New depreciation regime: Clarity needed on transitional provisions, say Auditors

The new depreciation regime is impacting corporate bottomlines in interesting ways this fiscal. While the new norms provide more flexibility to companies and are a step toward aligning with international practices, there is a need for more clarity on the transitional provisions, say audit experts.

Under the earlier company law, the Government prescribed the depreciation rates. However, the new company law has moved to specifying only the ‘useful life of assets’, which are seen to be lower than earlier industry estimates, while giving the companies room to deviate.

In late August, the Corporate Affairs Ministry clarified in Schedule II that the useful life of assets specified were indicative and not mandatory. This allowed companies to deviate from the ‘useful life’ norm. But, they needed to back this with technical certification.

Unlike in India, globally, depreciation rates are not statutorily prescribed for companies. Depreciation is used to record the decrease in life of a company’s assets. For accounting purposes, depreciation reflects the extent to which an asset has been used. From a Profit & Loss perspective, a higher depreciation hits net profit.

“The new provisions relating to depreciation provide flexibility to companies to reflect the depreciation charge based on the useful life pattern applicable to the assets. These provisions are getting aligned with the global accounting norms, where each entity is required to estimate the useful life of an asset, based on its usage/replacement pattern,” said V Balaji, Partner, Deloitte Haskins and Sells.

Ashok Haldia, former Secretary of the CA Institute, said the new company law had provided flexibility on depreciation, but with checks and balances. “The new system is better, as it takes into account the useful life of asset,” Haldia said.

That said, experts would like some clarity with regard to the treatment of assets that don’t have a ‘useful life’ as on the date of shift to the new company law provisions.

Balaji said there could be situations where a company applies a ‘useful life’ that is different from that specified in the 2013 Act and, based on this, determines that the balance life of an asset is ‘Nil’ as on the date of transition to the new norms.

“It is not clear whether the transition provision specified in Schedule II will be available for charging the net carrying value of such asset to the opening retained earnings, or whether the net carrying value should be charged to the ‘Profit and Loss’ account in line with the accounting standards. A clarification in this regard will enable ensuring consistency of accounting practice across companies”, he said.

IMPACT ON COMPANIES

Concor and TCS are two instances where the change in depreciation policy had a significant impact on their financials in the first half this fiscal.

For instance, Container Corporation of India (Concor), which revised the depreciation rates, booked ₹ 98.48 crore higher depreciation for the quarter-ended September 30, 2014. Also, for certain assets—where it reckoned that there was no useful life beyond April 1, 2014—it adjusted the carrying value against the retained earnings.

As for TCS, which too revised its depreciation policy and also changed methodology, the depreciation charge for the six months ended September 30, 2014 was higher ₹ 102.59 crore.

The effect relating to the period prior to April 1, 2014 is net credit of ₹ 489.75 crore (excluding deferred tax of ₹ 118.90 crore) which has been shown as an ‘Exceptional Item’ in the statement of profit and loss, according to the notes forming part of the latest quarterly financial statements.

Basically, the new depreciation norms could work either way for the bottomlines of companies, depending on the range and age of assets that they have. (K.R.SRIVATS/MAMUNI DAS - The Hindu Business)