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Accounting Standard (AS) 6 & 10 DEPRECIATION AND FIXED ASSETS

CASE STUDY
AS 6 DEPRECIATION http://www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf http://www.moneycontrol.com/annual-report/tatamotors/accounting-policy/TM03 http://www.moneycontrol.com/annual-report/relianceindustries/accountingpolicy/RI http://www.moneycontrol.com/annual-report/prajindustries/accounting-policy/PI17

CASE STUDY
AS 10 FIXED ASSETS http://220.227.161.86/252as10new.pdf http://www.moneycontrol.com/annual-report/tatamotors/accounting-policy/TM03 http://www.moneycontrol.com/annual-report/relianceindustries/accountingpolicy/RI http://www.moneycontrol.com/annual-report/prajindustries/accounting-policy/PI17

Methods of charging depreciation


DEPRECIATION METHODS Straight line method.

Written down value method.


Sum of digits method. Production units method.

Straight line method


Assume a bus costs Rs 8,00,000 and is expected to realise Rs 80,000 at the end of its estimated useful life of 6 years. Annual depreciation is

Rs 8,00,000 Rs 80,000 6 years = Rs 1,20,000 per annum

Written down value


Assume a bus costs Rs 8,00,000 and is expected to realise Rs 80,000 at the end of its estimated useful life of 6 years. Annual depreciation is

Depreciation rate is 1 - 680,000/8,00,000 1 0.6813 =0.3187 or 31.87%


Year
1 2

Cost
8,00,000 8,00,000

Depreciation
2,54,960 1,73,705

Accumulated depreciation
2,54,960 4,28,665

Ending book value


5,45,040 3,71,335

http://www.basic-mathematics.com/nth-root-calculator.html

Sum of digits method


Assume a bus costs Rs 8,00,000 and is expected to realise Rs 80,000 at the end of its estimated useful life of 6 years. Annual depreciation is (Cost Residual value) * 6 (sum of digits 1 to 6) (Rs 8,00,000 Rs 80,000) * 6/21 = Rs 2,05,714 (Rs 8,00,000 Rs 80,000) * 5/21 = Rs 1,71,428 (Rs 8,00,000 Rs 80,000) * 4/21 = Rs 1,37,143
Year 1 2 Cost 8,00,000 8,00,000 Depreciation 2,05,714 1,71,428 Accumulated depreciation 2,05,714 3,77,142 Ending book value 5,94,286 4,22,857

Production units method


Assume a bus costs Rs 8,00,000 and is expected to realise Rs 80,000 at the end of its estimated useful life of 6 years. Bus has a life of 2,00000 kms. Suppose bus shows that its usage was 10,000 kms in first year, 30,000 kms in second year compute depreciation Rs 7,20,000/ 2,00,000kms Rs 3.60 per km. Depreciation Year 1 10,000kms * 3.60 = Rs 36,000 Year 2 30,000kms * 3.60 = Rs 1,08,000

Problems in depreciation accounting


1. Depreciation for partial accounting period. 2. Accounting for assets of low unit cost.

3. Revising estimated useful life and residual method.


4. Changing the depreciation method. 5. Accounting for fully depreciated asset.

Case of jet airways


Question for analysis 1. Evaluate the alternative depreciation policy (St Line vs. WDV) adopted by a company say for Rs 35,000 invested in an equipment which has an economic life of 3 years with a residual value of Rs 5,000 at the end of 3 years .

2.

In question 1, what would be the impact on the income statement had the company changed the method from reducing balance to SLM in year 2?
What is the impact of the change in the accounting policy of jet airways on its net earnings? Why is the policy not followed from the beginning? What has changed in the year 2009 to warrant such a policy change?

3.