Schedule II of Companies Act, 2013

CA Tapesh Kumar

Earlier, the depreciation on fixed assets of companies are regulated by Schedule XIV of Companies Act, 1956 along with Accounting Standard 6 and guidelines issued by ICAI. The positions has been changed from Financial Year 2014-15, which has created curiosities in various professional. The ICAI has issued guidance for clarification of various provisions of Schedule II.

As per schedule XIV of Companies act, 1956, depreciation rates has been provided for Straight line Method as well as Written down Value. The Act also provides for charging the fixed assets below monetary limits. The depreciation is charged as per rates provided in the schedule irrespective of whether asset is scrapped, discarded etc. There is a short description of assets due to which a confusion is created for charging depreciation

As per Schedule II of Companies Act, 2013 The description of Fixed assets has been more detailed to short out the problem of rates of charging depreciation and the maximum life of assets has been provided so that the Financial statement can provided a true and fair view. The depreciation can be charged after taking into consideration of

1. Useful Life
2. Residual Value

Useful Life

As per Schedule II, useful life is either (i) the period over which a depreciable asset is expected to be used by an entity; or (ii) the number of production or similar units expected to be obtained from the use of the asset by the entity.

The useful life can be different as provided in Schedule II, The determination of useful life of depreciable asset on estimate basis and based on various factors and experience. The following factors shall be considered in determining the useful life of an asset:

(a) Expected usage of the asset. Usage is assessed by reference to the asset’s expected capacity or physical output.

(b) Expected physical wear and tear, which depends on operational factors such as the number of shifts for which the asset is to be used and the repair and maintenance programme, and the care and maintenance of the asset while idle.

(c) Technical or commercial obsolescence arising from changes or improvements in production, or from a change in the market demand for the product or service output of the asset. Expected future reductions in the selling price of an item that was produced using an asset could indicate the expectation of technical or commercial obsolescence of the asset, which, in turn, might reflect a reduction of the future economic benefits embodied in the asset.

(d) Legal or similar limits on the use of the asset, such as the expiry dates of related leases.

There are two circumstances arise

1. As per management, useful life is more than provided: – The useful life can be taken either provided by the management or as provided by Schedule II.
2. As per management, useful life is less than provided: – The useful life as per the management is to be taken for charging depreciation.

Part B of the schedule II states that 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.

RESIDUAL VALUE

Expected residual value means the sale price of scrap value of asset after the completion of useful life of assets. The Schedule II provides the residual value should not be more than 5% of the original cost of the asset. However it can be less than 5% of the original cost, then it should be taken as provided by the management.

COMPONENT ACCOUNTING

As per Note 4 of Schedule II,

a) 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.

(b) The requirement under sub-paragraph (a) shall be voluntary in respect of the financial year commencing on or after the 1st April, 2014 and mandatory for financial statements in respect of financial years commencing on or after the 1st April, 2015.

The provisions of component accounting are provided in Para 43 to 47 in Ind AS 16, Property Plant and Equipment which provides as follows:

• Each part of an item with a cost that is significant in relation to the total cost shall be depreciated separately.
• The entity allocates the amount initially recognized in respect of an item to its significant parts and depreciates separately each such part.
• If two or more items are of same useful life and depreciation method may be grouped for determining depreciation.
• For the balance of the parts, the useful life and depreciation can be determined from approximation.
• The entity may choose to depreciate separately the parts of an item that do not have a cost that is significant in relation to the total cost of the item.

CONTINUOUS PROCESS PLANT

In Schedule XIV of Companies Act 1956, separate rates were provided for plant and machinery used for double/triple shift basis. No such provisions has been provided in Schedule II of Companies Act, 2013.

However the guidance note provided by ICAI suggests that normal depreciation shall be calculated and it should be increased by 50%/100% for double/triple shifts respectively.

CONVERSION PROVISIONS

The company has to assess the useful life of assets as on 01.04.2014 and reduce the life used by the assets as per old provisions.

• The assets which are exist in the financial statement which has been completed useful life can be charged to Reserves and surplus/Profit and Loss account directly.
• The WDV of any asset can be derived as follow:

WDV=Cost*( 1-dep rate) ^no. of years used.

• The assets which has useful life, will be depreciated for balance useful life. The depreciation of SLM method can be easily drawn. In case WDV, The depreciation rates can be arrived as follows:

R= {1 – (s/c)^(1/n) } x 100

            Where R = Rate of Depreciation (in %)

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

            s = Scrap value at the end of useful life of the asset (Not NIL or about)

            c= Cost of the asset/Written down value of the asset

The various useful lives and depreciation rates as considering 1% scrap value are as follows:

The depreciation on intangible assets can be derived as per AS-26. However intangible assets created under ‘Build, Operate and Transfer” or any other form of PPP route in road projects, the amortization shall be done as under:-

Amortisation Rate = Amortisation Amount x 100/ Cost of Intangible Assets (A)

Amortisation Amount = Cost of Intangible Assets (A) x Actual Revenue for the year (B)

Projected Revenue from Intangible Asset (till the end of the concession period) (C)

Cost of Intangible Assets (A) = Cost incurred by the company in accordance with the accounting standards.

Actual Revenue for the year (B) = Actual revenue (Toll Charges) received during the accounting year.

Projected Revenue from Intangible Asset (C) = Total projected revenue from the Intangible Assets as provided to the project lender at the time of financial closure / agreement.

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