Amitesh Agarwal

Amitesh Agarwal1. What will be carrying cost and carrying life of the asset, if a company purchased it as second hand asset from another?

Reply:

a) Please note that carrying cost will be the historical cost or the amount substituted for the historical cost as per the books of account of the company. (i.e. in in simple words the cost to the company in purchasing such second hand machinery)

b) 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.

Part ‘C’ of Schedule II of the Companies Act, 2013 has prescribed useful life of various tangible assets. However, proviso to Clause (i) of Paragraph 3 of Part ‘A’ of the said schedule also provides freedom to the companies to adopt a useful life different from what is specified in Part ‘C’ with a condition that in such case the Financial Statements shall disclose such difference and provide justification in this behalf duly supported by technical advice.

Normally, the period of use by the previous owner should also be reckoned in determining the remaining useful life of the asset, but it is not the sole criteria. The ICAI, in its Application Guide on the Provisions of Schedule II, has stated that “determination of useful life is a matter of judgment and may be decided on a case to case basis. It is not merely an accounting exercise; rather, it involves technical expertise. Hence, the Companies will have to necessarily involve technical experts to determine the useful life of the asset.”

Therefore, the Company, if so desires, may take the help of technical experts in determining the useful life of the assets in the hands of the present owner.

2. Whether the Company needs to recalculate the Depreciation for the assets whose useful life has not been exhausted as on 31.3.2014?

Reply:

No. the provisions of Schedule II to Companies Act 2013 do not require to recalculate the Depreciation for past periods. The Schedule requires carrying amount (i.e. WDV) as on 31.3.2014 should be depreciated over the remaining useful life of the asset.

3. Is it mandatory to recognize the Carrying amount , after retaining the residual value, in the opening balance of the retained earnings in case of assets whose remaining useful life as on 31.3.2014 is already NIL?

Reply:

In case of assets whose useful life is NIL as on 31.3.2014, the Company has both options. After retaining the salvage value, the carrying amount as on 31.3.2014/01.04.2014 :-

(a) may be charged to Statement of Profit and Loss being depreciation for the transitional period, or

(b) may be recognized in the opening balance of retained earnings.

The ICAI, in its Application Guide on the Provisions of Schedule II, has stated that “if the Company opts to adjust the carrying amount of the assets to the retained earnings in accordance with the transitional provisions of the Schedule II, the tax effect of the same has to be also adjusted directly against the retained earnings in accordance with the ICAI announcement “Tax effect of expenses/income adjusted directly against the reserves and/ or Securities Premium Account.”

4. Enlighten Charging of Depreciation under Companies Act, 2013 in case of Revaluation of Assets.

Reply:

This has been very well explained by ICAI in its Application Guide on the provisions of Schedule II.

Which state as follows –

“Under the Companies Act, 1956 depreciation was to be provided on Original cost of the asset. However, Schedule II to Companies Act, 2013 requires depreciation to be provided on the historical cost or the amount substituted for the historical cost. Therefore, in case of revaluation, a company needs to charge depreciation on revalued amount. Consequently, the ICAI Guidance Note, which allows an amount equivalent to the additional depreciation on account of upward revaluation to be recouped from the revaluation reserve, may not apply. Accounting Standard-10 allows amount standing to the credit of revaluation reserve to be transferred directly to the general reserve on retirement or disposal of revalued asset. A company may transfer the whole of the reserve when the asset is sold or disposed of. However, some of the surplus may be transferred as the asset is used by a Company. In such a case, the amount of the surplus transferred would be the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on its original cost. Transfers from revaluation surplus to the general reserve are not made through the Statement of Profit and Loss.”

All said in simple terms Depreciation on revalued Assets can now be directly charges to Statement of Profit & Loss without having to recoup it from the revaluation reserve.

5. Whether component Accounting is mandatory for the Financial Year ended 31st March 2015?

Reply:

No. Your attention is invited to Notification dated 29th August 2014 of MCA whereby the requirement of Component Accounting is voluntary in respect of financial year commencing on or after 1st April 2014 and mandatory for financial statement in respect of financial year commencing on or after 1st April 2015.

6. If the Company was calculating Depreciation on WDV method upto 31st March 2014 under the provisions of Companies Act, 1956 and want to shift to SLM method w.e.f 1st April 2014 (or vice-versa)whether the same will be covered under the transitional provisions provided in Schedule II of the Companies Act 2013?

Reply:

No, such cases will not be covered by the transitional provisions of schedule II.

It will instead be considered as change of accounting policy as per Accounting Standard – 5 and relevant adjustments and disclosures thereon are required to be given in the Financial Statements of the Company.

7. Whether Salvage value can be more than 5%?

Reply:

As per clause (i) of paragraph 3 of part ‘A’ of Schedule II to Companies Act 2013, “the residual value of an asset shall not be more than five per cent of the original cost of the Asset”. However, the proviso to the said clause (i) also provides that where a Company adopts a useful life different from what is specified in Part C, or uses a residual value different from the limit specified therein, the Financial Statements shall disclose such difference and provide justification in this behalf duly supported by technical advice.

Therefore, if the Company so desires, it may have a salvage value more than 5% of the original cost but justification in the financial statement has to be disclosed duly supported by technical advice.

8. Whether useful life of an asset can differ from that prescribed in Schedule II?

Reply:

Yes, the useful life of an asset can differ from that prescribed in Schedule II but certain formalities have to be complied. -(Please refer reply 1(b) above for more details.)

9. How to provide Depreciation on Intangible Assets?

Reply:

Depreciation includes amortization. Provisions of accounting standards are applicable for amortization/ depreciation on Intangible assets.

10. What will be the rate of Depreciation under Schedule II in case of double/ triple shift working?

Reply:

Under Schedule II no separate rate or separate useful life are prescribed for extra shift workings. However for some of the items it specifically provides that no extra shift depreciation [N.S.E.D.] will be allowed for those assets. It is provided that for the period of the time an asset is used in double shift depreciation will increase by 50% and by 100% in case of triple shift workings.

11. Is there any change in the rate for depreciation under Income Tax due to change in the Companies Act, 2013?

Reply:

There is no change in the Computation of Depreciation for the purpose of Income Tax Rules. There is neither any change in the rate nor in the method of charging of Depreciation under Block of Method concept for the purpose of Income Tax. The Depreciation calculation under the Schedule II to the Companies Act, 2013 is not going to affect Depreciation as per Income Tax for the Assessment year 2015-16 in any manner.

12. What is the Formula to be used to calculate Rate of Depreciation to be used as per Companies Act 2013 in case of WDV method of depreciation is used ?

Reply:

a. In case of Assets having Remaining Useful Life as NIL

– Kindly refer reply 3 above.

b. In case of Assets other than that mentioned in serial 12(a) above:

Type I – Assets acquired on or before 31st March 2014 – (Existing Assets)

Rate =     (1- (sv/WDV)^(1/n)) X 100

Where

sv= Salvage Value of the Asset at the end of useful life of asset

WDV = WDV of Asset as on 31.03.2014

n= Remaining useful life of the Asset (in years)

Type II – Assets acquired on or after 01st April 2014 – (NEW ASSETS)

Rate =     (1- (sv/cost)^(1/N)) X 100

 Where

sv= Salvage Value of the Asset at the end of useful life of asset

Cost = Cost of the Asset

N= Useful life of the Asset (in years)

13. What is the Formula to be used to calculate Annual Amount of Depreciation to be charged as per Companies Act 2013 in case of SLM method of depreciation is used ?

Reply:

a. In case of Assets having Remaining Useful Life as NIL

– Kindly refer reply 3 above.

b. In case of Assets other than that mentioned in serial 13(a) above:

Type I – Assets acquired on or before 31st March 2014 – (Existing Assets)

Annual Depreciation Amount = (Cost- sv)/n

 Where

sv= Salvage Value of the Asset at the end of useful life of asset

Cost = Cost of the Asset

n= Remaining useful life of the Asset (in years)

Type II – Assets acquired on or after 01st April 2014 – (NEW ASSETS)

Annual Depreciation Amount = (Cost- sv)/N

Where

sv= Salvage Value of the Asset at the end of useful life of asset

Cost = Cost of the Asset

N= Useful life of the Asset (in years)

14. Whether Depreciation as per Sch II to the Companies Act 2013 has to be provided on Block of Assets Concept basis or on Individual Assets ?

Reply:

Depreciation has to be provided on individual Assets as per their useful/remaining useful life and not on Block of Assets Concept.

As per the ICAI Application Guide on Depreciation, “ upon transition to Schedule II, the company may have different rates of depreciation for individual assets within the same class in case of existing assets as there will be a different remaining useful life for each asset.”

15. Whether there is any Calculator/ Utility for Calculating Depreciation as per Companies Act 2013- Sch II?

Reply:

For ease of calculating Depreciation as per Companies Act 2013- Sch II (taking into consideration most of the above notes), I recommend you to kindly download this excellent utility which I came across the site of Tax Guru. It is an Excellent and User Friendly Utility in Excel for which I thank Tax Guru for making it available to the ultimate users. The said utility may take some time to download, but it is worth the wait, since the utility comprises of multiple user friends modules,

You can download the same from the below mentioned link:-

https://taxguru.in/company-law/depreciation-calculator-facility-find-tentative-date-addition.html

(Author can be reached at Email: meetamitesh@gmail.com; 8981272847)

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One response to “Depreciation Under Schedule II of Companies Act, 2013: FAQs”

  1. Madhav CH says:

    I provided depreciation using component approach for the financial year 2015-16. Is it necessary to disclose in the annual reports about each component or can i disclose depreciation for entire asset?
    Neither Schedule II or III, AS-6 or AS-10 is asking for separate disclosure component wise.

  2. Aryan Goel says:

    Dear Sir/Madam
    My Question is if an asset having useful life of 5 years has been used for 4.73 years till 31.03.2014.Is it necessary to calculate depreciation on remaining 0.27 years as asset was used for full year in FY 2014-15.Is it mandatory to retain salvage value of such asset whose useful life ends during the FY 2014-15.

    Copyright © TaxGuru 2015. All Rights Reserved.About Us – Advertise – Privacy Policy – Terms & Disclaimer – Job at Taxguru – See more at: https://taxguru.in/company-law/depreciation-schedule-ii-companies-act-2013-faq.html#sthash.i76A9cqh.dpuf

  3. Aryan Goel says:

    Dear Sir/Madam
    My Question is if an asset having useful life of 5 years has been used for 4.73 years till 31.03.2014.Is it necessary to calculate depreciation on remaining 0.27 years as asset was used for full year in FY 2014-15.Is it mandatory to retain salvage value of such asset whose useful life ends during the FY 2014-15.

  4. Dushyant Maharishi says:

    As regards the treatment is given in option in guidance note for charging the carrying amt to either retained earning or statement of profit and loss a/c. My question is what about the residual value whether it should be retained or not, since as per Sch.II the wording refers after retaining the residual value, it can be charged to retained earning. Where we should retain the residual value?

  5. Krishna says:

    Is the depreciation rates in new companies act are compulsary to be applied in current year i.e. FY 2014-15?
    or we can use old rates for CY?
    If any notification is there please provide link.

  6. Yashca says:

    Hi Sir

    Please guide me with the journal entries for the adjustment of the after tax net WDV of the asset with NIL useful life remaining from the opening Retained earnings

    Thanks in advance

  7. Rajesh selot says:

    My question is while calculating THE DEPRICIATION FOR F.Y. 2014-15 when we calculate life completed as on first day of F.Y. 2014-15 so what we have to take year end 31/03/2014 or 31/03/2015 for new assests purchased during the year for calculating life completed as on 01/04/2014.???

  8. Amitesh Agarwal says:

    Dear Mr Shubham

    As far as your query is concerned, till date, the Govt has not yet notified/ classified/defined any individual/persons/entity who can be termed or referred to as “Technical Expert” in relation to the said reference being drawn for Sch II of Companies Act 2013.
    The act/Rules/Notification is silent as such they can be External or even internal experts (i.e. employed in organisation). Therefore even the engineer of the company/mechanic can be termed as experts if they have proper knowledge of the functioning/working of the assets whose useful life is to be determined.

  9. Shubham Agrawal says:

    Dear Sir/Ma’am,
    The Guidance Note of ICAI on Schedule II says that if a company wants to use a useful life different from that given in the schedule, it would necessarily involve technical experts to determine the useful life of the asset. I would like to know who can be defined as a technical expert in this regard as one of my clients want to do so.

  10. Amitesh Agarwal says:

    Dear Mr Om

    AS regards your query is concerned ,as per my calculation on the basis of data given by you, the purchase date will be 08th july 2005 (trial and error), and the remaining life will be 1.27 years( not 0.43 years as mentioned by you) and correspondingly the life used will be 8.73 years (not 9.67 years as mentioned by you). Accordingly the rate of depreciation for Fin Year 2014-15 will be 26.3863% i.e Depn = Rs 860.
    Subsequently for Fin Year 2015-16 (remaining life being 0.27 years) the depreciation amount will be Rs 190 @ 7.92 %, since the life of asset will end on 07.07.2015 and WDV will be Rs 2909 i.e equal to salvage value.

    The rate of depreciation for the fraction year is different since the formula is an exponential one and thus you are to use daily rate of depreciation if you need proof thereof , which in this case will be 0.0840% Rate of WDV on a daily depreciation wise basis.
    In case you have any other query you can also contact me on 8981272847 or meetamitesh@gmail.com

    Thanks & Regards
    Amitesh

  11. Amitesh Agarwal says:

    Technical Advise can be taken from either be Internal or External Sources- but it needs to be supported by a report and relevant documents.

    As on date nothing has been prescribed in the Act/Rules or Schedule II as regards qualification of “Technical Expert”.

  12. whatever says:

    “technical advice” whether internal / external ?

  13. Om says:

    VEHICLE-BIKE
    Purchase price – 44,171
    Depreciation upto 31.3.14 – 40,912
    WDV as on 1.4.14 – 3,259
    Lfe as per Cos Act, 2013 – 10 years
    Used life – 9.57 years
    remaining Life – 0.43 years
    Salvage value – 2,209 (44,171 * 5%)

    Ques – What will be the rate of depreciation & how much will be the depreciation as per cos act, 2013 & what will be the treatment of Salvage value ?

  14. amitesh says:

    Dear Mr Dixit,

    No where is antlything mentioned regarding rounding off the remaining useful life of the asset

    It is suggested one should avoid the rounding off the remaining useful life.

    In case you are facing any trouble as regards the useful life of the asset and the subsequent year depreciation kindly download the depreciation calculator provided in the link above.

  15. amitesh says:

    It is suggested that you should take the help of the expert in determining the remaining useful life of the asset and apply depreciation accordingly ,as stated in my article at serial no 1. further you are also give a disclosure to that effect in the financial statements.

  16. Pratik Dixit says:

    Dear Sir,

    Will You Please Explain whether rounding of remaining useful life is allowed or not ??

  17. Deepak says:

    Dear Sir/madam
    My Question is we purchased Old Printing machinery as on 04/04/2014 from UK which is used 25 years with cost of Rs 1.5 Crores . now question is the what is the usefull life of asset it is Nil ? or as per your advice we recalculate the life of asset with the help of Expert (Machine Techanician )

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