schedule II of Companies Act 2013 has specified the useful life of various assets. Based on that, every company will have to follow the procedure specified as per Schedule II.
Due to this change, following thing will happen
1. More Depreciation in current Year, as compared to earlier year(s).
2. Where the useful life of asset is already over as on 1 April 2014, then carrying value of such assets will have to be recognized (i.e. adjusted) against Retained Earnings.
My Queries are :
a. How one can justify the extra charge of depreciation in current year, this is especially will be debated by Tax authorities in cases where the companies are falling under MAT.
b. as the carrying value of assets, (life of which is over as compared to life specified by Sch. II ) will be adjusted against Free Reserves.. it means, profit available for share holders will get reduced.. how the companies are tackling this issue. this will be very crucial in case of Listed Companies.
c. one more query... Sch. II mentions that Where useful life or residual value of the assets, which is different from the above limits, , the financial statements shall disclose such difference and provide Justification in this behalf duly supported by technical advice.
my query in point "c" above is that, who is technical expert? e.g. the life specified as per Sch. II for IT equipments (othe than Server ) is 3 years.. where as in reality, we use say laptop for more that even 5 years... in that case, can we keep ADVICE from our IT head (who is expert in his own field) and say this is a Technical advice?
08 May 2015
a.) We need to keep a WATER TIGHT compartment between Companies Act and Income Tax Act.
b) The very fact that the useful life is over denotes we have undercharged the depreciation. So no harm in rectifying the same in current year by diluting the free reserves in the hands of share holders.
c)The engineers, Govt Approved Valuers or the Manufacturer's Pamphlet about the product explaining the technical data ca be taken as the technical expert.
IT head can very well be relied upon for notifying the useful life vis a vis an external expert would be recommended.
08 May 2015
Dear Mr. Amol, thank you very much for your reply.
small clarification regarding point b)when I say useful life is over, it means useful life as compared to Sch. II and not actual useful life. e.g. life of say laptop or desktop as specified by sch. II is 3 years but in reality (in many organizations) we use it for even 5-6 years also. in that case, there is no question of undercharge in past...
08 May 2015
Dear Mr. Amol, thank you very much for your reply.
small clarification regarding point b)when I say useful life is over, it means useful life as compared to Sch. II and not actual useful life. e.g. life of say laptop or desktop as specified by sch. II is 3 years but in reality (in many organizations) we use it for even 5-6 years also. in that case, there is no question of undercharge in past...
08 May 2015
As has been pointed out by you, the asset might get used even after its useful life is over. So to say, it is an additional benefit extracted out of it. It means the income /service is derived out of such an asset where there is no any matching cost viz depreciation.
Now the argument would be which is better? WDV or SLM or sch 2 or sum of digits and so on so forth....
I think let us take is as laptops in your case may be regarded as EXCEPTIONs prove the rule.
Let me add one more point in favour of useful LIFE..... useful life does not mean life for which it is used. It is mainly the ECONOMICAL life of the asset.... (Take it in lighter sense...I know few of the companies which still have PAGERS, windows 3.1, WS4, mobile handsets nokia 8010, BPL etc, BW monitors etc.)
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