CA Debasis Sahoo

CA Debasis SabooThe Depreciation on fixed asset as per Schedule-II of Companies Act, 2013 became operational from 01/04/2014 vide MCA notification no S.O.902(E) dated 26/03/2014. In new era of depreciation, useful life of the asset plays a crucial role for calculation of depreciation. The change in the method of providing depreciation from fixed percentage (Schedule-XIV of Companies Act 1956) to useful life (Schedule-II of Companies Act,2013) requires change in accounting policy of the company. For change in accounting policy, provision contained in Accounting Standards-5 “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies” as well as AS-6 “Depreciation Accounting” both are required to be taken into consideration.

It is pertinent to note that, provision contained in Schedule-II of Companies Act, 2013 and provision contained in AS-6 are violating each other. Let’s have an analysis.

Para- 21 of AS-6, Depreciation Accounting:

“The depreciation method selected should be applied consistently from period to period. A change from one method of providing depreciation to another should be made only if the adoption of the new method is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise. When such a change in the method of depreciation is made, depreciation should be recalculated in accordance with the new method from the date of the asset coming into use. The deficiency or surplus arising from retrospective recomputation of depreciation in accordance with the new method should be adjusted in the accounts in the year in which the method of depreciation is changed. In case the change in the method results in deficiency in depreciation in respect of past years, the deficiency should be charged in the statement of profit and loss. In case the change in the method results in surplus, the surplus should be credited to the statement of profit and loss. Such a change should be treated as a change in accounting policy and its effect should be quantified and disclosed.

Notes-7, to the Schedule-II of Companies Act 2013

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 recognised in the opening balance of retained earnings where the remaining useful life of an asset is nil.

depre Example :

Depreciation Treatment as per Companies Act, 2013

Name of the asset: Furniture & Fixtures

Year of Acquisition of asset
Original Cost
No of year used as on 31/03/2014
Depreciation Charged as on 31/03/2014 @ 6.33% (Sch-XIV CA-1956)
Net Carrying Amount as on 31/03/2014
Residual Value 5% of cost
Useful life as per Companies Act 2013
Remaining Useful life as on 31/03/2014
Amount to be charged from Opening retain earnings on 01/04/2014
Depreciation to be provided for 2014-15
1
2
3
4
5= 2-4
6=2 x 5%
7
8
9= 5-6
10=(5-6)/8
<2002-03
< 10,000
<11
< 6,963.00
< 3,037.00
500
10
0
< 2,537.00
<2003-04
< 10,000
<10
< 6,330.00
< 3,670.00
500
10
0
< 3,170.00
<2004-05
< 10,000
<9
< 5,697.00
< 4,303.00
500
10
1
<3803.00
<2005-06
< 10,000
<8
< 5,064.00
< 4,936.00
500
10
2
<2218.00

AS-6 Vs Schedule-II – 1

It is clear from the above table that, by virtue of useful life of depreciation as envisaged in Schedule-II of Companies Act, 2013 the carrying amount of Asset is charged to opening retain earnings if remaining useful life is NIL (Note-7(i) of Schedule-II). The above adjustment which is in due course of change in method of depreciation is not as per the requirement of AS-6.

AS-6 : Depreciation Accounting Schedule-II of Companies Act,2013
AS-6 Depreciation Accounting envisaged that In case the change in the method results in deficiency in depreciation in respect of past years, the deficiency should be charged in the statement of profit and loss. Note-7: 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 recognised in the opening balance of retained earnings where the remaining useful life of an asset is nil.

AS-6 Vs Schedule-II –2

From the example cited above it is clearly understood that the depreciation on fixed asset which are having useful life charged to statement of profit and Loss on prospective basis not as per retrospective basis.

AS-6 : Depreciation Accounting Schedule-II of Companies Act,2013
AS-6 Depreciation Accounting envisaged that The deficiency or surplus arising from retrospective recomputation of depreciation in accordance with the new method should be adjusted in the accounts in the year in which the method of depreciation is changed Note-7: 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 recognised in the opening balance of retained earnings where the remaining useful life of an asset is nil.

From the above analysis, It depicts that at the time of transition to new method of depreciation as per Schedule-II of Companies Act,2013, the requirement of Accounting Standard -6 “Depreciation Accounting” has been violated.

Earlier as per Companies Act, 1956, depreciation on fixed asset has been calculated as per the percentage provided in schedule-XIV of Companies Act,1956 and As far as Accounting of depreciation is concerned provision contained in Accounting Standards-6: “Depreciation Accounting” is required to be followed.

But Companies Act,2013 vide its Schedule –II prescribe for both calculation of depreciation based on Useful life of individual Asset as well as accounting of depreciation.

Hence, In author’s view the requirement of Schedule-II of companies Act,2013 is always prevail over the treatment prescribed in Accounting Standard-6.

(Author may be contacted at cadebasissahoo@gmail.com)

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0 responses to “Schedule-II of Companies Act 2013 Vs AS-6 'Depreciation Accounting'”

  1. yogesh kumar says:

    SIR

    Is there any specific rate for charging depriciation or we can depriciate at any rate ??

  2. KRATIKA MATHUR says:

    if there is any manufacturing unit and production has been sttoped from last many years ; the fixed assets are idle , will depriciation be charged as per companies act, 2013 ?

  3. Naveen Singhal says:

    Sir,
    No doubt your post was very useful and clarificatory in some aspects but
    please provide clarification on the aforesaid matters posted by others.
    Such maters include:
    1. If a manufacturing entity has thousands of purchases on different dates, then it is justified to perform the time-consuming & tedious task of computing the WDV of each purchase?
    2. What if some private limited companies have followed IT Act, 1961 for computing Depreciation?
    3. Which treatment is more appropriate:
    – Following AS-6: WDV as per Companies Act 2013 Minus WDV as per Companies Act 1956
    OR
    – Following Schedule-II: Depreciating the asset over remaining useful life.
    Kindly provide your insights and oblige.

  4. BHAVESH CHAUHAN says:

    sir
    IF ANY COMPANY SO MANY ASSETS UNDER PLANT & MACHINERY HEAD WHICH ARE PURCHASED ON DIFERRENT DATE AND YEAR WHICH IS INCLUDED IN WDV VALUE OF PLANT & MACHINERY AS ON 01.04.2014

    HOW I WILL CALCULATE DEPRECIATION OF ABOVE ASSETS AS PER NEW COMPANIES ACT 2013.

  5. VIJAY RAO says:

    i have a query, regarding the calculation of rate of depreciation under WDV Method, may any one please explain it with an example.
    i have a example i.e printing machine purchase 11-09-2012. for Rs. 11,300. what is the rate of depreciation as per sched.II of company act 2013.

  6. CA RAJESH GATTANI says:

    Thanks for your updation.

  7. CA CHINNAPA REDDY says:

    Hello Everybody
    what about Deffered tax effect on such changes in rates of Depreciation as per Schedule-II under companies act 2013

  8. ashay says:

    useful lifes of the assets considerd by the management is more comapare to what prescribes in the schedule ii of the act. How auditor will verify whether the useful life cosidered by management higher than life prescribed in the schdule ii is appropriate or not.

  9. Shweta says:

    Dear Sir/Madam,
    Kindly provide journal entries for depreciation as per schedule II of companies act , 2013 as soon as possible.
    Thanx

  10. Susil Garg says:

    Incase some companies had followed the depreciation as per Income Tax Act 1961, and the same had been disclosed in Notes. Is it mandatory to follow the Sch II of Companies Act 2013 or still can be continued under the method as per Income tax Act 1961.

  11. Neha Jain says:

    Hello,

    I Have a quyery, if we want to charge deprecation on some asset as per sch II and on some asset as per rates available with us.

    whether it is possible or not

  12. Abhishek Dad says:

    Dear Sir,
    I have a query :-
    “Company was earlier taking depreciation on machines on triple shift basis i.e. 10.34 % for last 4 years. Now, as per new co. Act, the total life of machine is 15 years. Now, what will be the residual life in this case. Will it be 11 years (15-4 years) Or should we consider the fact that company has taken triple shift depreciation,so, spent life is 4 years *2 = 8 years (doubled as new co. act requires doubling of dep. in case of triple shift depreciation) i.e, the remaining life be 15-8= 7 years.

  13. Sharad says:

    I agree with what Mr Sudhir Says:This is Change in estimate not change in policy. Now one would have to recalculate the rate according to new useful life.Companies can follow WDV or SLM as earlier they were follow the method of charging Depreciation. So not triggering out AS-6 retrospective requirement which will be require if companies change in method of providing depreciation from WDV to SLM or vice a versa.

  14. Shrinidhi says:

    Hello everybody,
    That was really nice comparison. But I would like say that AS 6 and Schedule II of Companies act do not deviate w.r.t. point 2 of the difference stated by the author. AS 6 requires retrospective effect to be given in financial statement only in case of change in method of depreciation. The act has brought in change in the estimated useful life of the asset. In such case, AS 6 requires only a prospective effect in the financial statement. So, there is no violation between both.

  15. CA D G KURUNDWADKIAR PUNE says:

    I humbly beg to differ with learned Author when he is saying schedule II prevails over AS 6. The settled legal position is exactly opposite on the basis of precedents and case laws including one given by Supreme Court. Recall the general instructions of New schedule VI point no.1 clearly says when there is conflict in Schedule VI and AS the AS will prevail and schedule VI stand modified accordingly. Simplex concrete Piles (India) Ltd. Vs. Union of India (2007) 79 SCL 317 (Calcutta HC)
    J.K.INDUSTRIS LTD VS Union Of India (2007) 80SCL 283 states If there is conflict between schedule and AS then AS will prevail.

    Comments invited.

  16. Saran says:

    What about Deferred tax Impact on such change in revised useful life?

  17. Rohan Dani says:

    Please give Example of Depreciation if previously RBM method is followed instead of SLM method.

  18. Tarandeep Kaur says:

    Small private companies usually follow Depreciation as per Income Tax Act, 1961 and the same is qualified in auditor’s report. Now under new Companies Act is it mandatory to follow Schedule II or it can be done away with the qualification?
    If it is mandatory then would it require retrospective effect?

    Is it compulsory to apply schedule II for unlisted private limited company who is applying Income Tax act depriciation ?

    And for those unlisted private companies how to calculate the depriciation its not clear. What about addition of work in progress to the asset how to take that ?

  19. Sitesh Kumar Jha says:

    Please Ignore previous Post,

    If the company follow internal policy as per foreign holding company for useful life, then which tipe justification is required and please clarify the justification used in Schedule- II.

  20. Sitesh Kumar Jha says:

    If the company follow internal policy as per foreign holding company for useful life, then which time justification is required and please clarify the justification used in Schedule- II.

  21. GAURAV GARG says:

    I wish to know how should the useful life of used assets be determined. For example a Company is buying medical equipment already used in India. Please clarify the doubt.

  22. Vinay says:

    can we keep residual value Nil for those assets which are having Nil or Negetive useful life as on 01.04.2014 as per the useful life provided by Companies Act 2013

  23. SHILPI JALAN says:

    Are we required to provide depreciation as per Companies Act even after cessation of operations of the company?

  24. Sonam Jain says:

    Small private companies usually follow Depreciation as per Income Tax Act, 1961 and the same is qualified in auditor’s report. Now under new Companies Act is it mandatory to follow Schedule II or it can be done away with the qualification?

    If it is mandatory then would it require retrospective effect?

  25. Sudhir says:

    This is a change in the estimated useful life of the assets and as such change in the estimate and not the change in the accounting policy.. unless WDV is changed to SLM or SLM is changed to WDV in my opinion.

  26. CA Debasis Sahoo says:

    Dear Amit Arora

    It is pertinent to note that, As per AS-5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies. Para 4.4 “Accounting policies are the specific accounting principles and the methods of applying those principles adopted by an enterprise in the preparation and presentation of financial statements.”
    By virtue of enactment of Companies Act, 2013, companies will required to follow the principle set under Schedule-II of Companies Act, 2013 for Calculation and Accounting of Depreciation from the period starting from 01/04/2014.
    Hence, by virtue of requirement of New Statue company will required to change its accounting principle, as a result it will treated as change in accounting policy not estimate.

  27. Amit Arora says:

    But isn’t this a change in accounting estimate of useful life…which always had a prospective impact as per AS 5

  28. Prasanta says:

    + so which one will follow, the Companies Act or AS-06 for FY 2014-15 ?
    + is it compulsory to reduce 5% residual value from each asset ?
    + the useful life given in Sch-ll is maximum and we can’t depreciate an asset more than that year mentioned ?

    please clear my doubts…..

    Many Thanks…

  29. Sneha says:

    how to recognise the useful life and residual value…its just an estimate right? there’s no sure shot way to say it or is it?

  30. ASHOK KUMAR says:

    CA DABASIS SAHOO

    appreciate the your voice regarding the new schedule II of C A 2013 ,and AS 2 of Deprecation accounting as per ICAI. but till that the time ICAI has not change the the deprecation accounting AS 6, as required for applicable of Schedule II of CA 2013, and not issued any guildlines after the lapse of 4 month professional are also unaware this fact .

  31. CA VIJAY KUMAR says:

    Thanks for your updating. Good Analysis and comparison.

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