Depreciation Accounting under the Companies Act, 2013
Applicability of the Companies Act 2013
For the purpose of applicability of the provisions of the Companies Act, 2013 – Schedule II, the companies are divided into three classes as follows:
For prescribed class of companies, whose financial statements are required to comply with Accounting Standard prescribed under the 2013 Act, the useful lives should normally be in accordance with the Schedule, provided that in case of departure from the same, the reasons for the same should be disclosed .Companies regulated by other law, e.g., electricity companies, useful life or residual value of any specified asset, as notified for accounting purposes by a Regulatory Authority constituted under an Act of Parliament or by the Central Government shall be applied in calculating the depreciation to be provided for such asset irrespective of the provisions in this ScheduleFor other Companies, the useful life of an asset shall not be longer than the useful life than that prescribed and the residual value shall not be higher than that prescribed in Part C
The new Act provides for the concept of componentization of assets. Where the cost of a part of the asset is significant to the total cost of the asset and the useful life of that part is different from the useful life of the remaining asset, useful life of that significant part shall be determined separately.
Differences between the 2013 and the 1956 Acts
The new Act has provisions related to depreciation contained in Schedule II whereas the old Act had Schedule XIV containing provisions for the same . Some of the differences between these two schedules regarding depreciation are stated hereunder:
Schedule II deals not only with depreciation of tangible assets but also amortization of intangible assets, whereas Schedule XIV dealt only with depreciation of Tangible assetsSchedule II contains depreciation provision based on useful lives of tangible assets and does not prescribe the rates for the same whereas Schedule XIV contained rates of tangible assets based on the cost and useful life of the depreciable asset.Schedule II under the new act has removed the provision for 100% depreciation on asset whose actual cost does not exceed Rs.5, 000/- while Schedule XIV under the old act provided for the same. This will result in small assets with negligible values appearing in the books of accounts adding to unnecessary small calculations and provisionsSchedule II provides for the concept of Extra Shift Depreciation (ESD) which is not applicable to items marked NESD in that schedule. ESD will apply to items of Plant/Machinery subject to a general rate which is useful life of 15 years. In Schedule XIV, ESD was not applicable to items marked NSED in that schedule and specified items of plant/machinery had general rate of depreciation in percentage. The new act has simplified the working of ESD by providing 50% more depreciation for that period for which the asset is used for double shift and 100% more depreciation for that period for which the asset is used for triple shift. Also Schedule XIV provided that ESD for double and triple shift was to be made separately proportionate to the number of days for which concern worked second shift or triple shift bears to normal number of working days in a yearThe useful lives specified in Schedule II of the new Act for various assets will result in their depreciation over a different period than currently applicable under Schedule XIV of the Act. If in an entity having Straight line method of depreciation under the Act, useful life has been reduced for the following:
i. General plant and machinery from 21 years to 15 years; ii. General furniture and fittings from 15 years to 10 years; iii. Computers from 6 years to 3 years; This change in the useful lives of the assets may result into companies charging much higher depreciation in the books of accounts as compared to earlier rates. As per schedule II of Companies Act, 2013, for prescribed class of companies, whose financial statements comply with Accounting Standards prescribed for such class of companies under section 133 of the Act, it can have different useful life and residual value other than indicated in Part C of Schedule II of the Act, on disclosure of justification for the same . For other companies the useful life of an asset cannot be longer than the useful life and the residual value cannot be higher than that prescribed in Part C of schedule-II of the Act. The new Act provides for the concept of componentization of assets. Where cost of a part of the asset is significant to total cost of the asset and useful life of that part is different from the useful life of the remaining asset, useful life of that significant part shall be determined separately.
Depreciation on Revalued Assets
As per Guidance note given by the Institute of Chartered Accountants of India (ICAI) on “Treatment of Reserve created on Revaluation of Fixed assets”, only depreciation pertaining to historical cost needs to be provided out of current profits of the company. The additional depreciation arising on account of upward revaluation of Fixed Assets is to be transferred from Revaluation Reserve to Profit & Loss account. But as per the Companies Act, 2013, the depreciable amount of an asset is the cost of an asset or other amount substituted for cost, less its residual value. Therefore, in case of revaluation, depreciation will be based on the Revalued amount. As a result, the Guidance Note may not apply and full depreciation on revalued amount is expected to be provided.
New Provisions on amortization of intangible assets
For intangible assets, the provisions of the accounting standards applicable for the time being in force shall apply, except in case of intangible assets (Toll Roads) created under ‘Build, Operate and Transfer’, or any other form of public private partnership route in case of road projects. In such cases, amortization shall be done in the prescribed manner: Rate of amortization = Amount of amortization/Cost of Intangible asset *100 Amount of amortization = Actual Revenue for the year /Projected Revenue from the intangible asset * Cost of the intangible asset The amortisation amount or rate should ensure that the whole of the cost of the intangible asset is amortised over the concession period.
Other considerations for depreciation in the Companies Act, 2013
The depreciation method applied by the company shall be disclosed in the accounts & useful lives of the assets for computing depreciation, if it is different from the life specified in the schedule. Also factory Buildings does not include offices, godowns, and staff quarters. During any financial year, in case of any addition made to any asset or sale, disposal demolition or destruction of any asset the depreciation on such assets shall be calculated on a pro rata basis from the date of such addition or, as the case may be, up to the date of such sale, disposal, demolition or destruction. Further while considering the useful life of the asset, the useful life specified in Part C of the Schedule is for whole of the asset and where cost of a part of the asset is only significant to total cost of the asset and useful life of that part is different from the useful life of the remaining asset, the useful life of that significant part shall be determined separately and proportionately
Transitional Provisions
From the date this Schedule comes into effect, the carrying amount of the asset as on that date—
(a) shall be depreciated over the remaining useful life of the asset as per this Schedule;(b) after retaining the residual value, shall be recognised in the opening balance of retained earnings where the remaining useful life of an asset is NIL.
Conclusion
The Companies Act 2013 has been implemented in India from the financial year 2014-15. This transitional stage for companies from the old Companies Act 1956 to the new Companies Act 2013 has posed many challenges. One of such challenges is posed by Schedule II of the Companies Act, 2013 which is based on the concept of ‘useful life’ for the purpose of computation of depreciation. The change in the method of providing depreciation from fixed percentage as per Schedule-XIV of Companies Act 1956 to useful life as per Schedule-II of Companies Act, 2013 requires changes in the accounting policy of the company. For change in the accounting policy, the provisions contained in Accounting Standards-5 “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies” as well as AS-6 “Depreciation Accounting” both are required to be taken into consideration. It is however observed that, the provisions contained in Schedule-II of Companies Act, 2013 and the provisions contained in AS-6 are violating each other. Earlier as per Companies Act, 1956, depreciation on fixed asset has been calculated as per the percentage provided in Schedule-XIV of Companies Act,1956 and as far as Accounting of depreciation is concerned the provision contained in Accounting Standards-6: “Depreciation Accounting” is required to be followed. Such questions and other challenges in the implementation of the new Act will be settled when the new accounting standards will be introduced in line with these new provisions.
