Financial Management- Capital Budgeting Decesions

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Guest

Guest (Querist)

27 November 2009 Dear CACLUB members,

In Capital Budgeting Decesions we study the various methods of depreciation. The methods are:
1. Straight Line Method
2. Reducing Balance Method
3. Sum of years digit method.

We all know that depreciation in capital budgeting decesions is required to calculate the inflow on account of tax saving due to depreciation.

Now my query is that why do we learn 3 methods of depreciation as mentioned above when we are allowed depreciation under Income Tax Act,1961 as per only WDV method?

Thanks in advance.
Ketan Shah

CA Anil Kumar Tadaka

CA Anil Kumar Tadaka (Expert)
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27 November 2009 The depreciation depends on the company for which we are making capital budgeting. Electricity companies follow straight line method. Some other companies follow written down value. We may follow WDV as per Income tax act but while doing capital budgeting depending upon the organisation we have to change the method for the convenience.

shakuntala chhangani

shakuntala chhangani (Expert)
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27 November 2009 Hi Ketan, when we purchase asset, it is shown in the balance sheet. over the period of time it comes into P/L A/c as dep. the amount which is depreciated under accounts, the same is allowed under income tax. the only difference is the timing of such allowance. Due to this timing difference Dep as per accounts will be different from dep. as per Income Tax Act. Hence, u will have to create DTA or DTL as per AS 22 for which u need to know all the abovementioned methods. Regards,
CA Shakuntala Chhangani

CA. Rishabh Mittal

CA. Rishabh Mittal (Expert)
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27 November 2009 Hi Ketan, You are correct in the view that why other methods of depreciation are used when Income tax Act allows only WDV or SLM (in exceptional cases of power generating units). Please note that it happens only in theoretical (for exams point of view) matter that we use SLM or sum of year digit method. But in most of the practical scenarios in INDIA, you'll use only WDV Method. The Institute (ICAI) requires us to be update with all possible circumstances.
Further, most of the questions related to Capital budgeting are from books of foreign authors, which are as it is studied in India.
So, Just understand the concept & learn all possible cases.
Hope it clarifies your query ...!!

Rgds
RM

Guest

Guest (Querist)

28 November 2009 I agree with the views of CA. Risabh Mittal simply because all the other methods of depreciation are allowed in USA & UK and our intelligent authors have just copied the problems without considering the Indian secnario.

shakuntala chhangani

shakuntala chhangani (Expert)
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29 November 2009 I don't agree friends. Income tax and accounts are two different fields. you cannot always apply income tax dep. rates as these are accelerated rates and many times do not match with the life of asset. As you guys said only SLM or Wdv, if it is WASTING ASSET then what??? Further if you go for sum of years digit method, it is nothing but the modification of WDV method. If we take something good from others, there is no harm in that (SPECIFICALLY OPPOSING USE OF THE WORD INTELLIGENT AUTHORS). Our Institute is preparing us for international exposure, so what is wrong in that?? Regards, CA Shakuntala Chhangani

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