Presentation on theme: "Depreciation as per Schedule II of Companies Act 2013"— Presentation transcript:
1 Depreciation as per Schedule II of Companies Act 2013 Presented By : Niraj DoshiM.V.Damania & Co.Chartered Accountants
2 Scope & Coverage Introduction Classification of Companies Important terms and definitionsMethod of DepreciationSalient Features of Schedule IIKey ImpactsPractical issues
3 IntroductionDepreciation is based on Specified Useful Life over Specified minimum rates as specified in earlier Act.The Ministry of Corporate Affairs (MCA) vide its Notification dated has appointed as the date from which Schedule II comes into force.
4 Classification of Companies All companies are divided into broad three categories in order to decide application of depreciation :-Class of companies as may be prescribed and whose financial statements comply accounting standards prescribed for such class of companies under section 133 -These companies will provide depreciation based on use useful lives and residual values prescribed in the schedule II.These companies are permitted to adopt a different useful life or residual value for their assets, provided they disclose justification on this behalf duly supported by technical advice.
5 Continued…Class of companies or class of assets where useful lives or residual value are prescribed by a regulatory authority constituted under an act of the Parliament or by the Central Government –Example :- (Electricity companies, Insurance companies etc)3. Other companies –For these companies, the useful life of an asset shall not be longer than the useful life and the residual value shall not be higher than that prescribed in Part C of Schedule II.
6 Important Terms & Definitions Depreciation is the systematic allocation of the depreciable amount of an 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.Useful Lives :- Unlike the Companies Act 1956, Useful lives of the assets have been prescribed instead of rates of depreciation in Part C of Schedule II of the Companies Act, 2013, as a base for computing depreciation.Carrying Amount :- Carrying amount means the amount at which an asset is recognized in the Balance Sheet after deducting any accumulated Depreciation/amortization and accumulated impairment losses thereon.
7 Method of Depreciation Unlike old Schedule XIV, the new Schedule II, does not speak of Method of Depreciation as SLM or WDV. It only speaks of amortization of cost of assets based on the useful life .Since no method is prescribed, the company can follow either SLM / WDV / Unit of Production (UOP) method and arrive at the rate on the basis of useful life.UOP Rate = Total Cost – Residual ValueNo. of Production Unit
8 Continued… s = scrap value c = cost of assets SLM Rate = (Cost of Asset - Residual Value)Useful LifeWDV Rate will be arrived at by applying the following formulae:r = 1-(s/c)^(1/n), Wherer = rate of depreciations = scrap valuec = cost of assetsn = no. of year of life of assets
9 Salient Features of Schedule II Depreciation is calculated by considering useful life of asset, cost less residual value.Schedule – II contains a list of useful life according to class of asset, the useful life of asset shall not be taken longer than prescribed in this schedule.Residual value should not be taken more than 5% of cost of asset.A company is always free to take useful life shorter than mentioned in schedule – II and residual value less than 5%.If there is any addition to the asset or asset is sold, discarded, demolished or destroyed then the depreciation will be provided on pro-rata basis upto the date of such event.
10 Continued…For assets in which NESD is mentioned in Schedule – II, the depreciation remains same irrespective of the no. of work shifts.For other assets, if the asset is used for double shifts during any time of the year then the depreciation shall be increased by 50% for that period. Similarly if asset is used for triple shifts then depreciation shall be increased by 100% for that period.
11 Key ImpactsThe useful life of an asset can be number of production or similar units expected to be obtained from the asset. This indicates that a company may be able to use UOP method for depreciation, which is currently prohibited under Schedule XIV.Companies will be able to use different useful lives or residual values, if they have justification for the same. It appears that this provision is aimed at ensuring compliance with Ind-AS 16 for such companies.Vide Notification G.S.R 627(E) dated 29th August Component wise depreciation accounting is made voluntary for the F.Y and it will be mandatory from the F.YWhere asset is still in use but useful life has been passed out & only residual value appears in balance sheet, then no depreciation needs to be provided on such asset till the same is disposed off.
12 Practical IssuesThe transitional provision requires remaining carrying amount to be recognized in the retained earnings .What is the meaning of retained earnings ?“Profits generated by a company that are not distributed to the stakeholders and kept invested in the business rather than paying to the stakeholders as dividend”.Schedule II provides that the residual value shall not be more than 5% of the cost of asset. That is to say it can be less than 5% under this circumstance, the auditor needs to document the same with either Management Representation (MR) along with certificate from the technical experts within the Company or from the professional value.
13 Illustration 1 Depreciation as per SLM Method Cost of assets (Computer Purchased)Rs.5,00,000 /-Date of PurchaseRate of Depreciation as per Schedule IV16.21%Useful Life6 YearsResidual Value25,000/-Amount to be Depreciated (Cost – Residual value i.e 5,00,000 – 25,000 (5% of Cost))4,75,000/-Useful Lives as per Schedule II3 YearsExpired Life of Asset upto4 YearsDepreciation charged till (500000*16.21%*4)3,24,200Carrying value charged to retained earning as on1,50,800
14 Continued…Useful life as per schedule II is already passed out, the balance of carrying amount after retaining the residual value will be charged to the retained earnings.As referred in above example WDV of assets as on , Rs. 5,00,000 – 3,24,200 = 1,75,800. Since the useful life have been expired. Carrying amount less residual value will be transferred to retained earnings i.e 1,75,800– 25,000 = 1,50,800.
15 Illustration 2 Depreciation as per SLM Method Cost of assets (Computer Purchased)Rs.60,000 /-Date of PurchaseRate of Depreciation as per Schedule IV16.21%Useful Life6 YearsResidual ValueNILAmount to be Depreciated (Cost – Residual value i.e 60,000 – 3,000 (5% of Cost))57,000/-Useful Lives as per Schedule II3 YearsExpired Life of Asset upto1 YearsDepreciation charged till (60000*16.21%*1)10,000Carrying value of asset as on50,000Balance life available for depreciation2 YearsDepreciation for each year will be ((50, = 47,000) divided by 2 years)23,500
16 DisclosuresThe following information shall be disclosed in the accounts, namely :-Method of depreciation used; andThe useful lives of the assets for computing depreciation, if they are different from life specified in the Schedule II of the Companies Act 2013.