Jeetendra Goyal

The useful life of an asset shall not be longer than the useful life specified in Part ‘C’ and the residual value of an asset shall not be more than five percent of the original cost of the asset.

Provided that where a company uses a useful life or residual value of the asset which is different from the above limits, justification for the difference shall be disclosed in its financial statements.

The below example is for calculation of depreciation on assets purchased during the year (i.e. Purchased in FY 2014-15)

Purchase cost (Rs.)      5,00,000

Residual Value (Rs.)      25,000

Estimated useful life of asset (in years)  6

Date of Purchase          01-Oct-14

Assuming the Method of Depreciation is WDV.

Year Particulars Amount (in Rs.)
1 Date of addition – 1/10/2014            5,00,000
Less :Depreciation Year 1            1,05,980
  Carrying Value at end of Year 1          3,94,020
2 Less :Depreciation Year 2            1,67,032
  Carrying Value at end of Year 2          2,26,988
3 Less :Depreciation Year 3              96,224
  Carrying Value at end of Year 3          1,30,764
4 Less :Depreciation Year 4              55,433
  Carrying Value at end of Year 4              75,331
5 Less :Depreciation Year 5              31,934
  Carrying Value at end of Year 5              43,397
6 Less :Depreciation Year 6              18,397
Carrying Value at end of Year 6              25,000

Transitional provisions

With regard to the impact arising on the first time application, the transitional provisions to Schedule II state as below:

From the date Schedule II comes into effect, the carrying mount of the asset as on that date:

a) Will be depreciated over the remaining useful life of the asset as per this Schedule

The below example is for depreciation on opening assets (i.e. assets as on 1st April,2014) and method of depreciation used by Company is SLM:

Original useful life of the asset is 7 years, revised useful life is 5 years, expired life of the asset is 2 years.

As per clause 7(a), the carrying value of the asset shall be depreciated over remaining useful life, i.e 5-2= 3 years.

Therefore, in the calculation of Depreciation under Schdule II, we have considered the rate of depreciation for 3 years.”

Date of Purchase          01-Apr-12

Current Date      01-Apr-14

Purchase Cost (Rs.)      5,00,000

Residual value (Rs.)       25,000

Estimated useful life – Sch XIV (in years)            7

Estimated useful life – Sch II (in years)    5

Asset already used for (in years)            2

Remaining useful life of the asset (in years)        3

Method used     SLM

Rate of Depreciation – Sch XIV – useful life of 5 years     13.91%

“Rate of Depreciation – Sch II – for remaining useful life of 3 years

 Depreciation for 2 years under SLM @13.91%

Cost     5,00,000

Less : Depreciation Year 1 (31/03/2013)  69,550

Carrying value end of Year 1      4,30,450

Less : Depreciation Year 2 (31/03/2014)  69,550

Carrying value end of Year 2      3,60,900

As per Revised Rates under Sch II @ 31.67% – Rate for 3 years

Carrying Value at the beginning of Year 3           3,60,900

Less : Depre Year 3 (starting 01/04/2014)            1,14,285

Carrying Value at the beginning of Year 4           2,46,615

Less : Depreciation Year 4         1,14,285

Carrying Value at the beginning of Year 5           1,32,330

Less : Depreciation Year 5  –       1,14,285

Carrying Value at end of Year 5  – 18,045

Check for Carrying Value at the year of Year 5 –    18,045

The below example is for depreciation on opening assets and method of depreciation used by Company is WDV:

Original useful life of the asset is 7 years, revised useful life is 5 years, expired life of the asset is 2 years.

As per clause 7(a), the carrying value of the asset shall be depreciated over remaining useful life, i.e. 5-2= 3 years.

Therefore, in the calculation of Depreciation under Schdule II, we have considered the rate of depreciation for 3 years.”

Date of Purchase          01-Apr-12

Current Date      01-Apr-14

Purchase Cost (Rs.)      5,00,000

Residual value (Rs.)       25,000

Estimated useful life – Sch XIV (in years)            7

Estimated useful life – Sch II (in years)    5

Asset already used for (in years)            2

Remaining useful life of the asset (in years)        3

Method used     WDV

Rate of Depreciation – Sch XIV – useful life of 5 years     4.75%

“Rate of Depreciation – Sch II – for remaining useful life of 3 years

Depreciation for 2 years under WDV @ 4.75%

Cost     5,00,000

Less : Depreciation Year 1 (31/03/2013)  23,750

Carrying value end of Year 1      4,76,250

Less : Depreciation Year 2 (31/03/2014)  22,622

Carrying value end of Year 2      4,53,628

As per Revised Rates under Sch II @ 63.16% – Rate for 3 years

Carrying Value at the beginning of Year 3           4,53,628

Less : Depre Year 3 (starting 01/04/2014)            2,86,510

Carrying Value at the beginning of Year 4           1,67,118

Less : Depreciation Year 4         1,05,551

Carrying Value at the beginning of Year 5           61,567

Less : Depreciation Year 5         38,885

Carrying Value at end of Year 5  22,681

Check for Carrying Value at the year of Year 5    22,681

b) After retaining the residual value, will be recognised in the opening balance of retained earnings where the remaining useful life of an asset is nil.

The below example is if remaining useful life of opening assets as per Schedule II is nil.

Purchase Cost  5000

Residual value   250

Estimated useful life – Sch XIV (in years)            7

Estimated useful life – Sch II (in years)    5

Asset already used for (in years)            6

Method used     WDV

Rate of Depreciation – Sch XIV  4.75%

“Rate of Depreciation – Sch II – for remaining useful life of 5 years

Carrying value of asset after 6 years      3,734

Residual value   250

Difference to be recognised in Opening Retained Earnings or in P&L       3,484

(Author can be reached at jeet.k.goyal@gmail.com)

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Tags : Companies Act (2167) Companies Act 2013 (1940)

0 responses to “Practical application of depreciation under Companies Act, 2013”

  1. kishor kumar soni says:

    Dear sir,
    Your information is very useful.
    Thanks

  2. Puttaraju S says:

    Hi please tell me how Rs. 105980/- was calculated as depreciation for 1st year in example 1. and from Yr-2 onwards, how was depreciation calculated??

  3. Raghu says:

    and one more is that i am in rented building and incurred lot of money for interior designs and wash works. what about the depreciation rate for that interior designs..in which way i have to calculate like pop works.
    and how can i calculate that fromula.please guide me..
    thanks in advance

  4. Raghu says:

    and one more is that i am in rented building and incurred lot of money for interior designs and wash works. what about the depreciation rate for that interior designs..in which way i have to calculate like pop works.

  5. Raghu says:

    Dear Sir,

    Just want to know regarding the technical formula issued by ICAi, shall i use that formula for SLM and WDV calculations.or is there any different formula for both methods.

  6. Jeetendra Goyal says:

    @ Saurabh,

    Rate of depreciation 42.39% is calculated using Goal seek formula. If we dont use Goal seek formula then WDV at the end of year 6 comes Rs 33,105 which is not equivalent to Rs 25,000 (5% of original cost).

  7. Jeetendra Goyal says:

    @ Puneet

    Depreciation will bee calculated on assets appearing on 01-04-2014 in remaining life as per schedule II. Depreciation rate will be calculated on the basis of remaining life and accordingly depreciation will be calculated.

  8. Jeetendra Goyal says:

    @ Viral Shah

    1) Why you need to know carrying value of 25 chairs which have already been sold. There is no need to calculate depreciation on asset which has already been sold.

    Depreciation will be calculated on each assets as per its life. Life will differ for each assets basis on date of purchase, hence depreciation rate will also be differ. Simply each assets will be depreciated in its remaining life.

    2) Life of computers as per Schedule II is 3 years, if you want to apply schedule II lifes, then you need not to do anything. The carrying value of computers will be shown as it is untill these are sold.

  9. Saurabh says:

    Dear Jitendra,

    How did you calculated 42.392% depreciation rate in first example?

    Regards

  10. Saurabh says:

    Dear Srikant ,
    Can you guide me how you derived 39.95% depreciation rate?
    Regards

  11. SRIKANT AGARWAL says:

    Dear Saurabh
    technically you are correct that rate of depreciation under WDV should be 39.30% as it is calculated by mathematical formula of (1 – (25000/500000)^(1/6)). But by applying this formula the WDV at end of 6 years comes to Rs 26591 which is deviating from Rs 25000. The detail calculation is as below:
    This is because of the fact that rate of 39.30% will work well if the addition is made at beginning of the financial year. But if the addition is made during the financial year then this formula of calculating WDV rate is not working.
    Can anyone guide me about it.
    Date Particulars Am Rs
    01.10.2014 Date of addition 01.10.14 500,000
    Less: Dep Year 1 (for 6 months) 98,259
    31.03.2015 Carrying value at end of year 1 401,741
    Less: Dep Year 2 157,899
    31.03.2016 Carrying value at end of year 2 243,841
    Less: Dep Year 3 95,839
    31.03.2017 Carrying value at end of year 3 148,002
    Less: Dep Year 4 58,171
    31.03.2018 Carrying value at end of year 4 89,832
    Less: Dep Year 5 35,307
    31.03.2019 Carrying value at end of year 5 54,525
    Less: Dep Year 6 21,430
    31.03.2020 Carrying value at end of year 6 33,094
    Less: Dep Year 7 (for 6 months) 6,504
    30.09.2020 Carrying value at end of year 7 26,591

  12. Saurabh says:

    Sir,

    The first example given by you is incorrect. The rate of dep. should be 39.30% i.e. [1-(25000/500000)^(1/6)]. This formulae is as per technical application guide issued by ICAI.

  13. SRIKANT AGARWAL says:

    The given calculation is not correct in the table. If the life of the asset is 6 years and WDV method of depreciation is followed then the rate of depreciation would come to 39.95% (for addition at mid of the year) whereas in the given example the rate of depreciation applied is 42.392%.
    Date Particulars Am Rs
    01.10.2014 Date of addition 01.10.14 500,000
    Less: Dep Year 1 (for 6 months) 99,875
    31.03.2015 Carrying value at end of year 1 400,125
    Less: Dep Year 2 159,850
    31.03.2016 Carrying value at end of year 2 240,275
    Less: Dep Year 3 95,990
    31.03.2017 Carrying value at end of year 3 144,285
    Less: Dep Year 4 57,642
    31.03.2018 Carrying value at end of year 4 86,643
    Less: Dep Year 5 34,614
    31.03.2019 Carrying value at end of year 5 52,029
    Less: Dep Year 6 20,786
    31.03.2020 Carrying value at end of year 6 31,244
    Less: Dep Year 7 (for 6 months) 6,244
    30.09.2020 Carrying value at end of year 7 25,000

  14. Jeetendra Goyal says:

    1) Residual value for opening fixed assets would be taken on carrying value. residual value for fixed assets purchased during the year would be taken on original cost.

    2) Original cost and date of purchase can be identified from Fixed Assets Register.

    3) If you apply schedule II lifes, then remaining life of first floor would be 55 years and for ground floor it would be 40 years. if you want to apply lifes other than given in schedule II , then it should be supported with technical evaluation.

    In your case, life as per technical justification report is more appropriate.

  15. Jeetendra Goyal says:

    1) For transitional application i.e. depreciation on opening fixed assets, residual value is to be taken on carrying value. For fixed assets purchased during the year, residual value is to be taken on original cost.

    2) Original cost and year of purchase can be identified from Fixed Assets Register.

    3) If you apply schedule II lifes then remaining life of 1st floor would be 55 yrs and for ground floor would be 40 yrs. If you want to apply life other than given in schedule II, then it should be support with technical evaluation.
    In this case, life as per technical justification report is more appropriate.

  16. Puneet says:

    What if the same asset appearing on 01.04.2014 was purchased on 05/09/2012. How the rate of depreciation will be calculated.

    Also the Residual value is not equivalent to 5% of the original cost

  17. VIRAL SHAH says:

    During the course of Depreciation task I come to know following points on which your suggestion reqd.

    1.) If company had purchased 1000 Chairs with a single bill and having different rates of chairs in 2011 and recorded a single entry in books on basis of Bill.

    After 2 Year among 1000 chairs , 25 Chairs are sold. Now sir how can I come to know the carrying value of that 25 Chairs ?

    Do I required to make separate entries for this 1000 Chairs and for depreciation also ?

    2.) Sir, If we keep asset residual value below 5%, should we reqd to obtain certificate from a technical person ? Like for computers purchased before 7 years existing in our books with less than 5% residual value . what should be the solution ?

    3.) Sir, what should be the bifurcation of “battery backup” purchased for computer and Printer purchased ? whether to include as a part of computer ? in companies act 1956 it was Computer and peripherals which is not in new companies act 2013.

  18. BADRINARAYANAN says:

    It seems the rate applied for SLM and WDV have been swapped and wrongly taken.

  19. Sridhar says:

    Sir,
    Can you clarify the procedure to be followed for depreciation on assets under the comapnies Act,2013 when the date of purchase and cost unknown by the company?

  20. hitesh k c says:

    Please clarify following doubts
    1)residual value is to be taken at 5% of original cost or carrying cost? In the example you have taken it on carrying cost but it shall be on original cost.
    2)when original cost or year of purchase are not known, what to do. Say I have purchased a second hand asset. I have no idea of cost and remaining useful life,and to obtain technical justification would be an absurd step. for example I have purchased 2 room office with existing chairs, tables, fans, 2 air conditioners, would it be wise to get call electrical engineer for technical report to find out useful life of fans or interior designer for useful life of furniture? In most such cases the seller would have purchased them in different years!!!
    3) I have constructed 1st floor in 2010 on existing ground floor which was built in 1995, for addition of 1st floor useful life would be 55 yrs or 40 yrs? Simply life of 1st floor would not be more than ground floor. Such cases call for technical justification report?

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