MCA notification on amendment to Schedule II of Companies Act; 2013
Ministry of Corporate Affairs has amended Schedule II (Useful lives to compute depreciation) of the Companies Act; 2013 by issuing notification dated August 29, 2014. Schedule II of the Companies Act; 2013 prescribes the useful of the assets. Schedule II corresponds to Schedule XIV of the Erstwhile Companies Act; 1956. The depreciation rates prescribed by Schedule XIV of Erstwhile Companies Act; 1956 were considered the minimum rates. Higher depreciation rates would be provided based on assessment of the useful life of the asset.
The Schedule II of the Companies Act; 2013 prescribed the useful lives of the assets to compute depreciation and is effective from financial year commencing April 1, 2014. There was certain confusion with respect to the interpretation of Schedule II regarding whether the useful lives prescribed are the minimum or whether the Company can adopt a higher useful lives rather than Schedule II.
MCA vide notification dated August 29, 2014 introduced three amendments to existing Schedule II:
1. Para 3 of Part A of Schedule II
The notification amends the Para 3 which now suggests that Useful life of an asset shall not ordinarily different than that prescribed by Schedule II and the residual value shall not be more than 5% of the original cost. If Different useful life or residual value is applied by a Company, than the financial statements shall disclose such difference (i.e. difference in schedule II useful life/residual value and that adopted by the Company) and provide Justification in this behalf duly supported by technical advice.
The MCA has thus clarified that it possible to adopted different useful life (higher or lower) than the Schedule II rates provided adequate disclosure is provided and there is technical justification for the same.
2. Para 4 under Part C of Schedule II after notes:
This Para provided for mandatory componentization. It prescribed that if the cost of a part of the asset is significant to the total cost of the asset and it has different useful life than the main asset, useful life of that part is determined separately for depreciation.
There are two concepts involved for componentization. First, that it should a significant part of the main asset and second that the part should have different useful life than the main asset. For example in a Ship, the hull, keel, engine and the navigation system may be considered as separate components. In case of Building, the Air conditioning, elevators, Staircase may be considered as separate components. Concept of significance depends upon materiality and which would be specific to each Company.
Para 8.3 of Accounting Standard 10 on Accounting for Fixed Assets did not provide for mandatory componentization. It was recommendatory to improve the accounting of assets. IAS 16 on Property, Plant and Equipment provided for mandatory componentization.
Considering the hardships faced by Companies in the Current year, MCA has amended Schedule II and provided that componentization would be voluntary for FY 2014-2015 and mandatory thereafter.
3. The last amendment by MCA is in Para 7 in Part C under Notes Section: The existing Schedule II provided that if on applicability of the Schedule, the remaining useful life of the asset is NIL, the carrying value of the asset, if any, shall be adjusted to opening balance of retained earnings.
The MCA has replaced the words “Shall be” with “May be”, thus giving an option to adjust the carrying value of NIL life assets to retained earnings. The Company may adjust it otherwise for example in the Current year Profit and Loss.
The Notification issued by MCA can found by in the link attached below: