Reference sections: 123(2) and Schedule II
Schedule II to the Companies Act, 2013 requires depreciating the asset over its useful life unlike Schedule XIV of the Companies Act, 1956 which specifies minimum rates of depreciation to be provided by a company.
Normally, prescribed companies who have to follow the accounting standard prescribed under the new act should depreciate the asset over the useful life as prescribed under the act but there is no compulsion. They can use shorter life to depreciate the asset but the same should be disclosed along with the reason of using such shorter life period in “Notes to Account”. Other companies can also depreciate the asset over shorter useful life, but note that useful life cannot exceed the life as prescribed under the act.
Before starting the analysis, let’s go through the Schedule II of the act:
PART ‘A’
1. Depreciation is 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.
2. For the purpose of this Schedule, the term depreciation includes amortisation.
3. Without prejudice to the foregoing provisions of paragraph 1,—
i. In case of such class of companies, as may be prescribed and whose financial statements comply with the accounting standards prescribed for such class of companies under section 133 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, 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.
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.
iii. For intangible assets, the provisions of the Accounting Standards mentioned under sub-para (i) or (ii), as applicable, shall apply.
PART ‘B’
1. 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.
Notes
1. “Factory buildings” does not include offices, godowns, staff quarters.
2. Where, during any financial year, any addition has been made to any asset, or where any asset has been sold, discarded, demolished or destroyed, the depreciation on such assets shall be calculated on a pro rata basis from the date of such addition or, as the case may be, up to the date on which such asset has been sold, discarded, demolished or destroyed.
3. The following information shall also be disclosed in the accounts, namely:—
i. depreciation methods used; and
ii. the useful lives of the assets for computing depreciation, if they are different from the life specified in the Schedule.
4. 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.
5. 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.
6. The useful lives of assets working on shift basis have been specified in the Schedule based on their single shift working. Except for assets in respect of which no extra shift depreciation is permitted (indicated by NESD in Part C above), if an asset is used for any time during the year for double shift, the depreciation will increase by 50% for that period and in case of the triple shift the depreciation shall be calculated on the basis of 100% for that period.
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.
8. ‘‘Continuous process plant’’ means a plant which is required and designed to operate for twenty-four hours a day.
Analysis:
Firstly let us understand the concepts related to depreciation:
i. Useful Life: life over which asset can be used subject to maximum as specified in the act.
ii. Depreciable Amount: Cost of Asset – Residual Value
iii. Residual Value: Generally not more than 5% of original cost (Note 5 of Schedule II)
iv. Carrying Amount: Not defined in the act. AS-28 defines carrying amount as the amount at which an asset is recognised in the Balance Sheet after deducting any accumulated Depreciation (amortization) and accumulated impairment losses thereon”.
Issue: Problem which arises here is that note 7 of Schedule II of the act says the asset is to be depreciated over its carrying amount but AS-28 doesn’t give any reference of residual value. So, on which value the asset is to be depreciated – WDV or WDV less residual value??
Our Opinion: Many of the articles & notes we have gone through say carrying amount is WDV of the asset. Residual value is not to be considered again while calculating depreciation under the new act i.e. (SLM method):
| 1. | Original Cost | 100 |
| 2. | Original Useful Life (Co Act, 1956) | 20 years |
| 3. | Depreciation rate (Co Act, 1956) | 4.75 years |
| 4. | New Useful Life (Co Act, 2013) | 15 years |
| 5. | Expired Life | 10 years |
| 6. | Accumulated Depreciation | 47.50 |
| 7. | Carrying Amount (1-6) | 52.50 |
| 8. | Depreciation per year for next 5 years (52.50/5) | 10.50 |
But if we depreciate without taking into account residual value:
| 1. | Original Cost | 100 |
| 2. | Accumulated Depreciation under old act | 47.50 |
| 3. | Depreciation for the next 5 years (10.50*5) | 52.50 |
| 4. | Total Depreciation (3+4) | 100 |
| 5. | Residual Value (1-4) | 0 |
That means we are ignoring the residual value. At the end of the useful life, value in balance sheet will be zero which is against the basic concept of the act. Note 7(b) of the schedule says to retain the residual value and transfer the rest to retained earnings. So, the same concept must apply here. Therefore, it should be in this way:
| 1. | Original Cost | 100 |
| 2. | Original Useful Life (Co Act, 1956) | 20 years |
| 3. | Depreciation rate (Co Act, 1956) | 4.75 % |
| 4. | New Useful Life (Co Act, 2013) | 15 years |
| 5. | Expired Life | 10 years |
| 6. | Accumulated Depreciation | 47.50 |
| 7. | Carrying Amount (1-6 –Residual Value [5%]) | 47.50 |
| 8. | Depreciation per year for next 5 years (47.50/5) | 9.50 |
| 9. | Depreciation for the next 5 years (9.50*5) | 47.50 |
| 10. | Total Depreciation (6+9) | 95 |
| 11. | Residual Value (1-4) | 5 |
We welcome suggestions on this aspect, kindly mail your opinions/suggestions at the email id given at the end.
Calculating Depreciation under WDV method:
| 1. | Original Cost | 100 |
| 2. | Original Useful Life (Co Act, 1956) | 20 years |
| 3. | Depreciation rate (Co Act, 1956) | 13.91 % |
| 4. | New Useful Life (Co Act, 2013) | 15 years |
| 5. | Expired Life | 5 years |
| 6. | Remaining Useful Life (4-5) | 10 years |
| 7. | Accumulated Depreciation | 52.71 |
Depreciation will not be calculated over 15 years. It will be calculated over 5 years only.
Formula to calculate WDV rate:
We will like to discuss how to calculate such square root:
First divide 5,000/1,00,000 : 0.05
Press under root button 12 times
Subtract 1
Divide by factor, here 10
Add 1
Press (* =) 12 times
After these, amount 0.7412
Now, 1 – 0.7412 = .2588 i.e. 25.88 %
Here, Carrying Amount = 100 – 52.71 = 47.29
| Year | Closing Balance |
| 1 | 35.05 |
| 2 | 25.98 |
| 3 | 19.26 |
| 4 | 14.27 |
| 5 | 10.58 |
| 6 | 7.84 |
| 7 | 5.81 |
| 8 | 4.31 |
| 9 | 3.19 |
| 10 | 2.37 |
Though residual value is not 5% of the original cost, its 5% of carrying cost. This method can be applied. More appropriate method is welcomed.
Now, what if asset has served for than useful life as prescribed under Companies Act, 2013!!
If say, asset has served 15 years till now and Schedule II specifies useful life of 15 years only, then transfer the amount i.e. Carrying Amount – Residual Value (5% of original cost) to retained earnings (reserves) – Note 7b of the schedule.
The problem which will arise here is that companies will have to calculate depreciation of each asset differently according to its useful life.
Suggestions are welcomed. Also, kindly brief us if more appropriate method can be used.
(Author ‘Sagar Gupta’ is an innovative leader in delivering corporate advisory & solutions and can be reached at sgr@sgrgupta.com)
I Have prepared Fixed Asset Register from 01/04/2009 by taking
opening WDV as on 01/04/2009.Now How to deal with such opening WDV as
there is no record showing when this assets having opening WDV
purchased and its original cost.
There are several assets of Similar nature are grouped under this Opening WDV
eg. various assets grouped under Plant & Machinery.
Please Sir guide me in such situation as early as possible
for calculating rate of Depreciation as per WDV method what we should take eighter Orignal cost or WDV?
for calculating rate of Depreciation as per WDV method what we should take eighter Orignal cost or WDV
My query is if the useful life of the asset is nil and the carrying amount is less than the residual value,what should be the treatment in books?
For Example: 1. if WDV is 300 and residual value is 500 then how will it be treated?
2. if WDV is 800 and residual value is 500 then how will it be treated?
if useful life is less then use of life of asset and residual value of asset is less then 5% of original cost what will be the treatment.please answer as soon as possible.
Thanks for the article.
My query is how to proceed if company has not maintained fixed assets register till last year and all the similar assets are debited to single account head.
My Question is
How to treat the additional depreciation routed through Reseves which is not hit the P&L a/c. As per institute notification transitional items to be charged after tax.
How it will take in MAT & IT computation
Please Help
Dear Sir,
If residual value of 5% is to be maintained after useful life of asset.
does it mean that each asset procured till 31.3.2013 will have different depreciation rate due different life ?
There is an different rate when we use formula 1-√s/c^ 10 with log table!!??
whether to give retrospective effect for change in rate of depreciation under company act 2013 & if yes if any, what is treatment of short /excess depreciation .
I am following SLM method
Depreciation as per Schedule II of companies act 2013 shall be calculated from prospective basis and not from retrospective basis. Hence there will be a conflict with AS-6.
Article is fine.
I have one question , Company following SLM method of depreciation and depreciation is calculated at 100% of the asset.
Now we propose to retain residual value at 5% on cost of the asset and calcuated depreciation, is it necessary to recalculate deprecation retrospectively or not.
And other question is whether is it a discretion of the management to write off full cost without residual value, kindly clarify.
I wish to state that here the Author, has misunderstood the provision which states that Residual value generally not more than 5% of the original cost. The provision is not as explained that the asset should end up with 5% residual value. Instead, the intention of the act is, when depreciation is provided and the carrying balance of the asset is less than the 5% of its original cost, the entire balance should be written off in the books and the value of the individual item should be squared off or NIL. This situation will arise under WDV method during the end of the life term and under SLM if the depreciation on asset is provided on proportionate months of life during the last year of life provided.
Dear sir,
suppose we are charging depreciation earlier at WDV method as per companies Act.
Now from FY 14-15 if we change the method of charging Depreciation as per SLM useful life basis then whether we should calculate the amount from beginning as per SLM basis and then make a proper impact on Annual Accounts as per Accounting Standard???is it required???
What if comapnay calculate depreciation according to income tax act? IS there any change in rates of income tax due to change in comapnies act 2013?
Dear friends & seniors,
My query is how to proceed if company has not maintained fixed assets register till last year and all the similar assets are debited to single account head (Eg. all machinery related purchases are debited to plant & machinery account). but now for complying the companies act, 2013 we have to bifurcate all assets from such group to determine their remaining useful life.
what to do if it is not possible to separate any particular asset from group in books of accounts.???
please reply.
– See more at: https://taxguru.in/company-law/depreciation-companies-act-2013-practical-approach.html#sthash.ctEtrQaq.dpuf
The rate will be 20.12% as per calculation..
please go through it once..
you can also follow FV=PV(1+r)^n formulae to arrive that
if a company exist for 20 years, thn for how long we need to calculate the difference in wdv and new method of depreciation, as per companies Act 2013
Dear friends & seniors,
My query is how to proceed if company has not maintained fixed assets register till last year and all the similar assets are debited to single account head (Eg. all machinery related purchases are debited to plant & machinery account). but now for complying the companies act, 2013 we have to bifurcate all assets from such group to determine their remaining useful life.
what to do if it is not possible to separate any particular asset from group in books of accounts.???
please reply…
Dear Sir,
My Query is, if the carrying value of the asset if nil for the year ended 31/03/2014 (i.e., if the company has not retained residual value) but the life of the asset ends on 31/03/2020, whether residual value for F.Y 2014-15 is to be brought back? If Yes whether the entry would be
Accumulated Depreciation Dr
To General Reserve
Please answer my query as soon as possible.
Thank You.
rate comes arrount 20.11%…Plz check the calculation
Dear friends & seniors,
My query is how to proceed if company has not maintained fixed assets register till last year and all the similar assets are debited to single account head (Eg. all machinery related purchases are debited to plant & machinery account). but now for complying the companies act, 2013 we have to bifurcate all assets from such group to determine their remaining useful life.
what to do if it is not possible to separate any particular asset from group in books of accounts.???
please reply.
The rate comes to 20.12% . The calculation which u have made is not correct
please suggest me the calculation of tentative date of addition?
please suggest me how tentative date of addition is to be calculated?
HOW TO CALCULATE WDV RATE THE LAST STEP OF CALCULATION PRESS(*=) MEANS CAN YOU SUGGEST ME I CAN’T UNDERSTAND
Provide us the Depreciation working, practical notes
My Q is
How to treat sell of Assets from Block if such block is exits.Whether sell amount should be deducted or WDV of such assets….?????
pls rpl according to company act,2013.
Thanks
Where co. Is having useful life of its machine as 10 years n is continuing with same (of course with proper technical justification), will it continue to follow same rate or has to calculate new rate by dividing carrying value with residual life? Eg. I have used machine of rs. 100 for 2 years on double shift. Carrying amt. On 1.4.14 is 70. Shud I continue with charging SLM of 10% for single shift or need to divide carrying value into residual 8 years n show impact
impac divide carrying value of 70 into residual life of
Retained earning created as a result of change in useful life of the asset is to be adjusted to Reserve and Surplus. This reserve and surplus implies to General Reserve or Surplus??
As per schedule II of the new companies act, For calculating the rate under WDV method for assets already in existence as on 01.04.2014, residual value as 5% of original cost is to be considered. Excel formula for this can be :
1-(5% of Original cost/WDV as on 01.04.14)^(1/remaining useful life)
This will give WDV rate.
Try and suggest.
The problem which will arise here is that companies will have to calculate depreciation of each asset differently according to its useful life.
MY QUERY IS: THE WDV OF ASSET AS ON 31.3.2014 IS ZERO AND THE USEFUL LIFE IS ALSO EXPIRED BUT THE ASSET IS WITH THE COMPANY.SHOULD I RETAIN A RESIDUAL VALUE OF 5% OF THE ORIGINAL COST OF THE ASSET BY DEBITING FIXED ASSET A/C AND CREDITING RESERVES A/C. CAN SOMEONE CLARIFY
Kind attn. CA Kusum Khurana, the entry of depreciation presented in your comment on this topic on 01/31/2015 at 10:32 AM, shows that depreciation would hit the P & L a/c and fixed asset would get reduced in value. Now what about the application of rule 7(b) which says the depreciation to transfer in Reserves. How it could be transfer in reserves. Please clarify about the entry to be done.
Thanks in advance.
Sagar a very good analysis.But wouln’t it be appropriate for a Company to get the residual life of an an asset re-determined as on 01/04/2014? That I thing would be very proper. Otherwise, the entire article is very well presented except that few typographical errors, at few places.
Keep it up.
With regards
WHAT SHOULD BE THE TREATMENT OF LOW VALUE ITEMS OF AMOUNT LESS EQUAL TO RS 5000/-
whether they were fully depreciated as Guidance Note in this regard by the institute or
seprate treatment
Sir, Article is very useful. However I want to understand application of rule 7(b) in books of accounts through accounting entry. Suppose carrying amount is Rs. 500/- for any asset which has completed its useful life of 15 years and residual value is Rs. 200/-. Then we have to do the below mentioned entry in books of account.
Suggested Entry (1)
Profit & Loss Appropriation A/c Dr. Rs. 300/-
Fixed Asset Cr. Rs. 300/-
(According to above accounting entry, the retained earnings will be shown subtracted by Rs. 300/- and we will loose benefit of depreciation which should be available to company and it should not be intention of law of not to give deduction of asset which has been used for business).
Suggested Entry (2)
Depreciation Dr. Rs. 300/-
Asset Carrying Reserve Cr. Rs. 300/-
(According to above entry, we will have the benefit of depreciation and retained earnings will be shown by adding the amount of Rs. 300/- on this reserve. The asset will be shown for Rs. 500/- in the balance Sheet and simultaneously Asset carrying reserve will be shown in liability side of Balance Sheet to show true and fairness of fixed assets schedule so that user of balance sheet can know that value of assets has been shown over Rs. 300/- by the asset carrying reserve amount.)
Kindly express your useful opinion and advise and with suitable modification to above.
Thanks & regards
Sorry some typo error.
Here is the rectified one
Hi Sagar!! Thanks for a brilliant & useful article.
However, can you let me know if i have a Cost + Mark up Company , where my billing is based on Cost. And Depn forms part of it, then instead of taking the Carrying amt less Residual value to R&S of those assets, whose useful life is already exhausted as per Sch II , can the same be taken to P&L?
My concern is, if i take the amt in R&S then it will never form my cost & will not be billed, leading into loss of revenue to the company.
Please give me your view point on the same
Hi Sagar!! Thanks for the article.
However, can to let me know if i have a Cost + Mark up Company , where my billing is based on Cost & depn forms part of it, then instead of taking the Carrying amt less Residual value of those assets whose useful life is already exhausted as per Sch II to R&S , can the same be taken in P&L?
My concern is, if i take the amt in R&S then it will never form my cost & will not be billed, leading into loss to the me.
Please give me your view point on the same.
In my opinion, the financial statement would reflect a true and fair view, if the amount is depreciated after retaining 5% of the residual value on the original cost.
For calculating the residual value we hav to discover the cost of asset which might not be easy in so many cases. it wil be a good measure if we could take residual value on the carrying amount according to me.
why you taking net cost of assets is 100 for re calculation of dep rate
in my opinion we should take 47.29 then we find rate =20.12%
and residual value = 5
We have also said that “Carrying Amount less residual value” will be transferred to Reserves. Plz see.
For any query or suggestion, mail us at sgr@sgrgupta.com
If useful life of asset as mentioned in schedule II has been expired and then (cost- residual value) has been transferred to opening balance of retaining reserve.
What will be treatment of residual value if asset is still in use
Original cost has been excluded from the gross block in depreciation chart.
residual value – net carrying amount , where to be taken in balance sheet
Depreciation to be calculated as per new co’s act taking into consideration residual value not exceeding 5% and diference if any short or excess to be adjusted in current financial year so that at the end of the year the balance of asset should be reflected as per new act.
Also let us know in case Reserves and Surplus has a debit balance (carried forward losses), can the wdv of those assets whose useful life is exhausted as per the New Act be adjusted against these negative reserves?
ASHWIN GALA says: 01/27/2015 at 11:14 AM HOW RESIDUAL VALUE ( DEBIT BALANCE) CAN BE TRANSFERRED TO RESERVES (CREDIT BALANCE ) ? – See more at: https://taxguru.in/company-law/depreciation-companies-act-2013-practical-approach.html#comment-1506623
In this case you need to pass an entry of Reserve A/c Dr. and Asset Account Cr. ( with Original Cost minus Residual Value of that Asset). You must keep the Residual Value in books against that particular asset till the asset is sold / disposed off / discarded.
Definitions as per IAS 16 Property Plant & Equipment –
1. Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.
2. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
3. Carrying amount is the amount at which an asset is recognized after deducting any accumulated depreciation and accumulated impairment losses.
From above 3 definitions it is clear that Carrying Amount is arrived after considering the Accumulated Depreciation – Depreciation is calculated based on Depreciable Amount & useful life – and while calculating Depreciable Amount the Residual Value is to be considered.
“The problem which will arise here is that companies will have to calculate depreciation of each asset differently according to its useful life.” – Yes, the useful life of each asset may be different. This needs to be calculated based on the Asset Wise Fixed Asset Register.
Schedule II – Part ‘A’ – Point 1. specifies that ” Depreciation is 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.”
Accordingly in the change over phase the Company has a chance to use Other Amount Substituted for Cost – if the company choses to adopt Revaluation Model of PPE Accounting. Otherwise Cost Model may be used. IF Cost Model is used then in the year of change over, Carrying Amount Less Residual Value will be the Depreciable Amount of an asset and that Depreciable Amount is to be depreciated over the remaining useful life of that asset.
HOW RESIDUAL VALUE ( DEBIT BALANCE) CAN BE TRANSFERRED TO RESERVES (CREDIT BALANCE ) ?
For Calculating the rate under WDV method for assets already in existence on 01.04.2014, should we have to consider the Residual value as 5% of original cost or 5% of carrying value as suggested by many articles?
Also what if assets were capitalised at different dates during the earlier financial years?