Companies Act 2013 – Impact on Depreciation
With the advent of Companies Act, 2013, the method of Depreciation has also changed where Schedule II has replaced Schedule XIV.
The difference between WDV and SLM have been removed with the advent of useful Lives.
What’s New?
1. Amortization of Intangible Assets
2. Instead of Depreciation rates, USEFUL LIVES of all the assets are specified.
3. List has become although more exhaustive with inclusion of more assets, which were earlier not covered.
4. The treatment of Depreciation in case of Extra shifts, is changed.
5. Unit of Production method can be applied.
6. Component Approach
Comparison of Depreciation as per Revised Schedule XIV and Revised Schedule II (Practical Application)
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Particulars |
Revised schedule XIV |
Revised schedule II |
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Amortization of Intangible Assets (IA) |
No method was suggested regarding amortization of IA. However MCA Circular for amortization of Build Operate Transfer (BOT) has been issued. |
IA are required to be amortized as per Notified AS – 26 (Note 1). |
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Depreciation Method |
Different Rates are given as per WDV and SLM . |
Useful lives are given for all the assets. |
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Extra Shift Depreciation (ESD) |
Depreciation is charged on the basis of the number of days the concern worked for Single/Double/Triple Shift. |
Effect – i. If used for double shift (at any time during the year) – Depreciation will increase by 50% of that charged. ii. If used for Triple shift (at any time during the year) – Depreciation will increase by 100% of that charged. |
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Component Accounting (Note 2) |
An item should be separated into parts (components) when the cost of those parts is significant in relation to the total cost of the item and depreciation on such components is charged separately. (explained in notes with example) |
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It was optional read with AS – 10. |
Now it is mandatory. |
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Treatment of Addition of value less than Rs. 5000 |
Depreciation @ 100 % is to be charged. |
All such additions will be treated of revenue nature and there is no need of charging depreciation. |
Notes:
Amortization of IA – (As per AS 26) Not applicable on BOT contracts*
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i. Should be amortized in the ratio of Future Economic Benefits.Period of Future Economic Benefits can be any, but should be finite. |
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ii. Software’s and Websites – Life will be taken 3-5 Years and the value of the IA will be amortized. |
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iii. Life for all other IA will be taken as 10 years. |
2. Component accounting – in Schedule XIV component accounting was optional but it is mandatory under Schedule II –
Let’s say,
Machinery is purchased amounting to Rs. 5 Cr.
Useful Life – 10 Years
One of its parts being significant its value is Rs. 1.5 Cr and useful life is 5 Years.
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As per Schedule XIV |
As per Schedule II |
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Depreciation will be charged from a single rate on the complete asset of Rs. 5 Cr. |
Depreciation will be charged separately on the Part as well as on the Machine(excluding) the value of the part |
How to apply (Transitional Provisions) –
Applicability of the new schedule is to be done according to the Transitional provisions as specified in Schedule II –
1. The Carrying amount of the assets will be depreciated over the remaining useful life of the asset.
Useful Life will be taken according to new schedule.
2. In case there is no residual, useful life the complete carrying amount will be charged to Retained earnings.
Initially the applicability of Schedule II may prove to be brutual but on the other hand is overcoming the deficiencies of the Old Schedule and is leading to a better dsclosure of a Company's profit.
Thanks
Priya Agarwal
CAclubindia
