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Change in depreciation rate

Tom S Peter (Article) (148 Points)

26 July 2011

Dear friends I need ur help...

We were providing depreciation for windmill @ 28% (triple shift rate), now recoginised that the actual rate was 15.33%.

The machine was in operation for three years. So can we account directly @ 15.33% from this year or should we have to pass some adjustment entries. If yes,kindly tell me the accounting procedures and entries....

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12 Replies

valji (Accounts manager-MBA) (2150 Points)
Replied 26 July 2011

you have to pass adjustment of entry for past diffreance of depreciation

kamal kishor sen (STUDENT Rajasthan) (2156 Points)
Replied 26 July 2011

Procedure to be followed in case of change in rate:-

1. Depreciation should be recomputed applying the new method/rate from the date of its purchase/installation till the date of change of method/rate.

2. Difference between the total depreciation under the new method/rate and accumulated depreciation under the old method/rate till the date of change may be surplus/deficiency.

3. Such resultant surplus is credited to profit & loss account under the head "Depreciation written back".

4. Such resultant deficiency is charged to profit and loss account.

Such change of depreciation rate/method should be treated as change in accounting policy and its effect should be quantified and disclosed.

Plz clarify if i m wrong.

3 Like

(Guest)

Concur with kamal kishore statement

Tom S Peter (Article) (148 Points)
Replied 26 July 2011

Mr.Kamal thanks foryour reply. Will that have any impact on the income tax point of view?

Another part is that, is it really a change in acounting policy as providing depreciation at a different rate was due to the ignorance of the staff.

So whether it should be disclosed in the notes?

Rohtash (CA - Final / CS / B.Com) (1140 Points)
Replied 26 July 2011

totally agree with Kamal Kishore Sen..

Rohtash (CA - Final / CS / B.Com) (1140 Points)
Replied 26 July 2011

Dear Peter, Preparation of financials is the responsibility of the management which includes staff. Thus, it is assumed that the mistake is from the management`s side. Therefore, only the effect of the same should be stated in the notes to accounts.. Regards, Rohtash Hurria

1 Like

CA ADITYA SHARMA (CA IN PRACTICE ) (16719 Points)
Replied 26 July 2011

Originally posted by : Rohtash
	Dear Peter, Preparation of financials is the responsibility of the management which includes staff. Thus, it is assumed that the mistake is from the management`s side. Therefore, only the effect of the same should be stated in the notes to accounts.. Regards, Rohtash Hurria

Somshekar (Rankholder) (-) (158 Points)
Replied 26 July 2011

Depreciation is an integral part of audit. when there is a change in rate due to inadvertence then the method has to be applied retrospectively and the resultant excess or short depreciation has to be accounted in P&L a/c.

It will not impact on income tax figures as book depreciation is added back so the net profit wont change

it is change in accounting policy therefore disclosure in notes to accounts by stating the net impact on current year profit is necessary by way of quantification.

it will impact deferred tax figure as per AS 22

3 Like

Tom S Peter (Article) (148 Points)
Replied 01 August 2011

Mr.Someshekhar and Rohtash:-

Rather than acounting it as depreciation written back,can we account it as prior priod income and show notes accordingly?

V.MASTHANVALI (ACCOUNTS EXECUTIVE) (89 Points)
Replied 02 August 2011

As per AS-6 recompute the depreciation @ 15.33% for the three years and the difference between the already depreciated amount and Depreciation @ 15.33% should be shown in P&L A/C. We cant treat as prior period item as there is noquestion of ommision in the past years.

1 Like

Mukesh Kumar (Sr. Accounts Executive) (21 Points)
Replied 12 October 2011

Sir?Madam

Depreciation is a one of the important head which affects Deferred tax, Is there any other heads which affects deffered tax liability of assets. Plz if any one having answer of it plz let me guide.

Mukesh

CA Bada Sanjay Kumar Reddy (CA) (69 Points)
Replied 18 June 2013

If there is a change in rate of depreciation from year to year there will be prospective effect. I.e., It is not required to recompute the depreciation from the date of acquisition.

As per AS-6 the recomputation of depreciation is required, when there is a change in method of providing depreciation like from WDV to SLM or viceversa. The draft of te AS-6 is also provided for your information.

The method of depreciation is applied consistently to provide comparability of the results of the operations of the enterprise from period to period. A change from one method of providing depreciation to another is made only if the adoption of the new method is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise. When such a change in the method of depreciation is made, depreciation is recalculated in accordance with the new method from the date of the asset coming into use. The deficiency or surplus arising from retrospective recomputation of depreciation in accordance with the new method is adjusted in the accounts in the year in which the method of depreciation is changed. In case the change in the method results in deficiency in depreciation in respect of past years, the deficiency is charged in the statement of profit and loss. In case the change in the method results in surplus, the surplus is credited to the statement of profit and loss.

Such a change is treated as a change in accounting policy and its effect is

quantified and disclosed.

16. Where the historical cost of an asset has undergone a change due to circumstances specified in para 6 above, the depreciation on the revised unamortised depreciable amount is provided rospectively over the residual useful life of the asset.