GN (A) 35-  Guidance Note on Accounting for Depreciation in companies in the context of Schedule II to the Companies Act, 2013

Background

1. Schedule II to the Companies Act, 2013, specifies useful lives for the purpose of computation of depreciation. The said Schedule II was further amended by the Ministry of Corporate Affairs (MCA) through its notifications G.S.R. 237(E) dated March 31, 2014 and G.S.R. 627(E) dated August 29, 2014, respectively. As compared to Schedule XIV to the Companies Act, 1956, Schedule II, instead of specifying rates of depreciation for various assets, specifies that depreciation should be provided on the basis of useful life of an asset. While Schedule XIV was prescriptive in nature as it specified the minimum rate of depreciation, Schedule II provides indicative useful lives for various As a consequence, the companies are in a position to charge depreciation based on the useful life of an asset supported by technical advice, even though such lives are higher or lower than those specified in the said schedule. In view of this, depreciation charged as per the useful life is true commercial depreciation bringing the financial statements prepared accordingly closer to those prepared in accordance with international standards.

2. In this Guidance Note wherever the term ‘Schedule II’ is used it refers to Schedule II to the Companies Act, 2013, and wherever term ‘Schedule XIV’ is used it refers to Schedule XIV to the Companies Act, 1956, unless specified otherwise.

3. Overview of some of the key changes in Schedule II as compared to Schedule XIV are as follows:

  • Useful life is the period over which an asset is expected to be available for use by an entity, or the number of production or similar units expected to be obtained from the asset by the entity. Schedule XIV did not include such requirement.
  • Schedule II prescribes indicative useful lives of various assets instead of Straight Line Method (SLM)/ Written Down Value (WDV) rates for calculating depreciation
  • Depreciation is systematic allocation of the depreciable amount of an asset over its useful life.
  • The depreciable amount of an asset is the cost of an asset or other amount substituted for cost, less its residual value
  • Companies are allowed to follow different useful life/residual value if an appropriate justification is given supported by technical advice.
  • Useful lives of significant parts of an asset to be determined separately
  • No separate rate for double/ triple shift; depreciation to be increased based on the double shift/triple shift use of the assets
  • Useful lives of fixed assets prescribed under schedule II to the Act are different from those envisaged under Schedule XIV.
  • No reference to depreciation on low value assets.

Objective

4. This Guidance Note is issued with the objective to provide guidance on certain significant issues that may arise from the practical application of Schedule II with a view to establish consistent practice with regard to the accounting for depreciation.

Scope

5. This Guidance Note includes relevant provisions of Schedule II and provides guidance on implementing the requirements of Schedule II.

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