AS – 6AS – 6

DEPRECIATIONDEPRECIATION

ACCOUNTINGACCOUNTING

Depreciation is loss of value of an Depreciation is loss of value of an assetasset

It is a measure of wearing out, consumption or other loss of value of depreciable asset arising from use and passes of time

Depreciable AssetsDepreciable Assets

• Are expected to be used for more than one accounting period

• Have a limited useful life• Are held for use in production of

goods & services

Applicability of AS-6Applicability of AS-6Except the followings:• Forests, Plantations• Wasting assets, Minerals & Natural

Gas• Expenditure on research &

development• Goodwill• Live Stock – Cattle, Animal

husbandry

Calculation of DepreciationCalculation of Depreciation

• Historical cost or other amount in place of historical cost

• Estimate useful life of depreciable assets

• Estimated residual/scrap value

Cost of Depreciable AssetCost of Depreciable Asset

• Increase/decrease in long-term liability

• Price adjustments• Changes in duties• Revaluation of depreciable assets• Other similar reasons

Estimated useful life of Depreciable Estimated useful life of Depreciable AssetAsset

• Pre-determined by legal or contractual limits

• Depends upon the number of shifts for which the asset is to be used

• Repair & maintenance policy • Other similar reasons

Estimated useful life of Depreciable Estimated useful life of Depreciable AssetAsset

• Technological obsolescence

• Innovation/improvements

• Legal or other restrictions

Estimated residual /scrap value of Estimated residual /scrap value of depreciable assetdepreciable asset

It is estimated value of depreciable assets at the end of its useful life

Depreciable amountDepreciable amount

Historical Cost

Less

Residual Value

Method of DepreciationMethod of Depreciation

• Straight Line Method (SLM)

• Written Down Value Method (WDVM)

Selection of appropriate methodSelection of appropriate method

• Type of assets• Nature of the use of such asset• Circumstances prevailing in the

business• A combination of more than one

method may be used

Change in depreciation method Change in depreciation method

• For compliance of statute

• For compliance of accounting standards

• For more appropriate presentation of the financial statement

Procedure to be followed in case of Procedure to be followed in case of change in depreciation methodchange in depreciation method

Change of depreciation method should be treated as change in accounting policy and its effect should be quantified and disclosed

Change in estimated useful lifeChange in estimated useful life

Should be allocated over the revised remaining useful life of assets

Change in historical costChange in historical cost

Provided prospectively over the remaining useful life of the assets

Change in historical cost due to Change in historical cost due to revaluationrevaluation

Estimate of the remaining useful lives of the such assets

Depreciation charge on Depreciation charge on addition/extension to an existing addition/extension to an existing assetasset

• Addition/extension is an integral part of existing asset

Remaining useful life of the asset

Depreciation charge on Depreciation charge on addition/extension to an existing addition/extension to an existing assetasset

• Addition/extension is not an integral part of existing assets Estimated useful life of

additional assets Depreciable asset is disposed of,

discarded, demolished or destroyed

Disclosure Disclosure

• Total cost of each class of assets

• Total depreciation

• Accumulated depreciation

• Depreciation method

DisclosureDisclosure • Depreciation rate, useful life of assets,

if they are different than the rate specified in governing statute

• A change in method of depreciation

• Effect of the revaluation

Significant differences with Significant differences with IAS/IFRS & US GAAPIAS/IFRS & US GAAP

• AS-6 allows the depreciation on revalued value however, US GAAP prohibits revaluation. IAS-16 allows fair value accounting.

Significant differences with Significant differences with IAS/IFRS & US GAAPIAS/IFRS & US GAAP

• Change in depreciation method under AS-6 is treated as a change in accounting policy; whereas IAS-16 and US GAAP it is change in estimate.

IssuesIssues

• Depreciation on fixed assets where title not clear

• Depreciation on the assets not own by the company

• Depreciation on live stock held as fixed assets

IssuesIssues

• Income-tax rate Vs. Companies Act Vs. AS-6

• Depreciation on Addition to Building with Nil WDV

• Continuous Vs. Non-continuous process plant

• Depreciation in case of electricity company

IssuesIssues

• Depreciation on investment property• Useful life of asset acquired under

amalgamation

THANK

YOU

D.S. Rawat, FCAPartner, Basal & Co.