Depreciation

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20 March 2015 what are new changes in depreciation and how it is done expalin

CA AnKiT BoHrA (AB)

CA AnKiT BoHrA (AB) (Expert)
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20 March 2015 http://taxguru.in/company-law/scheduleii-companies-act-2013-accounting-standard6-depreciation-accounting.html

Querist : Anonymous

Querist : Anonymous (Querist)

20 March 2015 can give me an example for this

Aashok Kumar Sharma online

Aashok Kumar Sharma online

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21 July 2024 As of my last update, the most recent significant changes in depreciation rules were introduced by the Companies Act, 2013 in India, which replaced the earlier Companies Act, 1956. These changes brought about several revisions in the way depreciation is calculated and reported. Here’s a detailed explanation of the new changes and how depreciation is handled under the Companies Act, 2013:

### Changes in Depreciation Rules under Companies Act, 2013

1. **Schedule II Classification:**
- Schedule II of the Companies Act, 2013 categorizes assets into two categories:
- **Useful Life Specified**: Assets for which the useful life is specified in Schedule II (e.g., buildings, plant and machinery, furniture, etc.).
- **Useful Life Not Specified**: Intangible assets and assets for which the useful life cannot be determined with reasonable certainty.

2. **Depreciation Methods:**
- **Straight Line Method (SLM)**: Used for assets with a specified useful life in Schedule II or where the useful life can be reasonably estimated.
- **Written Down Value (WDV) Method**: Not the primary method under Schedule II. It's used for assets where the useful life cannot be reasonably estimated or is not specified.

3. **Useful Life Determination:**
- Assets with specified useful lives in Schedule II have predefined rates of depreciation. For example, buildings might have a useful life of 60 years, while machinery might have a useful life of 15 years.
- If the useful life of an asset is revised due to factors like technological obsolescence, new guidelines in Schedule II provide for the remaining useful life adjustment.

4. **Transition Provisions:**
- The transition from the Companies Act, 1956 to the Companies Act, 2013 allowed companies to adjust their accounting policies for depreciation. Accumulated depreciation as of the transition date was adjusted against the opening balance of retained earnings.

5. **Impairment of Assets:**
- Schedule II also addresses the impairment of assets, requiring companies to assess if there is any indication of impairment at the end of each financial year.

### How Depreciation is Calculated under Companies Act, 2013

1. **Identify Asset Category:**
- Determine whether the asset falls under the category with a specified useful life or the category where useful life is not specified.

2. **Choose Depreciation Method:**
- If the asset has a specified useful life, calculate depreciation using the Straight Line Method (SLM) based on the rates provided in Schedule II.
- If the asset's useful life is not specified, or if it cannot be reasonably estimated, the company may choose to use the Written Down Value (WDV) method.

3. **Calculation Example (SLM):**
- For example, if a building has a specified useful life of 60 years and the cost is Rs. 12000K, the annual depreciation would be Rs. 2,00K (Rs. 12000K / 60).

4. **Reporting and Compliance:**
- Companies need to ensure that depreciation calculations are in compliance with Schedule II of the Companies Act, 2013.
- Annual financial statements must disclose the methods used for calculating depreciation and any changes in useful life estimates or asset impairments.

### Conclusion

The changes introduced by the Companies Act, 2013 aimed to streamline depreciation calculations, provide clarity on asset useful lives, and enhance transparency in financial reporting. It’s essential for companies to adhere to these guidelines to ensure compliance and accurate financial reporting. If there have been any updates or amendments since my last training data, it's advisable to refer to the latest notifications and guidelines issued by the Ministry of Corporate Affairs (MCA) or seek advice from a qualified professional.

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