Section 123 of the Companies Act, 2013, states that depreciation shall be charged as per manner prescribed in Schedule-II.
Analysis of Schedule-II of the Companies Act, 2013:-Schedule-II is categorized in three parts i.e. Part A, B & C.
Part A described depreciation as “the 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.”
The useful life of an asset 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.
Useful life of tangible assets has bifurcated in two class of companies:-
- This includes those companies as may be prescribed and whose financial statements comply with the accounting standards prescribed for such class of companies under section 133. For such kind of companies, the useful life of an asset shall not normally be different from the useful life and the residual value shall not be different from that as indicated in Part C. However, such company may uses a useful life or residual value which is different from the useful life or residual value indicated therein, provided that it shall disclose the justification for the same.
- This includes the all companies other than above, In respect of these companies the useful life of an asset shall not be longer than the useful life and the residual value shall not be higher than that prescribed in Part C. In simple words such kind of companies are not permitted to take useful life and residual value higher than prescribed in Part-C.
For amortization of intangible assets, the provisions of Accounting Standard has to be followed.
Part B states that the useful life or residual value of any specific 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 requirements of this Schedule. In simple words, where books of accounts of any company governs by Regulatory Authority constituted under an Act of Parliament or by the Central Government then useful life or residual value of tangible assets provide therein shall prevail over this schedule.
Part C prescribed the useful life for different kind of tangible assets.
Generally, residual value of an asset is not more than 5% of its value.
Application of Schedule-II:-
Step-I:- Find out the useful life of all tangible assets existing as on 31.03.2014.
Step-II:-Calculate the used life (as on 31.03.2014) of all tangible assets existing as on 31.03.2014. (Used life is the period from date of purchase to 31.03.2014)
Step-III:-Now calculate the remaining useful life (as on 31.03.2014) of tangible assets by subtracting step-II from Step-I.
Step-IV:-Now carrying value of tangible assets as on 31.03.2014 shall be depreciated over remaining useful life.
Example:-Furniture was purchased of Rs. 5,00,000 as on 01.10.2012. Rate of depreciation as per schedule-XIV of Companies Act, 1956, is 6.33% p.a. and carrying value as on 31.03.2014 is Rs. 4,52,568/- (500000-15782-31650).
Step-I: Useful life of furniture as per schedule-II of Companies Act, 2013 is 10 year.
Step-II: Used life of furniture as on 31.03.2014 is 548 days i.e. 1.5014 years.
Step-III: Remaining useful life is 8.4986 year (10-1.5014).
Step-IV: Depreciation for the F.Y. 2014-15 is Rs. 53,252 (Rs. 4,52,568/8.4986 year)
Different useful life for different components of a main asset: Useful life specified in Part C of the Schedule is for whole of the asset. 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. However, the word significant has not been defined in the schedule.
Depreciable Amount: Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. Ordinarily, the residual value of an asset is often insignificant but it should generally be not more than 5% of the original cost of the asset.
Note-7 of Schedule-II: Note-7 states that where any tangible asset is having carrying value as on 01.04.2014 and:-
a). remaining useful life of that asset is nil on that date then after retaining residual value, the remaining carrying value shall be charged to opening balance of retained earnings.
Example: lets us assume furniture having carrying value of Rs. 45,700/- as on 01.04.2014 but having remaining useful life as on that date is Nil, in such case after retaining 5% as residual value the balance shall be charged to opening balance of retained earnings.
b). remaining useful life of that asset is more than nil then the carrying value of that asset shall be depreciated over remaining useful life as per this schedule.
Contradiction between AS-6 and Schedule-II:
Provisions of AS-6- This AS governs accounting for depreciation. AS-6 states that when method of depreciation is to be changed then retrospective calculation of depreciation is required to be carried out and if there is any deficit or surplus then same is to be charged to statement of profit & loss.
Provisions of Schedule-II- Note-7 of this schedule stats that where an asset having some carrying value in the books of account on the date of implementation of this schedule with the nil useful life then after retaining prescribed residual value entire carrying value must be charged to opening balance of retained earnings. Where asset is having some useful life as on implementation date then entire carrying value shall be depreciated over remaining useful life of asset.
Schedule-II of companies act does not require any retrospective adjustment of depreciation. Whereas AS-6 envisaged the retrospective adjustment of depreciation. Schedule-II envisaged the adjustment to opening balance of retained earnings where remaining useful life of asset is nil. Whereas AS-6 required such adjustment to current year profit & Loss account.
Prevailing Provision:-As per preface of Accounting Standard issued by ICAI, if any requirement/provision of AS is not in conformity with the law, then the provision of relevant law shall be prevailed over such AS.
Therefore, provision of Schedule-II shall prevail over the requirement of AS-6.
Impact on MAT liability u/s 115JB of Income Tax Act, 1961:-Where, remaining useful life of any asset is nil and having carrying value in the books of accounts then entire carrying value shall be charged to opening balance of retained earnings. In such case, this kind of charged depreciation shall not be considered (for the purpose of reduction from Net profit to Profit & Loss a/c) while computing MAT liability as per the relevant provisions. Hence, there shall be more Tax liability under the concept of MAT.
(Author can be contacted at M- 08287392720 or on Email: email@example.com)