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Depreciation policy

Pankaj (SAP FICO Consultant) (82 Points)

19 February 2013

Hi All Experts,

I am working for one Automobile Industry UK.

I have question about depreciation policy : Whether vehicle created in plant and placed at Warehouse for some time. Will it be liable for depreciation ?

Eg :

Vehicle created on : 1st Jan 2013
Vehicle stored in warehouse from 1st Jan 2013 to 30th June 2013 ( around 6 months. )

So as per accounting principles will depreciation applicable for these kind of stored vehicles ?

Kindly provide experts view.

Regards,

Pankaj Bhalerao.
SAP FICO Consultant.

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16 Replies

CA. Ankit Bhansali (---) (120 Points)
Replied 19 February 2013

Depreciation is charged to compensate wear and tear of vehicle and also for efflux of time..

even passive use also eligible for depreciation...

so you have to charge depreciation

CA Ashish Pathak (Employed at Cipla Ltd.) (2779 Points)
Replied 19 February 2013

I beg to differ with the above mentioned view. As per the Accounting Standard-6 on Depreciation Accounting, Depreciable Assets does not include such assets which are held for the purpose of sale in the ordinary course of business. In this case, the vehicle stored in warehouse is for the purpose of sale. So depreciation is not applicable on this vehicle as it not a depreciable asset.

Regards.

ASHISH PATHAK

1 Like

Abhisek Rungta (PRACTISING CHARTERED ACCOUNTANT) (234 Points)
Replied 19 February 2013

As the asset is ready for use and for passage of time , you can claim depreciation.

CA Ashish Pathak (Employed at Cipla Ltd.) (2779 Points)
Replied 19 February 2013

The AS-6 defines "DEPRECIABLE ASSETS" as assets which (i) are expected to be used during more than one accounting period, (ii) have limited useful life, and (iii) are held by the enterprise for use in the production, or supply of goods and services for rental to others, or for administrative purposes and not for the purpose of sale in the ordinary course of business.

CA Ashish Pathak (Employed at Cipla Ltd.) (2779 Points)
Replied 19 February 2013

@ Ankit, Na. why depreciation can be claimed. This vehicle is meant for sale and so its not a depreciable asset only. So the question of depreciation doesnt arise. How can a business entity claim depreciation on its "stocks" which is meant for sale?

1 Like

CA Gaurav Ajit Potdar (Chartered Accountant) (846 Points)
Replied 19 February 2013

Agree with Ashish Pathak, Depreciation can be claimed only on Companies Fixed Assets not on Stock., in this case vehicles are part of stock.

2 Like

Ramarao Gullipalli (Dy.Manager-Finance & Accounts) (99 Points)
Replied 19 February 2013

"Agree with Ashish Pathak"

1 Like

Pankaj (SAP FICO Consultant) (82 Points)
Replied 19 February 2013

Dear Ashish / All Experts,

Is this policy followed accross the globe ? or something based on Local GAAP ?

The reason to ask is I am working on UK based client.

@ Ashish : Appreciating your indepth knowledge and clear concepts.

All the best to you.

Regards,

Pankaj Bhalerao.

1 Like

(Guest)

AGREE WITH ASHISH...........

SINCE STOCK IS FALLING UNDER CURRENT ASSETS ............ AND CURRENT ASSETS IS NOT ELIGIBLE FOR DEPRECIATION

2 Like

Mahesh Ghonge (Assistant Manager-Audit) (24 Points)
Replied 20 February 2013

Agree wth Ashish,

You can not claim depreciation on your stock, since you are in automobile industry vehcle lying at ware house for sale is your stock.

1 Like

CA Ashish Pathak (Employed at Cipla Ltd.) (2779 Points)
Replied 20 February 2013

Thanks everyone for appreciating my answer. @ Pankaj, Even as per the IAS which is applicable to UK based entities there is same treatment for this.

CA. Ankit Bhansali (---) (120 Points)
Replied 20 February 2013

i would really like to know wether vehicle was for use as an asset or purpose was to sale. may be i m missing something

Pankaj (SAP FICO Consultant) (82 Points)
Replied 20 February 2013

Hi All,

@ Ankit : It mansufactured for sale, but until gets customer treated as stock in warehouse. Is the case.

Regards,

Pankaj Bhalerao.

(Guest)

HI Pankaj,

I am very happy that you have raised an interesting point regarding AS 6. I am reproducing the same words as mentioned in the AS 6

Depreciable assets are assets which

(i) are expected to be used during more than one accounting

period; and

(ii) have a limited useful life; and

(iii) are held by an enterprise for use in the production or supply of

goods and services, for rental to others, or for administrative

purposes and not for the purpose of sale in the ordinary course

of business.

As per (i) Since your company is an automobile industry, cars manufactured are inventory for them as per AS2, the manufactured car is not expected to be used, its going to be sold. - So the car does not come under point (i)

As per (ii) The car has limited useful life - So the car comes under point (ii)

As per (iii) The car is held for the purpose of sale in the ordinary course of business - So the car does not come under point (i)

To be called an Asset as a Depreciable Asset, all the 3 conditions stipulated as per AS 6. Since 2 conditions were not satisfied, the car is not a depreciable asset and no depreciation is required.

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