Companies Act, 2013 - Depreciation- · PDF fileCompanies Act, 2013 - Depreciation- Significant...

Companies Act, 2013 -

Depreciation-

Significant Provisions

SIRC of ICAI- Chennai, July 6, 2014

by CA. Sekkizhar Balasubramanian

http://www.caclubindia.com/forum/significance-of-icai-logo-188549.asp

Depreciation

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Key Provisions Depreciation

• Depreciation - Systematic allocation of the depreciable

amount of an asset over its useful life.

• Depreciable amount is cost of an asset or other amount

substituted for cost, less its residual value.

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• Depreciation on tangible fixed assets based on estimated

useful life

‒ From a Rates regime to Useful Lives

‒ Useful life of an asset is the period over which the asset is

expected to be available for use by the entity or the

number of production or similar units expected to be

obtained from the asset

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• The provisions of the Accounting Standards

applicable for the time being in force to apply, except

that for intangible assets (toll roads) created under

any form of public-private partnership, amortisation

may be done using a revenue based model or in

accordance with any method as per applicable

Accounting Standards. Where a method as specified

in Accounting Standards is used, disclosure of the

same should be made.

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Key Provisions Depreciation – Intangible assets (AS 26)

• The depreciable amount of an intangible asset

should be allocated on a systematic basis over the

best estimate of its useful life.

• There is a rebuttable presumption that the useful life

of an intangible asset will not exceed ten years from

the date when the asset is available for use.

• Amortisation should commence when the asset is

available for use.

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• A revenue based amortisation model will be

available only in the case of road projects that are

created under any form of public- private partnership

and not for any other intangible assets.

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• Depreciation of plant & machinery based on industry

category. Specified industries:

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Production and exhibition of

motion picture films

Steel

Glass manufacturing Non-ferrous metals

Mines & quarries Medical & surgical

operations

Telecommunication Pharmaceuticals and

Chemicals

Exploration, production and

refining of oil & gas

Civil construction

Generation, transmission

and distribution of power

Salt works


• Schedule II introduces the concept of ‘Special Plant

and Machinery’ which classifies assets on the basis

of their specified usage. The useful lives for such

assets have been determined based on past

experience of various industries, which historically

have lives which are fairly longer than those

prescribed under the general class.

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• Schedule II identifies numerous assets used for the

purposes specified therein. Since Schedule II has

used the term “Plant and machinery used in

manufacture of …”, and not “Plant and machinery

used by companies engaged in the manufacture of

…..”, it is our understanding that if a company owns

any asset which is ultimately used in the

manufacture of the prescribed products, though the

company does not necessarily belong to the

specified industry, it may be permitted to apply the

useful life prescribed by Schedule II for such assets

based on their end use.

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• Accordingly, if a company which is in the business of

manufacture of steel has a captive power plant, such

a company may also be able to adopt the useful life

prescribed for power plants which would normally

have been applicable to companies generating,

transmitting and distributing power.

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• Componentisation of assets mandated

Separate capitalisation and depreciation of a part

of an asset if its cost is significant to the total cost

of the asset and its estimated life is different from

the remaining asset

• Accounting for replacement costs.

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Key Provisions - Depreciation

• Significant increase / (decrease) in rate of depreciation of commonly used assets

as compared to Schedule XIV rates under the 1956 Act

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Nature of asset - illustrative

The Companies

Act, 2013

The

Compa

nies

Act,

1956

Increa

se

%

change

Single shift (St.line)

Useful

Life

Deemed

rate

General Plant and Machinery

other than continuous process

plant 15 6.33% 4.75% 1.58% 33.26%

Continuous process plant * 25 3.80% 5.28% -1.48% -28.03%

General furniture and fittings 10 9.50% 6.33% 3.17% 50.08%

Office equipment 5 19.00% 4.75%

14.25

% 300.00%

Desktops, laptops, etc. 3 31.67% 16.21%

15.46

% 95.37%

Electrical Installations and

Equipment 10 9.50% 4.75% 4.75% 100.00%


• Depreciable amount to be determined after

reducing expected residual value

Residual value generally not more than 5%

of the original cost of the asset

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Where a company uses a useful life other than prescribed by

Schedule II or residual value other than 5% of the original cost

of the asset, justification for the difference shall be disclosed

in financial statement.

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Key Provisions Depreciation – Shift basis

Useful lives have been determined on the

basis of single shift. For assets working on

double shift, depreciation will increase by 50

percent and in case of triple shift working by

100 percent in respect of specified assets.

(other than where NESD useful life is given)

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• Transitional provisions

Carrying value (net of residual value) to be

depreciated over the remaining revised useful life

of the asset

• Depreciation in respect of each asset

(existing on March 31, 2014) has to be

worked out separately (this is because the

remaining useful life for each asset can be

different.

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Depreciation – Example for assets on March 31, 2014

• Old act – say 10 yrs is useful life. Already 2 yrs got

completed on 31.3.2014

• New act say 6 yrs is useful life.

• WDV on 31.3.2014 is to be depreciated over 4 yrs

(6 – 2yrs)(after adjusting residual value)

• Applying new rate in place of old rates will not be

possible.

• Depreciation for each asset is to be computed for

2014-15 in respect of assets existing on April 1,

2014 based on revised useful life.

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• Transitional provisions

If the remaining revised useful life is nil, the

carrying value net of residual value should be

recognised in the opening balance of retained

earnings

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• Depreciation / amortisation of intangible assets

should be as per the Accounting Standards

‒For Intangible assets such as toll roads, etc.,

these can continue to be amortised based on the

expected revenue from operating such assets

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• Incremental depreciation relating to surplus on

revaluation of assets would need to be charged to

the Profit & Loss Account and will impact Profits

Depreciable amount is the cost of an asset or

other amount substituted for its cost less residual

value

(Impact of utilisation of revaluation reserve to be

considered)

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Consequential implications

• Changes to the amount of depreciation charge will impact

profits for managerial remuneration, profits available for

distribution as dividend

• Componentisation of assets involves judgment and

establishing thresholds. Critical to evaluate

appropriateness of criteria since it would have an impact

on the profits of the Company

• Information Systems, including the Accounting application,

would need to be modified to meet the new requirements

for calculating depreciation


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Consequential implications

• Changes in the profits consequent to changes in

depreciation could impact terms of conversion of

convertible instruments if the conversion is based on book

profits

• Evaluation of lease as operating or finance lease will need

to consider the estimated useful lives as provided in the

Schedule II to the new Act

• Impact of transitional provision likely to be significant

where the expired life (to date of transition) is less than that

under 2013 Act.

Thank you

099493 58838

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