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Gist of Depreciation under Companies Act 2013

Gist of Depreciation under Companies Act 2013

Provision as per Schedule II of Companies Act, 2013

  • Depreciation = allocation of depreciable amount + over useful life.
  • Depreciable amount = Cost of Asset – Residual Value.
  • Useful life = Expected period of use or no. of production etc.
  • Depreciation includes amortization.
  • For other companies – useful life and residual value shall not be different than prescribed in part C normally. If deviation is there, disclosure with respect to same has to be made supported by technical advice.

For Companies constituted under Act – useful life and residual value will be as per the relevant act.
For intangible assets – AS as applicable shall apply.

  • Residual Value – generally not more than 5 % of the original cost of the asset.
  • Carrying amount of the asset:-
  • Depreciate over the remaining useful life of the asset.
  • Remaining useful life is nil, recognized in the opening balance of retained earnings.
  • Cost of part asset is significant – different useful life shall be determined separately.
  • If asset is used for double shift – Depreciation will be increased by 50% for that period and in case of triple shift, 100% for that period.

Gist of Depreciation under Companies Act 2013

Application guide to Schedule II by ICAI – Depreciation

  • All financial statements prepared on or after 01st April, 2014.

Shift to Useful life

  • As per AS-6, Depreciable assets are:-
  • Expected use is beyond an accounting period.
  • Limited useful life.
  • Use in production of goods or services, or on rental to others or for administrative purposes.
  • Not for sale in ordinary course.
  • As per AS-6, rates prescribed under the act are minimum. If management estimate higher rate than the higher rate should be applied.
  • For amortization of intangible assets (toll roads) created under BOT, revenue based amortization is allowed. For other intangible assets, AS-26 needs to applied.

Transitional provisions under Schedule II

  • Carrying amount of the asset as on 01/04/2015
  • if useful life of assets remains, depreciate over the remaining useful life
  • if useful life of assets is nil, value after retaining the residual value be recognized in the opening balance of retained earnings or charged to P&L A/c.
  • Companies will have to reassess the useful life of its existing assets.
  • If company is using SLM method currently, then depreciate the asset equally over the new useful life of the asset.
  • If company is using WDV method currently, then a new rate of depreciation will be calculated as follows:

R = {1-(s/c)^1/n}x100
Where R = Rate of depreciation (%)
n = Remaining useful life of asset (in years)
s = Scrap value at the end of useful life of asset
c = Cost of the asset / WDV of the asset

Gist of Depreciation under Companies Act 2013

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