IN DEAPTH ANALYSIS OF DEPRRECIATION

Others 1222 views 4 replies

CHARTERED BISHU

FINANCE MANAGER

49 Points Joined August 2009

Here is the most rare question which is normally used but not noticed by persons.

A.S. 6 clarifies that while calculating depreciation rate whether by S.L.M. or by W.D.V. or any other method whatsover which the management deems fit for earning according to the repairs and maintenance.

NOW the question is that what is the depreciation rate when number of useful life is uneven i.e. say 3.4166666667.

while we applying the formula S>L>M> i.e. for e.g. ,

( original cost -scrap)/ no. of useful life

the above formula gets absurd because depreciation is based on yearly concept............and for the residual month. year is proportioned accordind to the needs.

what is the rate when no. of useful life is uneven i.e. say 3.4166666667 if scrap is y and original cost is X ?????

Replies (4)

CA Manish Agrawal

Chartered Accountant

115 Points Joined August 2007

Generally, it will be taken by rounding off upto 2 digits of Decimal Places. In case of Corporate entities it has already been given in Sch. XIV of the companies Act, 1956 WDV rates/SLM rates as well as Single Shift /Extra Shift Depreciation. These rates are Atleast rate which are to be charged by The companies. Management may even Charge More than what prescribed in Sch. XIV of the companies Act. but it will be allowed in income tax as per income tax act/rules. No Matter What depreciation is being Charged by management. Plz Be CAREFUL regarding frequent Change in Accounting Estimates. If so Occured, Auditor has to Qualify his report that This much Effect on Profit has arose(under profit/Overprofit) due to change in Accounting Estimate. since Depreciation is an estimate of Useful life of assets underlying . Any Change in rate should be brought into notice of Shareholders by the auditors.

Moreover, Always Charge Depreciation on Day to Day basis in companies Books unlike Income Tax Act.

CA Manish J. Agrawal

madhu

26 Points Joined August 2009

Thank you for sharing

CHARTERED BISHU

FINANCE MANAGER

49 Points Joined August 2009

all right .. but i could not get the exact answer what iam searching for?/

see when the numerator is divisible by the uneven year , the the resultant will be the proportionate part of the year , noe the full 1 year........

then depreciation is based on yearly concept,,how can we go for divisible by uneven year?

answer will be on what way?

bishu

CA Manish Agrawal

Chartered Accountant

115 Points Joined August 2007

Bishu !!

Now you are going to Debate the Issue.

SUBSTANCE OVER FORM !! This may also be followed !! Your mean to say that You are exactly knowing the life of your Asset underlying, i.e. 3.41666666 % S.L.M. Depreciation Rate means Life of assets is 29 Years 3 months 6 Days & something Hours .... !! Isn't It ???

My Friend you have to only Write off atleast 95 % of Asset's Value, by doing this you may cover life of asset because almost every asset has a salvage value also.

from 95% to 99.99% of Cost of Asset can be taken into consideration while calculation depreciation rates !!

It may Suffice your Compliance Needs.

More over, Depreciation are Atleast Rate for which depreciation should be written off. therefore, you may follow 3.41% SLM Rate for your Asset under debate !!

Thanks... Please Reply Whether you are satisfied by my answer or not !!??

CA Manish Agrawal.