Schedule II 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. Depreciation includes amortisation”. The detailed definition for depreciation is itself a new concept in the Companies Act 2013 particularly the definition of the useful life.
1. Conceptual Changes - Depreciation – 1956 Vs 2013 Acts
Let us now proceed to analyse some of the differences between Companies Act 1956 and Companies Act 2013 which impact Depreciation charge
|
As per Companies Act 1956 |
As per Companies Act 2013 |
Remarks |
|---|---|---|
|
Depreciation rates provided for various assets |
Useful life defined for various assets |
The depreciation rates prescribed under the 1956 Act was the minimum depreciation that should be charged by any Company. This is no longer so in the new Act ( as per the Schedule II which was revised ) |
|
Rates specified for single, double and triple shifts and for SLM and WDV methods |
Useful life only based on single shift. If assets are used for double shift the depreciation to be increased by 50% for that period and in case of triple shift usage depreciation to be calculated at 100% for that period. Only useful life prescribed with no reference to the method of depreciation |
|
|
Assets individually costing less than Rs. 5,000 to be fully depreciated in the year of addition |
No such requirement |
|
|
Does not specifically provide for depreciation on revaluations. As per the guidance note of the ICAI additional depreciation on account of revaluation of depreciable assets can be adjusted with the revaluation reserve |
As per the depreciable amount definition under Schedule II it is the cost of the asset or other amount substituted for cost. Hence adjustment with revaluation reserve may not be permissible. |
Increase in charge due to depreciation on revaluations instead of on historical cost Adjustment of existing revaluation reserve – when and how. No specific guideline in the 2013 Act. |
|
No reference to component depreciation |
Where cost of a part of the asset is significant to the total cost of the asset and the useful life of the part is different from the remaining asset, then useful life of that part to be determined separately |
The 2013 Act has introduced the component based depreciation to bring the accounting in line with the IFRS standard IAS 16 Property plant and equipment. Identification of component costs would be a huge exercise for many companies which have assets with components spread over different useful lives. |
2. Comparison of Changes in useful life – 1956 and 2013 Act for different class of assets
|
Nature of asset |
Useful life Companies Act 1956 (SLM) – In years |
Useful life Companies Act 2013 – In years |
|
Factory buildings |
28 |
30 |
|
Buildings (other than factory buildings) other than RCC frame structure |
58 |
30 |
|
Plant & machinery other than continuous process plant |
20 |
15 |
|
General Furniture & Fittings |
15 |
10 |
|
Computers – end user devices like desktops, laptops |
6 |
3 |
3. Amendment to the Schedule – Notification dated 31st March 2014
a. The useful life of an asset is not to be longer than the useful lives specified in the schedule.
b. The residual value of an asset not to be more than five percent of the original cost of the asset.
c. Where a company uses a different useful life or a residual value, justification for the difference shall be disclosed in its financial statements.
d. For intangible assets, the accounting standards applicable for the time being will apply except in case of :
- Intangible assets created under Build operate Transfer or Build own operate and transfer basis or
- Any other public private partnership route in case of road projects.
The amortization for the exceptions shall be as follows:
Amortization amount = Cost of intangible assets x Actual Revenue for the year / Projected revenue from the asset (till the end of concession period)
5. Applicable useful life for continuous process plant for which no special rate has been prescribed in item IV of Part C of the schedule is amended to 25 years from 8 years.
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