Changes in Depreciation under Companies Act, 2013

Key Highlights of Schedule II of the Companies Act, 2013:

Useful Life:

Unlike the Companies Act, 1956, Useful life of the asset on the basis of Shift has been prescribed in place of rates of depreciation in the part C Schedule II of the companies Act 2013 as a base for computing depreciation.

Now the Question arises, what’s the meaning of Shift?

The Term Shift has not been specified in the Companies Act, 1956 or Companies Act, 2013, So it should be understood in Common Commercial Parlance. As Per Factories Act, 1948, the term shift means:

“Where Work of the same kind is carried out by two or more sets of workers, working during different periods of the day, each of such set is called group or relay and each of such period is   called a shift”

The basic meaning of extra shift is employment of a different set of worker for a period additional to normal working hours. The extra hour worked by the same set of workers is termed as overtime and not referred to as a shift, why because worker is same and he is continuing his work. However, Manifestation of extra shift can also be the situation where a significant number of extra hour are worked beyond the normal working hour in a day say four or more above a shift of eight hour.

Calculation of Shift has to be with reference to a working day and not with reference to the entire year.

How to calculate Extra Shift Depreciation?

The Calculation of the extra depreciation for double shift working and for triple shift working should be made separately in the proportion which the number of days for which the concern worked double shift or triple shift as the case may be, bears to the normal number of working days during the year.

• In the case of Seasonal Factory or concern, the number of days on which the factory or concern actually worked during the year or 180days, whichever is greater.

• In any other cases the number of days on which the factory or concern actually worked during the year or 240days, whichever is greater.

Extra Depreciation for double shift working should be the difference between the depreciation for double shift working and the depreciation for single shift working, adjusted in proportion which the number of days for which the concern worked double shift bears to the normal working days during the year. The extra shift depreciation so calculated has to be added to the depreciation for single shift working to arrive at the total depreciation for double shift working.

Formula for arriving the depreciation

Depreciation for Single Shift working + (Depreciation for Double/triple Shift working- Depreciation For single Shift Working)x(Number of days worked double or triple shift/normal working days during the year)

Component Accounting:

The Companies Act, 2013 has introduced the concept of Component accounting which was not the case of Companies Act 1956. To understand Component Accounting, we can take guidance from IND AS-16 which Provides as under:

Each Part of an item of an asset with a cost significant in relation to the total cost of the item shall be depreciated separately.

Where cost of the part 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 should be determined separately.

For Example:

X Ltd Purchased a Ship of Rs.30 Crore which Comprises Engine of Rs. 27Crore and Structure and others for Rs.3Crore.The residual value and useful life would be Rs. 7crore and Rs. 1crore respectively. The Useful Life of an asset is 30years.

Ship	Allocated Cost (Rs.)	Residual Value	Useful Life
Engine	27 Crore	7 Crore	10 Year
Others	3 Crore	1 Crore	20 Year

 As per Companies Act 1956

Annual Depreciation of the Ship=(22Crore/30)= 0.73Crore

As per Companies Act 2013

Ship	Depreciable Amount (Rs.)	Useful Life	Depreciation
Engine	27 Crore – 7 Crore= 20 Crore	10 year	2 Crore
Others	3 Crore- 1 Crore=2 Crore	20 Years	10 Lakh
	Total		2.10 Crore

 When at the end of respective useful lives of the component, the components will be replaced, the replacement cost should be capitalized and the existing carrying value, if any, should be decapitalised.

Thus, although the overall amount that will be charged to the statement of profit and loss will be same during the entire life of the ship, the annual charge to the statement of profit and loss will differ significantly.

Impact of Component Accounting on replacement of Component

Let us explain this with an example:

A Company has recently acquired a new factory for a cost of Rs.23Lakh with a residual value of Rs.3 Lakh. This factory has a flat roof, which need to be replacing every ten year at a cost of Rs.5 Lakh. The useful life of new factory would be 20 year.

Now Think, if we applies Companies Act 1956, the new factory will be considered as an one asset and depreciate the whole factory over its useful life of 20 year, charging Rs. 1 Lakh Per Annum

The Cost and accumulated depreciation of the old roof will be Rs.5 Lakh and Rs.2.5 Lakh respectively.  There will be a loss of Rs.2.5 Lakh which is to be recognized in the Income Statement.

However if we applies Companies Act 2013, The Factory roof will be treated it as a separate asset and the factory would be treated as another asset.

Now How Depreciation would be calculated?

Now you have to derecognize the cost of roof, so that it could be treated as an another asset i.e. Rs.23 Lakh (original value of an asset)-Rs.5Lakh (replacement cost of factory roof)= Rs.18 Lakh – Rs.3 Lakh(Residual Value)=Rs.15Lakh, The depreciation would be Rs.15 Lakh/20=Rs.75,000 Per annum. Plus depreciation of Factory roof is Rs.5Lkh/10= Rs.50000/- Per Annum. Hence total Depreciation Would be 1.25lakh Per annum.

The carrying amount of the old roof in year 10 will be Nil under the second approach. The cost and accumulated depreciation of Rs. 5lakh are written off, with no profit or loss on disposal arising.

The Second approach more accurately reflects the consumption of economic benefits of the factory with an even charge to the income statement over the 20years of the useful economic life of the factory.

Residual Value:

If residual value is considered as an insignificant, it is normally regarded as NIL. On the Contrary, if the residual value is likely to be significant, it is estimated at the time of acquisition/installation, or at the time of subsequent revaluation of an asset. One of the basis for determining the residual value would be realizable value of similar assets which have reached to end of their useful lives and have operated under conditions similar to those in which the asset will be used.

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.

Can it be possible to take different residual value and useful life as prescribed in companies act 2013

Basis	Regulated Entities	Such class of CompaniesAs may be prescribed and Whose financial statements comply with the accounting standards	For other companies
For	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 central government should be applied in calculating depreciation irrespective of the requirements of the schedule.	Useful life or residual value shall not be different as indicated in Part-C of schedule-II of Companies Act, 2013, otherwise disclose the justification for the same	Useful life shall not be longer and residual value shall not be higher than the prescribed in Part-C of schedule-II of Companies Act, 2013,
Explanation	Mandatory	Management can take differ useful life or residual value, the only thing is that give justification for the same.	Management can take only shorter useful life and lower residual value.

 Transitional Provisions

From the date schedule-II comes into effect, the carrying amount of the asset as on that date:

• Shall be depreciated over the remaining useful life of the asset as per schedule-II
• After retaining the residual value, shall be recognized in the opening balance of retained earning where the remaining useful life of an asset is Nil.

For Example

A Company acquired a building at accost of Rs. 10 Crore. The Company was depreciating the building according to schedule XIV SLM rate i.e. 1.63%. Now In August 2013 Schedule-II was introduced via the companies Act 2013 in which the useful life specified is 30 year.

If the building is acquired on 01/04/2000

Depreciation charges till FY 2012-13, depreciation on SLM Basis for 13 year

Rs 10Crore X1.63%X13 Year=Rs.21190000/-

Carrying Value=10 crore-2.11 Crore=7.88Crore approx.

Now the carrying value as on 01 April 2013 will be depreciated over the remaining useful life of the asset as per schedule II of the companies Act 2013. The remaining useful life is 17 year (30-13)

So annual depreciation to be charged to the profit and loss account from FY 2013-14 would be Rs7.88 crore/17= Rs.46.35 Lakh approx.

If the building is acquired on 01/04/1980            

The useful life of an asset as per new schedule has already expired if the building was acquired on 01 April 1980. In such case, the carrying value as on 01 April 2013 would be recognized in the opening balance of retained earnings.

Depreciation charged till FY 2012-13, depreciation on SLM basis for 33 year

Rs 10CroreX1.63%X33 Year=5.37Crore

Carrying Value as on 01 April 2013 was Rs 10 Crore-Rs 5.37Crore= Rs.4.62 Crore Would be recognized in the opening balance of retained earnings. Suppose there is an residual value of Rs. 10lkh, then only 4.52 crore will be adjusted through retained earnings and Rs. 10 Lakh will remain in the carrying amount of the asset.

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Author – CA. Himanshu Sharma

ACA, B.Com(H)

The Author is a member of ICAI.

He can be reached at cahimanshukhajuria@gmail.com