Depreciation As Per Schedule II of Companies Act 2013

♠ Schedule II to the Companies Act, 2013 requires depreciating the 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.

♠  New schedule by companies’ act 2014 provides the method to amortize intangible assets which is as per the provisions of AS-26.

♠  Instead of method and rates of depreciation, new Act prescribed only assets’ useful life. The difference between WDV and SLM will be removed. The useful life shall not be longer than the Specified life of the Asset as given in Part C of the Act and the residual value shall not exceed 5% of the cost of the asset. 95% of the original cost of asset only has to be depreciated.

♠  In case of Plant & Machinery, shift based depreciation needs to be calculated as under:

1. For Single shift: Useful life mentioned under Companies Act 2013
2. For double shift: depreciation to be increased by 50% [i.e. 50% of depreciation amount calculated under point (a)]
3. For triple shift: depreciation to be increased by 100% [i.e. 100% of depreciation amount calculated under point (a)]

♠ New act prescribes depreciation of assets whose cost is less than Rs. 5,000/- as per normal provisions of schedule II.

♠ 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. As Per Schedule II of the Companies Act Component Approach as Defined in Ind AS 16 becomes Mandatory.

♠ If 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.

♠ 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.

Note 7 to Part C of Schedule II prescribes the transitional effect as follows:-

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.”

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 as under based on the remaining useful life of the Asset.

CALCULATION OF DEPRECIATION:-

Rate of Depreciation under WDV Method:

R= (1 –(s/c) ^(1/n)) x 100

Where R = Rate of Depreciation (in %),

n = Useful life of the asset (in years)

s = Scrap value at the end of useful life of the asset (i.e. max 5% of cost)

c= Cost of the asset

Let’s take an Example to understand note 7(a):-

Asset: Plant & Machinery

Original Cost: Rs. 1,00,000

Useful Life and rate of Depreciation as per Old Provisions:   20 years & 13.91%

Useful Life and rate of Depreciation as per New Provisions: 15 Years & 18.10%

Expired Life: 5 years

Accumulated Depreciation for 5 years: 52,711/-

Now the Carrying Amount as on 01.04.2014 will be 47,289/- (1,00,000-52,711)

Remaining Useful life as on 01.04.2014 as per new provisions 10 years (15 years – Expired Life)

Rate of Depreciation on the basis of remaining useful life i.e.10 years is 25.89%

Let’s take another Example to understand note 7(b):-

Asset: Plant & Machinery

Original Cost: Rs.1,00,000

Useful Life and rate of Depreciation as per Old Provisions: 20 years & 13.91%

Useful Life and rate of Depreciation as per New Provisions: 15 Years & 18.10%

Expired Life: 16 years

Accumulated Depreciation for 16 years: 90,896/-

Now the Carrying Amount as on 01.04.2014 will be 9,104/- (1,00,000-90,896)

Remaining useful life as on 01.04.2014 as per new provisions is nil (15 years – Expired Life)

In such a case Note 7(b) comes into picture and the entry on 01.04.2014 would be

Retained Earnings Dr   4,104

To Plant & Machinery 4,104

(Being shortfall in the depreciation consequent upon change in the useful life of asset provided for after retaining residual value of 5% charged against opening balance of retained earnings)

Residual value should not be more than 5% of cost of asset i.e. Rs. 5,000 and accordingly the amount to be adjusted shall be Rs. 4,104 (9,104-5,000).

Rate of depreciation as per two methods can be calculated as follows:-

USEFUL LIFE OF VARIOUS ASSETS AS PRESCRIBED IN SEC 123 READ WITH SCHEDULE II – PART C   OF COMPANIES ACT, 2013 CAN BE CHECKED AT FOLLOWING LINK :-

Depreciation Rate Chart as per Companies Act 2013 with Related Law