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.
Application guide to Schedule II by ICAI – Depreciation
Applicability
- 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
Submitted by - CA Vivek Parakh (Prop. at V Parakh & Associates)
Reach at - cavivekparakh@yahoo.com, 09623885567
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