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Depriciation under Schedule II of Companies Act, 2013 & Income Tax Act, 1961

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Detailed Contents

Bharat? 5
Preface to the Sixth Edition 7
Contents at a glance 9

Chapter 1

Depreciation under Companies Act, 2013

1.Net Worth [Section 2(57)] 2
2.Calculation of profits [Section 198] 2
3.Declaration of dividend [Section 123] 4
4.General instructions for preparation of Balance Sheet and Statement of Profit and Loss of a Company [Schedule III read with Section 129] 7
5.Useful life to compute depreciation [Schedule II read with Section 123] 8
6.Commencement of provisions of the Companies Act, 2013 with regard to maintenance of books of accounts and preparations/adoption/filing of financial statements, auditors report, Board's report and attachments to such statements and reports — Applicability with regard to relevant financial year 16
7.Depreciation on low value items 17
  • 7.1.Can a company still have a policy to fully depreciate 100% of cost of asset below certain amount?
 17
8.Useful Life vis-à-vis rates of depreciation 17
  • 8.1.Useful life cannot be derived from the rates of depreciation
 18
  • 8.2.Useful Life & Residual Value
 18
  • 8.3.Useful life v economic life and acquisition of second hand asset
 18
  • 8.4.Useful lives as given under Part ‘C’ of Schedule II for various types of assets are indicative only
 19
  • 8.5.Revision of the estimated useful life of an asset
 21
  • 8.6.Residual Value
 22
9.Basic Illustrations on Schedule II (2013 Act) 22
10.Component Accounting made mandatory 24
  • 10.1.Non-availability of fixed assets register/records – what to do
 26
11.Continuous Process Plant 26
12.Revaluation of assets 27
13.Unit of Production (UOP) Method of Depreciation 29
14.Transition to Schedule II 31

Chapter 2

Depreciation AS-6 (Revised): Depreciation Accounting

1.Objective 33
2.Non-applicability of AS – 6 to Depreciable Assets 33
3.Definitions 34
4.Determination of Depreciation 35
5.Historical Cost 35
6.Determination of Useful Life 36
7.Review of Useful Life 36
8.Treatment for addition or extension to an existing asset 37
9.Determination of Residual Value 38
10.Quantum of Depreciation 38
11.Depreciation Method 38
12.Impact of Rates of Depreciation vis-à-vis Governing Statute 39
13.Change in the Method of Depreciation 39
14.Disclosure Requirements 41
15.EAC Opinions 43

Chapter 3

AS-10: Accounting for Fixed Assets

1.Objective 45
2.Scope 45
3.Exclusions from AS-10 45
4.Definitions 46
5.Identification of Fixed Assets 47
6.Valuation of Machinery Spares (ASI 2) 47
7.Components of Cost 48
8.Self-constructed Fixed Assets 50
9.Non-monetary Consideration 51
10.Improvements and Repairs 52
11.Retirements and Disposals 53
12.Amount Substituted for Historical Cost 55
13.Valuation of Fixed Assets in Special Cases 60
14.Fixed Assets of Special Types 61
15.Disclosure Requirements 62
16.EAC Opinions 63

Chapter 4

AS-10: Property, Plant and Equipment

A.Objective 64
B.Scope 65
C.Definitions 65
D.Recognition 67
E.Initial Costs 67
F.Subsequent Costs 68
G.Measurement at Recognition 69
H.Elements of Cost 69
I.Measurement of Cost 71
J.Measurement after Recognition 72
K.Cost Model 72
L.Depreciation 74
M.Depreciable Amount and Depreciation Period 75
N.Depreciation Method 76
O.Changes in Existing Decommissioning, Restoration and Other Liabilities 77
P.Impairment 78
Q.Compensation for Impairment 78
R.Retirements 79
S.Derecognition 79
T.Disclosure 80
U.Transitional Provisions 82
Appendix Differences between Ind AS and Indian GAAP 82

Chapter 5

Indian Accounting Standards (Ind AS 16):Property, Plant and Equipment

A.Objective 83
B.Scope 83
C.Definitions 84
D.Recognition 85
E.Initial costs 86
F.Subsequent costs 86
G.Measurement at recognition 87
H.Measurement of cost 89
I.Measurement after recognition 90
J.Depreciation 92
K.Depreciable amount and depreciation period 92
L.Depreciation method 94
M.Impairment 95
N.Compensation for impairment 95
O.Derecognition 95
P.Disclosure 97
Appendix A Changes in Existing Decommissioning, Restoration and Similar Liabilities 99
Appendix B Stripping Costs in the Production Phase of a Surface Mine 101
Appendix C References to matters contained in other Indian Accounting Standards 104
Appendix 1 Opinions given by Ind AS Transition Facilitation Group of ICAI 105

Chapter 6

AS-19: Leases

1.Objective 111
2.Scope 112
3.Lease, Inception of the Lease and Lease Term 112
4.Minimum Lease Payments and Contingent Rent 112
5.Finance Lease, Operating Lease, Non-Cancellable and Cancellable Lease 114
6.Economic Life and Useful Life 114
7.Residual Value 114
8.Gross Investment, Net Investment and Unearned Finance Income 115
9.Criteria for Classification of Leases into Finance Lease and Operating Lease 115
10.Situations where a lease would be classified as a Finance Lease 116
11.Classification of Lease into Finance or Operating – at what point of time: 116
12.Finance Leases – Accounting Treatment for Lessee 117
13.Disclosure Requirements for Finance Lease in the Financial Statements of Lessee 121
14.Operating Leases – Accounting Treatment for Lessee: 122
15.Disclosure Requirements for Operating Lease in the Financial Statements of Lessee 123
16.Finance Leases – Accounting Treatment for Lessor: 125
17.Finance Leases – Accounting Treatment for Manufacturer/Dealer Lessor (para 32 to 36) 126
18.Disclosure Requirements for Finance Lease in the Financial Statements of Lessor 128
19.Operating Leases — Accounting Treatment for Lessor 128
20.Disclosure Requirements for Operating Lease in the Financial Statements of Lessor 129
21.Sale and Leaseback Transactions 130
22.Disclosure Requirements in case of Sale and Leaseback Transactions: 132
23.EAC Opinions 132
Appendix 1.Major Differences between Ind AS 116 and Indian GAAP 132
Appendix 2.Major Differences between Ind AS 17 and Indian GAAP 133

Chapter 7

Ind AS 116 (IFRS 16): Leases

1.Objective 138
2.Scope 138
3.Key Definitions 139
  • 3.1.Interest rate implicit in the lease
 139
  • 3.2.Lease term
 139
  • 3.3.Lessee’s incremental borrowing rate
 139
  • 3.4.Right-of-use asset
 139
  • 3.5.Short-term lease
 139
  • 3.6 Variable lease payments
 139
  • 3.7 Sublease
 139
  • 3.8 Underlying asset
 139
  • 3.9 Optional lease Payments
 139
  • 3.10 Lease payments
 139
4.Recognition Exemptions 140
  • 4.1 Assessing low value leases
 140
5.Identifying A Lease 140
  • 5.1 Identified asset
 141
  • 5.1.(a) Substantive substitution rights
 141
  • 5.1.(b) Portions of assets
 142
  • 5.2 Right to obtain economic benefits from use
 142
  • 5.3 Right to direct the use
 143
  • 5.4 Decisions determined during and before the period of use
 144
  • 5.5 Protective rights
 145
6.Separating Components of A Contract 147
  • 6.1 Portfolio application
 147
  • 6.2 Combination of contracts
 149
7.Accounting by Lessees 149
  • 7.1 Sublease classification
 150
8.Accounting by Lessors 151
  • 8.1 Lease of land and buildings
 152
9.Manufacturer or Dealer Lessors 152
10.Lease Term 153
  • 10.1 Lease term of cancellable property rentals under Ind AS 116
 156
11.In-Substance Fixed Lease Payments 158
12.Lessee Involvement with the Underlying Asset Before the Commencement Date 159
  • 12.1 Costs of the lessee relating to the construction or design of the underlying asset
 159
  • 12.2 Legal title to the underlying asset
 159
13.Lease Modifications 160
14.Sale and Leaseback Transactions 160
15.Presentation by Lessee 161
16.Disclosure 162
17.Transitional Provisions 163
18.Rent Concession and Lease Modification 166
19.Comprehensive Illustrations 167
Illustration 1 (IAS 17 vs. Ind AS 116) 167
Illustration 2 (Identification of lease components) 169
Illustration 3 (Allocation of consideration between lease and non-lease component) 170
Illustration 4 (Identification of lease) 171
Illustration 5 (Lease term - Lease payments on assets not in use) 180
Illustration 6 (Various cases of lease modifications) 181
Illustration 7 (sale and lease back) 185
Illustration 8 (variable lease payments) 186
Illustration 9 (irregular lease payments) 187
Illustration 10 (Variable lease payments dependent on an index and variable lease payments linked to sales) 188
Illustration 11 (rent concession due to pandemic) 190
Illustration 12 (municipal taxes) 191
Illustration 13 (in substance fixed lease payment) 192
Illustration 14 (in substance fixed lease payments) 192
Illustration 15 (variable payments) 192
Illustration 16 (Measurement by a lessee and accounting for a change in the lease term): 192
Illustration 17 (Modification that is a separate lease) 195
Illustration 18 (Modification that increases the scope of the lease by extending the contractual lease term) 196
Illustration 19 (Modification that decreases the scope of the lease) 196
Illustration 20 (Modification that both increases and decreases the scope of the lease) 197
Illustration 21 (Modification that is a change in consideration only) 199
Illustration 22 (Lessee allocation of consideration to lease and non-lease components of a contract – comprehensive example) 199
Illustration 23 (identifying a lease under a contract for energy/power – power purchase agreement) 201
Appendix 1 Exposure Draft for Lease Liability in a Sale and Leaseback – Amendments to Ind AS 116, Leases issued by ICAI on 30th December, 2022 203

Chapter 8

AS-26: Intangible Assets

1.Objective 208
2.Scope 209
3.Intangible Asset and other related elements 210
4.Definitions 210
5.Intangible Assets 211
6.Identifiability 212
7.Control and Future Economic Benefits 212
8.Recognition and Initial Measurement of an Intangible Asset 214
9.Cost of an acquired Intangible Asset 215
10.Modes of Acquiring Intangible Asset 215
11.Internally Generated Goodwill 219
12.Internally Generated Intangible Assets 220
13.Research Phase 221
14.Development Phase 221
15.Cost of an Internally Generated Intangible Asset 223
16.Expenditure on Intangible Asset – Recognition of an Expense or Asset 224
17.Subsequent Expenditure 225
18.Measurement Subsequent to Initial Recognition 226
19.Amortisation 226
20.Amortisation Method and Recognition of Amortisation Charge 229
21.Periodic Review of Amortisation Period and Amortisation Method 229
22.Residual Value 230
23.Recoverability of the Carrying Amount 231
24.Retirements and Disposals 233
25.Disclosure 234
26.Transitional Provisions (para 99) 235
27.Special Situations and Application of AS-26 237
Appendix Major Differences between Ind AS and Indian GAAP 246

Chapter 9

Indian Accounting Standards (Ind AS) 38:Intangible Assets

�

 247

Chapter 10

AS-28: Impairment of Assets

1.Objective 280
2.Scope 280
3.Impairment of Assets 281
4.Other Definitions 283
5.Assets carried at Revalued Amounts: 283
6.Identifying an Asset that may be Impaired 285
7.Measurement of Recoverable Amount 287
8.Net Selling Price 288
9.Value in Use 289
10.Recognition and Measurement of an Impairment Loss for an Individual Asset 294
11.Cash-Generating Units (CGU) 297
12.Goodwill 302
13.Corporate Assets 304
14.Recognition and Measurement of Impairment Losses for a Cash-Generating Unit 305
15.Reversal of an Impairment Loss 311
16.Reversal of an Impairment Loss for a Cash-Generating Unit 314
17.Impairment in case of Discontinuing Operations: 315
18.Disclosures 316
19.Transitional Provisions (para 124 & 125) 318
Appendix Major Differences between Ind AS and Indian GAAP 319

Chapter 11

Indian Accounting Standards (Ind AS-36):Impairment of Assets

�

 320

Chapter 12

Practical Illustrations on Depreciation including Transitional Provisions as per Pre-Revised AS-6 and AS-10

(1) Computation of depreciation under Schedule II 359
(2) Transitional Provisions under Schedule II 374
  • Part A – provisions that existed till 28th August, 2014
 374
  • Part B – provisions with effect from 29th August, 2014
 385
(3) Component Accounting under Schedule II 389

Chapter 13

Practical Illustrations on Depreciation as per AS-10 (Revised)

Question 1 [Remodelling cost for supermarket stores] 394
Question 2 [Incremental costs incurred for constructing an asset] 394
Question 3 [Capitalisation of net operating costs] 395
Question 4 [Revaluation of a class of PPE] 395
Question 5 [Review of estimated useful life] 396
Question 6 [Depreciation and residual value] 396
Question 7 [Component accounting] 396
Question 8 [Review of residual value and useful life] 397
Question 9 [Evaluating the applicability - AS 10 vs. AS 2] 398
Question 10 [Acquisition of PPE on deferred settlement terms] 398
Question 11 [Construction of new production line and dismantling costs] 399
Question 12 [Leasehold Land-Amortisation] 400
Question 13 [Bearer Plant] 400
Question 14 [Spare Parts] 401
Question 15 [Assets Retirement Obligations] 401
Question 16 [Enabling Assets] 402

Chapter 14

Cost Accounting Standards on Depreciation and Amortisation

1.Introduction 405
2.Objective 405
3.Scope 405
4.Definitions 405
5.Principles of Measurement 407
6.Assignment of Costs 409
7.Presentation 409
8.Disclosures 409

Chapter 15

Case Laws on Depreciation

1.Deduction of unprovided depreciation for previous years while computing net profit for purposes of managerial remuneration as per provisions of sections 349 and 350 [Vinay Bharat Ram v Registrar of Companies [[2010] 100 SCL 19 (Delhi)] 411
2.Refund of balance loan amount when there was a specific condition that at time of repayment of loan company was entitled to adjust therefrom depreciation on vehicles and business losses and accordingly after making such adjustments, balance had been paid to petitioner, is a bonafide dispute [Kunj Behari Rungta v Shree Shyam Radio Taxi Services (P) Ltd. [2004] 53 SCL 404 (Raj)] 413
3.Gross profit before interest and depreciation is an indicator of progressive growth, sound financial position of company [[1998] 17 SCL 152 (CLB - New Delhi), Company Law Board, Northern Region Bench, New Delhi, Cebon India Ltd., In re] 414

Chapter 16

Depreciation Requirements under Competition Act

�

 415

Chapter 17

Depreciation under Income Tax Act, 1961 and Reporting under Clause 18 of Form 3CD

1. Clause 18: Depreciation 423
(1) Applicability 424
(2) Depreciation under Income-tax Act, 1961 424
(3) Depreciation and Depreciable Assets – Meaning 439
(4) Accounting Depreciation v Taxation Depreciation 439
(5) Depreciation need not be provided in books to claim depreciation allowance under Income-tax Act, 1961 440
(6) Whether the “user� should be judged for block of assets or individual assets 440
(7) Continued ‘put to use’ not necessary for claiming depreciation 440
(8) In "Finance Lease" Lessor is not "Owner" for Depreciation 441
  • QUERY(Depreciation claim on Immovable Property not yet registered in Assessee’s name)
 442
  • QUERY(Claim of Cost of Construction on Lease Hold Land as Revenue Expenditure)
 442
  • QUERY(Depreciation on vehicle not registered in the Assessee’s name)
 443
  • QUERY(Depreciation under succession of business)
 443
  • QUERY(Computation of Depreciation in case of Amalgamation)
 444
  • QUERY(Assets acquired under hire purchase/installment transactions)
 445
  • QUERY(Depreciation on Hotel Building)
 445
  • QUERY(Deduction for Technical Know How)
 445
  • QUERY(Validity of the order of the Assessing Officer)
 446
  • QUERY(Actual cost of Assets for the purpose of Depreciation)
 446
  • QUERY(Depreciation on building held for personal use put into business)
 448
  • QUERY(Interest on loan of purchased of Plant & Machinery)
 449
  • QUERY(Foreign Company of the same name)
 450
  • QUERY(Interest on waived debt)
 450
  • QUERY(Treatment of MODVAT etc.)
 451
  • QUERY(Treatment of Trial Run Expenses & Income)
 451
  • QUERY (Treatment of Foreign Currency Fluctuation)
 451
(9) BSE Membership Card 452
(10)Depreciation on Goodwill purchased 452
(11)Tax treatment for depreciation on emergency spares 458
(12)Business information, contracts, records etc. are “intangible assets� & eligible for depreciation 459
(13)Investment in new plant or machinery [Section 32AC] 466
  • QUERY(computation of depreciation and additional depreciation)
 468
  • QUERY(computation of depreciation and additional depreciation – comprehensive)
 469
(14)Investment in new plant or machinery in notified backward areas in certain States [Section 32AD] 472
(15)Adjustment made to the written down value under section 115BAC/ 115BAD 474
Appendix 1 Table of Rates at which Depreciation is Admissible 497
Appendix 2 Table of rates at which depreciation is admissible for power generation business 505

Chapter 18

Unabsorbed Depreciation under the Income Tax Act, 1961

1.Unabsorbed Depreciation [Section 32(2)] 507
  • 1.1.Prescribed order of Loss Adjustment
 507
2.Loss Returns [Section 80] 511
3.Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger, etc. [Section 72A] 512
4.Provisions relating to carry forward and set-off of accumulated loss and unabsorbed depreciation allowance in scheme of amalgamation of banking company in certain cases [Section 72AA] 517
5.Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in business reorganisation of co-operative banks [Section 72AB] 519

Chapter 19

CBDT Clarifications on Depreciation under Income Tax Act, 1961

1.Leased assets 525
2.Finance Lease Agreements - Effect of publication of Accounting Standards on allowability of depreciation 526
3.Allowance of depreciation when profit is estimated 526
4.Equipments provided at employees' residences 526
5.Foreign motor cars used by tour operators/travel agents 526
6.Tax officers' role in assisting taxpayers 527
7.Treatment of expenditure incurred for development of roads/highways in BOT agreements 527
8.Backward areas of State of Bihar notified under first proviso to section 32(1)(iia) and section 32AD(1) 529
9.Additional depreciation under section 32(1)(iia) to printers 530
Appendix 1 Schedule II of Companies Act, 2013 versus Schedule XIV of Companies Act, 1956 531
Appendix 2 Dividends — Declaration of — Computation of Depreciation under Straight Line Method as Contemplated In Clause (b) of sub-section (2) — Certain Queries Answered 550
Appendix 3 Dividends — Declaration of — Accounting Standard (AS) 6 on Depreciation Accounting based on General Principles of Accounting issued by the Council of the Institute of Chartered Accountants of India 552
Appendix 4 Commencement of Provisions of the Companies Act, 2013 with regard to Maintenance of Books of Accounts and Preparations/Adoption/Filing of Financial Statements, Auditors Report, Board's Report and Attachments to such Statements 564
Appendix 5 Depreciation [Rule 5] 565

About the Author

CA Kamal Garg

CA Kamal Garg

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Depriciation under Schedule II of Companies Act, 2013 & Income Tax Act, 1961
Publisher: Bharat Law House
Pages: 592
Language: English
ISBN: 9788119565320
₹ 995 Price : ₹ 1395
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