Basics (Understanding and Analysis) of Depreciation under Schedule II of Companies Act, 2013

The Companies Bill 2011 was introduced in Parliament in December 2011 and was referred to the Parliamentary Standing Committee on Finance for its review and suggestions.  Based on its Recommendations and suggestions, amendments were made to the Companies Bill 2011. Then it was introduced as Companies Bill 2012 and was passed by the Lok Sabha in December 2012. Companies Bill 2012 was passed by Rajya Sabha On August 08, 2013 as Companies Bill, 2013.

And finally, On August 29, 2013, Bill 2013 Received assent from president and Companies Bill, 2013 becomes Companies Act, 2013. The Companies Act, 2013 has brought in extensive changes with the objective to ensure and seek transparency and establish better corporate governance practices. This article is based on Understanding, Impact and Analysis of Deprecation provision which is in Schedule II of Companies Act, 2013. I hope that you will find this publication useful in understanding Deprecation provision of the Companies Act, 2013.

1. Key point for Depreciation under Schedule II of Companies Act, 2013 (Act 2013):

1) The depreciation needs to be provided based upon the useful life as specified in Schedule II of companies Act, 2013.

2) In the Schedule II of companies Act, 2013, useful life of Plant and Machinery bifurcated into General Plant and Machinery and Special Plant and Machinery (Industry in Specific like glass manufacturing industries, Telecommunications industries, Refining industries, power generation and distribution industries, steel manufacturing industries etc )

3) Defined its residual value cap. Ordinarily, the residual value of an asset is often insignificant but it should generally be not more than 5% of the original cost of the asset.

Accounting Standard 6:

As per Para 13 of Accounting Standard 6, The statute governing an enterprise may provide the basis for computation of the depreciation. For example, the Companies Act, 1956,(now to say the companies Act, 2013) lays down the rates of (now to say Useful life for) depreciation in respect of various assets. Where the management’s estimate of the useful life of an asset of the enterprise is shorter than that envisaged under the provisions of the relevant statute, the depreciation provision is appropriately computed by applying a higher rate (now any change in useful life of asset which is not as per Schedule II then justification should be given)

2. Analysis and interpretation of Deprecation under Schedule II of Companies Act, 2013

1) Schedule II – PART ‘A’ of the Companies Act 2013,

　

• Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.

• The depreciable amount of an asset is the cost of an asset or other amount substituted for cost, less its residual value.

• The useful life of an asset is the period over which an asset is expected to be available for use by an entity, or the number of production or similar units expected to be obtained from the asset by the entity.

• For the purpose of this Schedule, the term depreciation includes amortisation.

• Without prejudice to the foregoing provisions of above paragraph —

(i) The useful life of an asset shall not be longer than the useful life specified in Part ‘C’and the residual value of an asset shall not be more than five per cent. of the original cost of the asset:

Provided that where a company uses a useful life or residual value of the asset which is different from the above limits, justification for the difference shall be disclosed in its financial statement.

(ii) For intangible assets…….

2) Schedule II – PART ‘B’ of the Companies Act 2013

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.

3) No separate depreciation rate is prescribed for intangible assets. The same will be governed by notified AS.

4) In Schedule XIV of Companies Act, 1956 for the assets used in double shift or triple shift, shift wise different rates are prescribed, whereas in Schedule II of Companies Act, 2013 it specifies that if an asset is used for any time during the year for double shift, the depreciation will increase by 50% for that period and in case of the triple shift the depreciation shall be calculated on the basis of 100% for that period. No additional deprecation for the assets in respect of which no extra shift depreciation is permitted and the same is indicated by NESD in Part C. 

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Nirmal Shah – nirmal.shah@essar.com