The useful life specified in Part C of the Schedule II of the Companies Act,2013 is for the whole of the asset. As per Part A, useful life of an asset shall not ordinarily be different from the useful life specified in Part C and the residual value of an asset shall not be more than 5 % of the original cost of the asset. In a case where cost of a part of the asset is significant to total cost of the asset and useful life of that part is different from useful life the principal asset, then useful life of that significant part shall be determined separately.
Act requires companies to identify and depreciate significant components with differential useful lives, however the requirement is voluntary for FY 2014-15 and shall become mandatory form FY 2015-16. Identification of significant part of the asset may require technical expertise, thus it may be necessary to involve technical experts to determine the significant part of an asset.
The components which needs to be identified should be material and materiality is a matter of judgement and needs to be decided on the facts of each case. As per the Guidance Note issued by the ICAI on Provision of Schedule II of the Companies Act,2013 , the company may consider 10% of original cost of the asset as a threshold to determine whether a component is material. If the useful life as determined for the component is lower than the useful life of the principal asset as per Schedule II, then such lower useful life shall be used.
However, if the useful life of the component is higher than the useful life the principal asset and company intends to use the component even after the expiry of useful life of the principal asset, then company can use such higher life or even choose to depreciate the component at a lower useful life at par with principal asset i.e. life given in Schedule II. Component accounting is required to be done for the entire block of assets, it cannot be restricted to new assets purchased after 1-04-2014 or 1-04-2015 as the case may be. (Correction/Comments invited)
Tags Corporate Law