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.
Downloads
Annexure I –Depreciation Rate Chart as per Part “C” of Schedule II of The Companies Act 2013
Annexure II – Calculation of Depreciation for Fixed Assets Existing As On 01.04.2014
(Author: CA Rajan Raichura, R. Raichura & Associates, Chartered Accountants)
Author Bio
its very nice working and will be very useful to us
Thanks SIVARAMAN for proving very useful information
Are the new rates given in the annexure mentioned in the act..?? what is it reliability?
Also what is to be done for newly added asset in F.y 14-15?
this excel can not work when remaining life of assest in days
DEPRECIATION – an – Analysis
PART-A When is providing of Depreciation compulsory?
1-> The Depreciation is provided in CL-2013 in Sec- 123 + 198
The Depreciation is provided in CA 1956 Sec 205 + 349
These sections prescribe the situation and conditions where and when the Depreciation is to be provided.
CL-2013_Sec 123 begins: (1) No dividend shall be declared or paid by a company for any financial year except— (a) out of the profits of the company for that year arrived at after providing for depreciation.
[CA-1956_Sec 205. DIVIDEND TO BE PAID ONLY OUT OF PROFITS (1) No dividend shall be declared or paid by a company for any financial year except out of the profits of the company for that year arrived at after providing for depreciation]
CL-2013 Sec-198 (1) In computing the net profits of a company in any financial year for the purpose of section 197…. & 198 (4) In making the computation aforesaid, the following sums shall be deducted, namely:— (k) depreciation to the extent specified in section 123.
[CA-1956 349. DETERMINATION OF NET PROFITS: (1) In computing the net profits of a company in any financial year – (4) In making the computation aforesaid, the following sums shall be deducted : … (k) depreciation to the extent specified in section 350 ;]
So it is obviously clear that only when the company wants to declare a dividend {CL-2013 sec 123 [CA-1956 Sec 205]} the minimum “repeat” the minimum depreciation to be provided for.
Further 197 & 198 applies only for Public limited companies refer 197. (1) The total managerial remuneration payable by a public company. Section 198 refers to 197.
[CA-1956 198. OVERALL MAXIMUM MANAGERIAL REMUNERATION AND MANAGERIAL REMUNERATION IN CASE OFABSENCE OR INADEQUACY OF PROFITS (1) The total managerial remuneration payable by a public company or a private company which is a subsidiary of a public company,..].
In fact interestingly sec 197 of CL-2013 is silent on a subsidiary of a public limited company, whether the same is covered anywhere else has to be looked into.
Observation: Hence if the company is not a public company & paying managerial remuneration, or is not declaring any dividend the providing of Depreciation is not compulsory.
PART-B(i) rate of depreciation as per Sch-II:
True Sch-II of CL-2013 is different in prescribing the “Useful Life” against “rate of Depreciation” in CA-1956. In reality there is no big difference. Eg: the Computer [NESA] was allowed a rate of depreciation as 40%, when calculated for 6 years the “useful life” [as per Sech-II of CL-2013] the residual value become 5%.
PART-B(ii): what happens if the FA has “useful life” even after the period given in Sch-II
Please read Sch-II PART-A clause 3 (ii) In respect of other 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.
Also read Notes under the schedule as reproduced below to confirm that the assets should not be revalued if the useful life as per the schedule is completed when the sch comes in to force:
“QUOTE”
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 recognised in the opening balance of retained earnings where the remaining useful life of an asset is nil.
“UNQUOTE”
This means that if an asset has real life after the “useful life” as prescribed in the Sch-II, revaluation and related issued does not arise. If the company wants it may revalue but other related conditions will apply.
While on this a doubt may arise what is meant by “other companies”. The special cases are given in Paragraph 3 of Part-A of Sch-II which reads as:
“Without prejudice to the foregoing provisions of paragraph 1, — (i) In case of such class of companies, as may be prescribed … “
In such cases provided that if such a company uses a useful life or residual value which is different from the useful life or residual value indicated therein, it shall disclose the justification for the same.
But I am not sure whether as of now any such companies have prescribed.
PART-C: Why make Depreciation compulsory?
If depreciation is not accounted, which in reality a deferred expenditure on FA on which the benefits are got over the lifetime of the asset, the payment of dividend will tantamount to refund of capital. The Dividend can be paid only and only out of profits and not out of capital.
PART-D: Can a company provide for depreciation at higher rate?
In my opinion “S”. The rates prescribed are “minimum” to comply with certain situations.
Neither CL-2013 nor CA-1956 anywhere prohibited excess provision.
However the Income tax act restricts with a prescription of maximum. This is because the revenue the government will lose otherwise.
My Summary:
1-> Only if Dividend is distributed in case of all companies and for Public limited company which is paying Managerial Remuneration, shall have to provide deprecation as per CL-2013 Sch-II [CA-1956 Sch-XIV].
2-> The depreciation as per CL-2013 Sch-II [CA-1956 Sch-XIV] is minimum and a higher depreciation can be provided.
3-> “Useful Life” and residual value cannot be changed even though the asset may have a real life of more than useful life.
4-> There is a view that since AS-6 talks of depreciation the same shall apply. When the section itself does not apply the how AS-6 can have any applicability?
Some counters raised
My explanation
1. Sch-III has mentioned and hence Depreciaion as per sch-II must.
2. Sec 129 refers to sec 133 and Sch-III in which one of the items is Depreciation, even though 123 is not applicable, as sec 129, 133 and Sch-III are applicable Depreciation must be provided.
Ans to 1 & 2:
In a nutshell what the counters’ say is that sec 123 has no relevance at all and ab-initio is of NULL value.
Then why have such a section and provisions which has no relevance value?
The law makers could have had sec 129, 133 and Sch-III which as countered are compels providing depreciation, then 123 is automatically taken care of and hence 123 has not place in the CL-2013.
The very fact the section is there in CL-2013 and a corresponding provision in CA-1956, means that the sec is as much relevant as the other provisions of the respective Law.
3. If Depreciation is provided at higher rate the value will depreciated sooner that what is given in Sch-II.
There is no harm in providing higher depreciation as long as “Residual value” of 5% is maintained.
Sch-II PART-A clause 3 (ii) In respect of other companies the useful life of an asset shall not be longer than the useful life..
This does not prohibit a shorter useful life since only longer useful life is prohibited as Sch-II uses the term “shall not be longer”. It does not say shall not be shorter.
And again why Depreciation at all:
Please read PART-C on page 2 above.
FINALLY: Small companies need not brake their head in adopting two different depreciation rates, one under income tax and again under companies act, thus save time and energy in unnecessary duplication of work and create Deferred Tax to this extent in the books, as long as the total depreciation provided is higher as per income tax rates.