AS-6

Annual Report Conclusion

Analysis
Annual Report Analysis A Concluding Statement
of 3 Companies, with on AS-6
adherence to AS-6
 AN
INTRODUCTION
Meaning, Features and
Types, and Causes of
Depreciation
MEANING AND CONCEPT OF DEPRECIATION:
MEANING and DEFINITION:

"Depreciation is a measure of the wearing out, consumption or other loss of

value of depreciation asset arising from use, effluxion of time or obsolescence
through technology and market changes.”

In other words, it is the decline in the value of depreciable assets on account of

use and effluxion of time.

CONCEPT:

Depreciation is the cost of lost usefulness or cost of diminution of service yield

from a use of fixed assets.
A permanent fall in the value of fixed assets arises through wear and tear from
the use of those assets in business.
FEATURES AND CAUSES OF DEPRECIATION:
FEATURES:
● Depreciation is a decrease in the book value of fixed assets.
● Depreciation involves loss of value of assets due to the passage of time and obsolescence.
● Depreciation is an ongoing process until the end of the life of assets.

CAUSES:
TYPES OF DEPRECIATION:
● Straight Line Method

● Diminishing Balance Method

● Sum of Years’ Digits Method

● Double Declining Method

● Sinking Fund Method

● Annuity Method

● Insurance Policy Method

● Discounted Cash Flow Method

TYPES OF DEPRECIATION (Contd.)
This is the most commonly used method to calculate
STRA depreciation. In this method, an equal amount is charged for
I
LINE GHT
depreciation of every fixed asset is charged in each of the
accounting periods.
METH
OD Annual Depreciation Expense =
(Cost of an asset – Salvage Value)/Useful life of an asset

This method is also known as reducing balance method. A fixed

DIMI percentage of depreciation is charged in each accounting
NISH period to the net balance of the fixed asset under this method.
BALA ING
NCE It is based on the assumption that more amt. of depreciation
METH should be charged initially for the asset.
OD
Depreciation Expense = (Book value of asset at the start of
the year x Rate of Depreciation)/100
TYPES OF DEPRECIATION (Contd.)
This method recognizes depreciation at an accelerated rate.
SUM
OF Thus, the depreciable amount of an asset is charged to a
YEAR
S fraction over different accounting periods under this method.
DIGIT ’
S
METH Depreciation Expense = Depreciable Cost x (Remaining
OD useful life of the asset/Sum of Years’ Digits
Where depreciable cost = Cost of asset – Salvage Value
Sum of years’ digits = (n(n +1))/2 (where n = useful life of an asset)

This method is a mix of straight line and diminishing balance

DOU
BLE method. Thus, depreciation is charged on the reduced value of
DECL the fixed asset in the beginning of the year under this method.
IN
BALA ING (Diminishing Bal. Method). This rate of depreciation is twice the
NCE rate charged under straight line method.
METH
OD
Annual Depreciation Expense =
2 x (Cost of an asset – Salvage Value)/Useful life of asset
 MAIN
PRINCIPLES
Explanation,
Disclosure, and
Applicability of AS-6
EXPLANATION OF AS-6
1. Factors affecting assessment of depreciation:
° Historical cost
° Expected useful life of the depreciable assets.
°Estimated residual value of the depreciable assets.
2. Determination of residual value:
Residual value is the estimated amount that the asset's owner would earn by
disposing the asset which is estimated at the time of acquisition of the asset.
Formula :
Residual value = Estimated salvage value - Cost of the asset disposal.
3. Any addition or extension to an existing asset:
When an addition is made it becomes an integral part of the existing asset. Hence it
is depreciated over the remaining useful life and retains a separate identity and is
capable of being used after the existing asset is disposed off.
EXPLANATION OF AS-6 (Contd.)
4. The statute governing a firm provides basis for computing of the depreciation:
The Companies Act, 1956 lays down the rates of depreciation in respect of various assets,
where the estimate of the useful life of an asset is shorter than that envisaged under the
provisions of the statute, then the depreciation provision is appropriately computed by
applying a higher rate, and vice-versa.

5. A change in method of depreciation is possible only if it is required by statute or

for the compliance of accounting standards:
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.
EXPLANATION OF AS-6 (Contd.)
6. Quantum of Depreciation Provided:
The quantum of depreciation to be provided in an accounting period involves the exercise of
judgement by management in the light of technical, commercial, accounting and legal
requirements and accordingly may need periodical review.

7. Allocating Depreciation over Useful Life of the Assets:

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 straight-line
method and the reducing balance method.

8. Disclosure of discarded assets after their life span:

Where depreciable assets are disposed of, discarded, demolished or destroyed, the net
surplus or deficiency, if material, is disclosed separately.

○
EXPLANATION OF AS-6 (Contd.)
9. Historical cost of a depreciable asset:
The 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.

10. Determination of the useful life of a depreciable asset:

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.
 DISCLOSURE PROCEDURES IN AS-6
1. All the depreciation methods used, depreciation for various class of
assets,gross amount of the depreciable asset has to be disclosed in the
financial statements!
-Also the disclosure of accounting policy is compulsory
-depreciation rates can be mentioned if it is necessary

2. The provision for the depreciation is based on the revalued amount on the
remaining useful life of the assets in the case of "Depreciation being revalued"

3. A change in the method of depreciation has to be treated as a change in

accounting policy and also disclose it accordingly.
APPLICABILITY OF AS-6
AS-6 Depreciation Accounting is applicable to all level of enterprises, i.e.,

● Level I Enterprises
● Level II Enterprises
● Level III Enterprises

A depreciable asset is as asset that provides economic benefit for more than
one financial period. It is applicable to all depreciable assets except:

● Forest, plantations and similar regenerative natural resources

● Wasting assets such as search for non-regenerative resources like minerals,
oils and natural gas
● Expenditure of Research and Development
● Goodwill
● Livestock
● Land (in certain cases)
THE WITHDRAWAL OF AS-6
AS-6 Depreciation Accounting was withdrawn and merged with AS-10 in
2017, and which was thereafter called as the ‘Property, Plant, and
Equipment’

The Council of the Institute of Chartered Accountants of India (ICAI) at its 359th
meeting held on August 16th-17th, 2016 noted that the Ministry of Corporate Affairs
(MCA) has notified Companies (Accounting Standards) Amendment Rules, 2016
(G.S.R. 364(E) dated 30.03.2016) and omitted AS 6, Depreciation Accounting.

This amendment came into effect from April , 2017 and was applicable thereon.

This was done with the view to harmonise Accounting Standards issued by the
Institute of Chartered Accountants of India for non-corporate entities and the
amendments to the Accounting Standards notified by the Central Government
 ANNUAL
REPORT
ANALYSIS
 AMUL
Amul, is an Indian dairy cooperative
society, based at Anand in the Indian
state of Gujarat.

It was formed in the year 1946 and is

the leading supplier of the packed
milk products in india.
Assumptions used in the Depreciation Accounting Process
● Depreciation on fixed assets is provided on Written down Value Method and Straight
Line Method based on management's best judgment and estimates. In the case of
Amul-III Dairy, Khatraj Dairy, Virar Dairy, Mumbai, Cattle Feed Plant - Kapadivav and
New Chocolate Plant, RUTF Plant and THR Plant at Mogar, depreciation has been
charged on Straight Line Method as per the estimated useful lives of assets.

● Depreciation has been provided for the full year for the assets acquired and
commissioned by September 30, 2018, otherwise for half year, if commissioned
between October 01, 2018 to March 31, 2019

● Where grant has been received against any asset, the depreciation on the grant
portion has been adjusted against the grant. Leasehold land is amortized over the
life of lease period.

● No Depreciation has been charged on assets sold during the year.

● Gain or Loss arising from the de- recognition of Tangible and Intangible assets are
measured as the difference between net disposal value and the carrying amount.
 Depreciation Rate
Sr. No. Type of Assets Rate of Depreciation Rate of Depreciation
Under Written Down Under Straight Line
Value Method Method

1 Factory Building 10% 3.34%

2 Building other than factory Building 5% 1.63%

3 Plant and Machinery # 15% 10.34%

4 Vehicles 15% 10.34%

5 Dead Stock 10% 6.33%

6. Computer system 40% 16.21%

# Additional depreciation 20% taken on new plant and machinery acquired during the year.
KAIRA DISTRICT CO-OPERATIVE MILK PRODUCERS' UNION LIMITED 2018-2019
Calculation of Depreciation [₹ in lakhs]
Calculation of Depreciation (Contd.)
Note: Depreciation for the year includes amount of ₹ 282.37 lakhs pertaining to
depreciation adjusted from grants. So net amount of depreciation debited to profit and
loss account comes to ₹ 10597.51 lakh for FY 2018-19.

Depreciation transferred = Total of depreciation of current financial year – Total of

depreciation of previous financial year –Grants (adjusted depreciation) + Total of
depreciation on sales of assets:

= 72474.85 - 61646.41 lakhs - 282.37 + 51.45

= ₹ 10597.51 lakhs
 ITC
ITC Limited is an Indian multinational
conglomerate company headquartered
in Kolkata, West Bengal, and was
established in 1974.

The company completed 100 years in

2010 and as of 2019–20, had an
annual turnover of US$10.74 billion.
Assumptions used in the Depreciation Accounting
Process of ITC:
i) Property, plant, and equipment are stated at cost of acquisition or construction less
accumulated depreciation and impairment if any.

ii) Depreciation of these assets commences when the assets are ready for their intended use
which is generally on commissioning. Items of property, plant, and equipment are depreciated
on a straight-line basis. The land is not depreciated.

iii) Property, plant, and equipment’s residual values and useful lives are reviewed at each
Balance Sheet date, and changes, if any, are treated as changes in the accounting estimate.

iv) Properties that are held for long-term rental yields and/or for capital appreciation are
classified as investment properties. Depreciation is recognized using the straight-line method.
Calculation of Depreciation [₹ in lakhs]
Computation of Depreciation [₹ in Crore]

From the above tables, we can clearly see that the accumulated depreciation as of 31st
March 2020 is Rs 1.16 crores and Rs 103.87 crores for buildings and plant/ equipment
respectively. The depreciation changes for the year 2020 were 0.54 crores and 22.80 crores
respectively for buildings and plant/ equipment.