Topics covered in this article
i) Comparison of depreciation as per Schedule II of CA, 2013 and Schedule XIV of CA, 1956
ii) Transitional effect of Schedule II
iii) Depreciation Rate year wise based on the useful life/balance useful life
Companies Act 2013 has brought a lot of challenges for all companies, more for the private companies. There are certain provisions of the Companies Act, 2013, which will affect all the companies right from day one i.e. 1st April, 2014.
One of them being adjustment to carrying amounts of certain fixed assets and calculation of depreciation thereon.
Depreciation under Companies Act, 2013 – Section 123, Section 198 and Schedule II
Schedule II of the Act has also come into force from 1st April 2014.
List of major changes as compared to Companies Act, 1956
1. Companies act 1956 does not deal with the amortization of intangible Assets but New Schedule by companies’ act 2014 provides the method to amortize them.
2. Instead of method and rates of Depreciation (whether WDV method or Straight line Method and Single shift or double shift or triple shift) new Act prescribed only assets’ useful life. – Refer Annexure I attached for rate and useful life as prescribed by Schedule II.
3. If a Company, being a class of company specifically prescribed by MCA, can adopt a different useful life longer than what is prescribed in Schedule II, however the same shall be disclosed, as Note on Accounts together with justification. For other companies, useful life cannot be longer than what is prescribed in Schedule II.
4. New act prescribed the residual value to be 5% of cost of asset, in older schedule there is no such prescription as but rates given by schedule are worked out by considering the 5% residual value.
5. New method for double shift and triple shift is prescribed under which addition depreciation of 50% or 100% will be allowed for double and triple shift respectively.
6. The concept of 100% depreciation of assets whose cost are less than Rs. 5000/- is deleted hence under new act it will be depreciated as per other normal provisions of schedule II.
7. Under act if any component of Asset have significant cost and has useful life other than the assets then is should be considered as separate asset for depreciation.
8. List of assets cover is more specific in new schedule.
Transitional effect of Schedule II
The most important and challenging aspect of Schedule II is the effect to be given in the books of account on the date of transition, i.e. 1st April, 2014. Reproduced below is Note 7 to Part C of Schedule II,
“7. 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 recognized in the opening balance of retained earnings where the remaining useful life of an asset is nil.”
There could be two possibilities regarding the assets as on 1st April, 2014 in context of the above note:
1. Asset’s remaining useful life as per Schedule II is nil:
In that case, as per Note 7(b), the carrying amount has to be adjusted in the opening balance of retained earnings in the balance sheet after retaining the residual value.
2. Asset’s remaining useful life is as per Schedule II is not nil:
If one reads Note 7, specifically clause (a), then one has to continue depreciating the balance as on 1st April, 2014 systematically over the remaining useful life after recalculating the rate of depreciation. In that case, no effect of restating the carrying amount will be needed to be given. Depreciation should be provided at a rate prescribed in Annexure II attached based on the remaining useful life of the asset.
(Author: CA Rajan Raichura, R. Raichura & Associates, Chartered Accountants)