Accounting Standard 6 (AS 6), issued by the Institute of Chartered Accountants of India (ICAI), governs the principles and methodologies for depreciation accounting in India. Though AS 6 has been withdrawn and subsumed into the broader framework of Ind AS (notably Ind AS 16 and Schedule II of the Companies Act, 2013), its historical relevance and the principles it introduced remain foundational to understanding depreciation practices in Indian accounting. This expert-level article delves into the objectives, scope, definitions, methods, disclosure requirements, and practical implications of AS 6.
Objectives of AS 6
The primary objective of AS 6 was to standardize the accounting treatment for depreciation to ensure consistency, comparability, and reliability in financial reporting.
The standard aimed to:
Define depreciation and its accounting treatment.
Prescribe appropriate methods for its calculation.
Establish principles for the recognition, measurement, and disclosure of depreciation.
Ensure that users of financial statements are informed about the depreciation policy adopted.
Scope of AS 6
AS 6 was applicable to all enterprises except:
Assets for which depreciation provisions were covered under another accounting standard.
Natural resources such as mineral rights, expenditure on exploration, extraction, etc.
AS 6 was mandatory for all entities to which the Companies Act, 1956 applied and was also followed by other business enterprises to ensure best practices.
Definitions
AS 6 defined depreciation as the measure of the wearing out, consumption, or other loss of value of a depreciable asset arising from use, effluxion of time, obsolescence through technology and market changes.
Depreciable Assets: These are assets which:
Are expected to be used during more than one accounting period;
Have a limited useful life;
Are held by an enterprise for use in the production or supply of goods and services, for rental to others, or for administrative purposes.
Key Principles of AS 6
Depreciation is a Charge, Not an Allocation
Depreciation should be charged against profits as a measure of consumption of economic benefits.
Basis for Depreciation
Historical cost or revalued amount of a depreciable asset forms the basis for computation.
Useful Life and Residual Value
Useful life is the period over which an asset is expected to be used. Residual value is the estimated value at the end of the useful life. These estimates are critical in determining the depreciation charge.
Depreciation Methods
Two primary methods were prescribed: a. Straight Line Method (SLM): Depreciation is charged equally over the useful life. b. Written Down Value Method (WDV): Depreciation is charged on the net book value of the asset each year.
Enterprises could use other methods if they provided a more appropriate representation, with full disclosure.
Revaluation of Assets
If an asset is revalued, depreciation should be calculated on the revalued amount. The increased charge should be adjusted from the revaluation reserve.
Change in Method of Depreciation
A change in method is treated as a change in accounting policy. Its effect must be quantified and disclosed in the financial statements.
Accounting Treatment
Depreciation is to be recognized as an expense in the profit and loss account.
The accumulated depreciation should be deducted from the gross value of assets in the balance sheet.
Disclosure Requirements Under AS 6
AS 6 required the following disclosures:
Historical cost or other amount substituted for historical cost of each class of depreciable asset.
Total depreciation for the period.
Accumulated depreciation.
Depreciation method(s) used.
Useful lives or depreciation rates used.
Any change in the method of depreciation and its effect.
Interaction with Other Standards
AS 10 (Accounting for Fixed Assets): AS 6 had to be read in conjunction with AS 10, which dealt with the acquisition and disposal of fixed assets.
AS 26 (Intangible Assets): AS 6 did not cover amortization of intangible assets, which was addressed in AS 26.
Illustrative Example
Assume an asset costing INR 10,00,000 with a useful life of 10 years and a residual value of INR 1,00,000.
Under SLM: Depreciation = (10,00,000 – 1,00,000) / 10 = INR 90,000 per annum
Under WDV at 20%: Year 1 depreciation = 20% of 10,00,000 = INR 2,00,000 Year 2 depreciation = 20% of 8,00,000 = INR 1,60,000, and so on.
Limitations and Criticisms of AS 6
Inflexibility: It lacked detailed guidance on complex assets or components.
Exclusion of Intangibles: Amortization of intangible assets was not addressed.
Lack of Uniformity: Allowed varied practices across industries.
Non-alignment with International Standards: AS 6 was not fully converged with IFRS, limiting comparability on a global level.
Key changes introduced under Ind AS:
Componentization: Assets must be broken into parts and depreciated separately if parts have different useful lives.
Fair Value Measurement: More emphasis on fair value in certain conditions.
Accounting Estimates: More stringent guidance on reviewing and adjusting useful lives, residual values, and depreciation methods.
Practical Implications and Legacy of AS 6
Despite its withdrawal, AS 6 shaped India’s accounting landscape for decades. Many small and medium enterprises (SMEs) and entities not covered under Ind AS still rely on AS 6 principles or their derivative practices under current rules.
Training and Education: AS 6 remains part of academic and professional training, forming the basis of understanding depreciation.
Judicial Precedents: Several tax and accounting litigations reference AS 6 principles.
Conclusion
Accounting Standard 6 was a pivotal development in the codification of accounting norms related to depreciation in India. While its direct application has ceased, the principles embedded in AS 6 continue to influence financial reporting, especially for enterprises outside the Ind AS regime. Understanding AS 6 is essential for accountants, auditors, financial analysts, and students to grasp the evolution of depreciation accounting and the rationale behind current standards. As Indian accounting standards move toward greater harmonization with global practices, the legacy of AS 6 serves as a testament to the foundational work done by ICAI in bringing uniformity, clarity, and rigor to the accounting of fixed assets.
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