♠ Schedule II to the Companies Act, 2013
requires depreciating the asset over its useful life. The depreciable amount of
an asset is the cost of an asset or other amount substituted for cost, less its
residual value.
♠ The useful life of an asset is the
period over which an asset is expected to be available for use by an entity, or
the number of production or similar units expected to be obtained from the
asset by the entity.
♠ New schedule by companies’ act 2014
provides the method to amortize intangible assets which is as per the
provisions of AS-26.
♠ Instead of method and rates of
depreciation, new Act prescribed only assets’ useful life. The difference between
WDV and SLM will be removed.
The useful life shall not be longer than the Specified life of the Asset as
given in Part C of the Act and the residual value shall not exceed 5% of the cost of the asset. 95% of the original cost of asset only has
to be depreciated.
♠ In case of Plant & Machinery,
shift based depreciation needs to be calculated as under:
- For Single shift: Useful life mentioned under Companies Act 2013
- For double shift: depreciation to be increased by 50% [i.e. 50% of depreciation amount calculated under point (a)]
- For triple shift: depreciation to be increased by 100% [i.e. 100% of depreciation amount calculated under point (a)]
♠ New act prescribes depreciation of assets
whose cost is less than Rs. 5,000/- as per normal provisions of schedule II.
♠ Under act if any component of Asset have
significant cost and has useful life other than the assets then is should be
considered as separate asset for depreciation. As Per Schedule II of the
Companies Act Component Approach as Defined in Ind AS 16 becomes Mandatory.
♠ If Company, being a class of company specifically
prescribed by MCA, can adopt a
different useful life longer than what is prescribed in Schedule II, however the same shall be disclosed, as Note
on Accounts together with justification. For other companies, useful life cannot be
longer than what is prescribed in Schedule II.
♠ Transitional effect
of Schedule II
The most important and challenging aspect of
Schedule II is the effect to be given in the books of account on the date of
transition, i.e. 1st April, 2014.
Note 7 to Part C of Schedule II prescribes the
transitional effect as follows:-
From the date this Schedule comes into effect,
the carrying amount of the asset as on that date-
(a) Shall be depreciated over the remaining
useful life of the asset as per this Schedule;
(b) After retaining the residual value, shall
be recognized in the opening balance of retained earnings where the remaining
useful life of an asset is nil.”
Two possibilities regarding the assets as on
1st April, 2014 in context of the above note:
1. Asset’s remaining useful life as per
Schedule II is nil:
In that case, as per Note 7(b), the carrying
amount has to be adjusted in the opening balance of retained earnings in the
balance sheet after retaining the residual value.
2. Asset’s remaining useful life is as per
Schedule II is not nil:
If one reads Note 7, specifically clause (a),
then one has to continue depreciating the balance as on 1st April, 2014
systematically over the remaining useful life after recalculating the rate of
depreciation. In that case, no effect of restating the carrying amount will be
needed to be given. Depreciation should be provided at a rate prescribed as
under based on the remaining useful life of the Asset.
CALCULATION OF
DEPRECIATION:-
Rate of Depreciation under WDV Method:
R= (1 –(s/c) (1/n))
x 100
Where R = Rate of Depreciation (in %),
n = Useful life of the asset (in years)
s = Scrap value at the end of useful life of
the asset (i.e. max 5% of cost)
c= Cost of the asset
Let’s take an Example to understand note
7(a):-
Asset: Plant & Machinery
Original Cost: Rs. 1,00,000
Useful Life and rate of Depreciation as per
Old Provisions: 20 years & 13.91%
Useful Life and rate of Depreciation as per
New Provisions: 15 Years & 18.10%
Expired Life: 5 years
Accumulated Depreciation for 5 years: 52,711/-
Now the Carrying Amount as on 01.04.2014 will
be 47,289/- (1,00,000-52,711)
Remaining Useful life as on 01.04.2014 as per
new provisions 10 years (15 years – Expired Life)
Rate of Depreciation on the basis of remaining
useful life i.e.10 years is 25.89%
Let’s take another Example to understand note
7(b):-
Asset: Plant & Machinery
Original Cost: Rs.1,00,000
Useful Life and rate of Depreciation as per
Old Provisions: 20 years & 13.91%
Useful Life and rate of Depreciation as per
New Provisions: 15 Years & 18.10%
Expired Life: 16 years
Accumulated Depreciation for 16 years:
90,896/-
Now the Carrying Amount as on 01.04.2014 will
be 9,104/- (1,00,000-90,896)
Remaining useful life as on 01.04.2014 as per
new provisions is nil (15 years – Expired Life)
In such a case Note 7(b) comes into picture
and the entry on 01.04.2014 would be
Retained Earnings Dr 4,104
To Plant & Machinery 4,104
(Being shortfall in the depreciation
consequent upon change in the useful life of asset provided for after retaining
residual value of 5% charged against opening balance of retained earnings)
Residual value should not be more than 5% of
cost of asset i.e. Rs. 5,000 and accordingly the amount to be adjusted shall be
Rs. 4,104 (9,104-5,000).
Rate of depreciation as per two methods can be
calculated as follows:-
|
Method
|
Rate of depreciation
|
|
Written Down Value
Method
|
(1-(salvage
value/original cost of asset)(1/useful life)) * 100
|
|
Straight Line Method
|
Depreciation=(Carrying
Value– Salvage Value)/ (Useful life)
Hence Rate of
depreciation =(Depreciation/ Carrying value)*100
|
USEFUL LIFE OF VARIOUS
ASSETS AS PRESCRIBED IN SEC 123 READ WITH SCHEDULE II – PART C OF
COMPANIES ACT, 2013 CAN BE CHECKED AT
FOLLOWING LINK :-
http://taxguru.in/company-law/depreciation-schedule-ii-companies-act-2013.html#sthash.EUCnuRDz.dpuf