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/accounting-policy/
RI

http://www.moneycontrol.com/annual-report/prajindustries/accounting-policy/PI1
7
 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/accounting-
policy/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 - 6√80,000/8,00,000
1 - 0.6813
=0.3187 or 31.87%
Year Cost Depreciation Accumulated Ending book
depreciation value
1 8,00,000 2,54,960 2,54,960 5,45,040
2 8,00,000 1,73,705 4,28,665 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 Cost Depreciation Accumulated Ending book

depreciation value
1 8,00,000 2,05,714 2,05,714 5,94,286
2 8,00,000 1,71,428 3,77,142 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?

3. 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?