Depreciation nihar jambusaria
20
Depreciati on By Nihar Jambusaria THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA VASHI STUDY CIRCLE July 10, 2015 1
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Transcript of Depreciation nihar jambusaria
1
DepreciationBy Nihar Jambusaria
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF
INDIA
VASHI STUDY CIRCLE
July 10, 2015
2 Key terms
Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from;
use,
efflux of time or
obsolescence through technology and market changes.
Questions –
Is depreciation required to be provided for Idle Assets ?
Is depreciation required to be provided on Asset held for Disposal ?
July 10, 2015
3 Key terms
Depreciable assets are assets which;
are expected to be used during more than one accounting period; and
have a limited useful life; and
are held by an enterprise for use in the production or supply of goods and services, for rental to others, or for administrative purposes and not for the purpose of sale in the ordinary course of business.
Questions
Is Goodwill required to be depreciated ? (Para 1 of AS-6)July 10, 2015
4 Key terms
Useful life is either
(i) the period over which a depreciable asset is expected to be used by the enterprise; or
(ii) the number of production or similar units expected to be obtained from the use of the asset by the enterprise.
Depreciable amount of a depreciable asset is its historical cost, or other amount substituted for historical cost in the financial statements, less the estimated residual value.
July 10, 2015
5
Section 350 and Schedule XIV red with AS-6.
Depreciation to be provided on the basis of Historic cost, before declaration of dividend and managerial remuneration.
95% of cost to be depreciated at the rates specified in Schedule XIV (SLM or WDV).
Shift from rate based approach to useful life approach.
Depreciation to be provided on the historical cost or amount substituted for the historical cost.
Schedule II has prescribed indicative useful lives for certain tangible assets.
The useful life shall not be ordinarily different from the useful life specified in Part C.
If useful life or residual value adopted is different than that prescribed in Part C of Schedule II, the company shall disclose such difference and provide justification that is duly supported by technical advice.
The residual value shall not be more than 5% of the original cost of the asset.
1956 2013
July 10, 2015
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Separate rates for Intangibles, electricity companies, etc.
Accounting Standards 26 – Intangible assets will continue to apply for calculating the amortisation of Intangible assets, except for intangible assets created under ‘Build, Operate, Transfer’ (BOT) or ‘Build, Own, Operate, Transfer’ (BOOT) model or any other form of Public Private Partnership (PPP) Route.
BOT Assets may use revenue based amortisation as follows.
o Amortization Rate =
Amortization Amount X 100 / Cost of Intangible Assets
o Amortization Amount =
Cost of Intangible Asset X Actual Revenue for the year / Projected Revenue from Intangible Asset (till the end of the concession period)
1956 2013
July 10, 2015
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Units of Production method prohibited.
Separate rates specified for extra shift.
Assets whose actual cost does not exceed Rs. 5000 are depre-ciated at 100%.
Component approach was optional.
Company may be able to use Units of Production method for depreciation.
Separate rates not specified for extra shift.
o Double shift - Increase by 50%
o Triple shift - Increase by 100%
No provision for low value items.
Component approach is mandatory for financial year commencing on or after 01-04-2015. Components should be identified on the transition date. It cannot be restricted only to new assets acquired on or after adoption of component approach by the company.
1956 2013
July 10, 2015
8 Some significant changes in useful lifeNature of Assets Useful life
- 2013Rate of depreciation – 1956
Rate converted to years – 2013
Difference
Buildings (other than factory buildings) other than RCC Frame Structure
30 1.63 61.35 (31.35)
Bridges 30 1.63 61.35 (31.35)
General Plant and Machinery 15 4.75 21.05 (6.05)
Continuous process plant 25 5.28 18.94 6.06
General rate for furniture and fittings
10 6.33 15.8 (5.8)
Furniture and fittings used in hotels, etc.
8 9.5 10.52 (2.52)
Electrically operated vehicles 8 7 14.28 (6.28)
Computer 3 16.21 6.17 (3.17)July 10, 2015
9 Key updates impacting depreciation
The useful life or residual value of any specific asset, as notified for accounting purposes by a Regulatory Authority constituted under an Act of Parliament or by the Central Government shall be applied in calculating the depreciation to be provided for such asset irrespective of the requirements of this Schedule.
July 10, 2015
10 Transitional Provision
From the date this Schedule comes into effect , the treatment for the carrying amount of the asset as on that date shall be as follows -
In case there is remaining useful life of the asset:
The same shall be depreciated over the remaining useful life as per this Schedule;
In case the remaining useful life is nil:
Retain the residual value, and balance carrying amount should be adjusted against the opening balance of retained earnings. (an option available to charge to P&L also – Notification no. G.S.R.627(E), 29th August, 2014)
July 10, 2015
11 Illustration
Name of the Asset
Date put to use
Cost Depreciation
WDV as on 31.03.2014
Salvage Value
No of years the asset is used
Balance Useful Life
Carrying amount adjusted Against Reserves
Depreciation for C. Y. on Residual Carrying amount
Plant & Machinery
01.04.1996
5,00,000 4,51,440
48,560 25,000 18 - 23,560 -
Plant & Machinery
01.04.2001
10,00,000
6,52,080
3,47,920 50,000 13 2 - 1,48,960
Furniture 01.04.2008
15,00,000
4,06,125
10,93,875
75,000 6 4 - 2,54,719
Computers 01.04.2011
10,00,000
4,61,985
5,38,015 50,000 3 - 4,88,015 -
Server 01.04.2011
10,00,000
4,61,985
5,38,015 50,000 3 3 - 1,62,672
July 10, 2015
12 To calculate Rate of Depreciation under WDV Method:
R = (1 - nth root of s/c ) 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
c = Cost of the asset
July 10, 2015
13
Indian GAAPv. Ind AS
July 10, 2015
14 Major differences – GAAP & Ind AS
Sr. No. Particulars Indian GAAP Ind AS
Property, Plant and equipment
1 Initial Recognition - deferred settlement term
PPE purchased on deferred settlement terms are not explicitly dealt with in AS 10. Cost of fixed assets include purchase price for deferred payment term unless interest element is specifically identified in the arrangement.
Difference between the purchase price under normal credit terms and the amount paid, is recognized as interest expense over the period of the financing.
2 Component Accounting
There is no mandatory requirement for component accounting in accounting standards.Though as per the requirement of Companies Act, 2013, component accounting approach has to be followed with effect from April 1, 2015.
Each major part of an item of property, plant and equipment, the cost of which is significant in relation to the total cost of the item, has to be depreciated separately.
July 10, 2015
15 Major differences – GAAP & Ind AS
Sr. No. Particulars Indian GAAP Ind AS
3 Replacement Costs
Unless the expenditure incurred increases the future benefits from the asset, beyond its original standard of performance, it should be expensed.
Replacement cost is capitalized if it meets the recognition criteria. Carrying amount of items replaced is derecognized.
4 Revaluations
Revaluation is permitted and there is no stipulation as to the frequency of revaluation.
Ind AS 16 requires an entity to choose either the cost model or the revaluation model as its accounting policy. If the company adopts the revaluation model, revaluations are required to be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period.
July 10, 2015
16 Major differences – GAAP & Ind AS
Sr. No. Particulars Indian GAAP Ind AS
5 Depreciation
Schedule II to the Companies Act, 2013 has provided the limits for maximum useful life and residual value for calculating depreciation on fixed asset. A company may use different measures, provided justification for the same is disclosed.
Depreciation is charged over the estimated useful life of the asset. There is no concept of minimum statutory depreciation.
6 Periodic review
There is no specific requirement as to reassess the depreciation method, residual value and useful life at each balance sheet date.
Depreciation method, residual value and useful life are reassessed at each balance sheet date.
July 10, 2015
17 Major differences – GAAP & Ind AS
Sr. No. Particulars Indian GAAP Ind AS
7 Change in method of depreciation
Considered as change in accounting policy, the effect of which is quantified and disclosed. Requires retrospective calculation of depreciation and adjustment of excess or deficit in the period of change.
Considered as change in accounting estimate and the new method is applied prospectively.
8 Capitalization of exchange differences
recognized in the statement of P&L. However, an entity has an option to recognize unrealized exchange differences on translation of certain long-term monetary assets/ liabilities directly in equity or as adjustment to cost of an asset. The amount so accumulated in equity shall be transferred to profit or loss over the period of maturity of such long-term monetary items in an appropriate manner.
All exchange differences arising on translation of foreign currency transactions are generally recognized in profit or loss unless can be regarded as borrowing cost eligible for capitalisation.
July 10, 2015
18 Major differences – GAAP & Ind AS
Sr. No.
Particulars Indian GAAP Ind AS
9 Decomm-ssioning and Restoration (ARO)
No specific guidance. (Guidance Note on Accounting for Oil and Gas Activities contains specific information relating to such costs, but limited to the industry)
Cost of an item of PPE includes the initial estimates of the cost of dismantling & removing the item & restoring the site on which it is located, the obligation of which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.
10 Cash flow hedge
There is no specific guidance on capitalisation on fair value gains/losses on qualifying cash flow hedge relating to purchase of PPE in foreign currency.
Fair value gains and losses on qualifying cash flow hedges relating to purchase of PPE in foreign currency can be capitalized.
July 10, 2015
19 Major differences – GAAP & Ind AS
Sr. No.
Particulars Indian GAAP Ind AS
11 Transfer of Assets from Customers : Recognition of Asset
Recognition of assetNo specific guidance
Recognition of asset
1. When an entity receives an asset from customer, it should assess whether the transferred item meets the definition of an asset set out in the framework. If yes, then the asset would be recognized as PPE as per Ind AS 16 and measure its cost on initial recognition at its fair value. The entity will recognize the corresponding amount as revenue in accordance with Ind AS 18.
2. When the entity receives cash, it should assess whether the asset to be constructed meets the definition of the asset. If yes, then it is recognized as PPE as per Ind AS 16 and revenue is recognized at the amount of Cash received.
July 10, 2015
