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Companies Act, 2013 -
Depreciation-
Significant Provisions
SIRC of ICAI- Chennai, July 6, 2014
by CA. Sekkizhar Balasubramanian
Key Provisions Depreciation
• Depreciation - Systematic allocation of the depreciable
amount of an asset over its useful life.
• Depreciable amount is cost of an asset or other amount
substituted for cost, less its residual value.
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Key Provisions Depreciation
• Depreciation on tangible fixed assets based on estimated
useful life
‒ From a Rates regime to Useful Lives
‒ Useful life of an asset is the period over which the asset is
expected to be available for use by the entity or the
number of production or similar units expected to be
obtained from the asset
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Key Provisions Depreciation
• The provisions of the Accounting Standards
applicable for the time being in force to apply, except
that for intangible assets (toll roads) created under
any form of public-private partnership, amortisation
may be done using a revenue based model or in
accordance with any method as per applicable
Accounting Standards. Where a method as specified
in Accounting Standards is used, disclosure of the
same should be made.
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Key Provisions Depreciation – Intangible assets (AS 26)
• The depreciable amount of an intangible asset
should be allocated on a systematic basis over the
best estimate of its useful life.
• There is a rebuttable presumption that the useful life
of an intangible asset will not exceed ten years from
the date when the asset is available for use.
• Amortisation should commence when the asset is
available for use.
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Key Provisions Depreciation
• A revenue based amortisation model will be
available only in the case of road projects that are
created under any form of public- private partnership
and not for any other intangible assets.
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Key Provisions Depreciation
• Depreciation of plant & machinery based on industry
category. Specified industries:
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Production and exhibition of
motion picture films
Steel
Glass manufacturing Non-ferrous metals
Mines & quarries Medical & surgical
operations
Telecommunication Pharmaceuticals and
Chemicals
Exploration, production and
refining of oil & gas
Civil construction
Generation, transmission
and distribution of power
Salt works
Key Provisions Depreciation
• Schedule II introduces the concept of ‘Special Plant
and Machinery’ which classifies assets on the basis
of their specified usage. The useful lives for such
assets have been determined based on past
experience of various industries, which historically
have lives which are fairly longer than those
prescribed under the general class.
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Key Provisions Depreciation
• Schedule II identifies numerous assets used for the
purposes specified therein. Since Schedule II has
used the term “Plant and machinery used in
manufacture of …”, and not “Plant and machinery
used by companies engaged in the manufacture of
…..”, it is our understanding that if a company owns
any asset which is ultimately used in the
manufacture of the prescribed products, though the
company does not necessarily belong to the
specified industry, it may be permitted to apply the
useful life prescribed by Schedule II for such assets
based on their end use.
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Key Provisions Depreciation
• Accordingly, if a company which is in the business of
manufacture of steel has a captive power plant, such
a company may also be able to adopt the useful life
prescribed for power plants which would normally
have been applicable to companies generating,
transmitting and distributing power.
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Key Provisions Depreciation
• Componentisation of assets mandated
Separate capitalisation and depreciation of a part
of an asset if its cost is significant to the total cost
of the asset and its estimated life is different from
the remaining asset
• Accounting for replacement costs.
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Key Provisions - Depreciation
• Significant increase / (decrease) in rate of depreciation of commonly used assets
as compared to Schedule XIV rates under the 1956 Act
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Nature of asset - illustrative
The Companies
Act, 2013
The
Compa
nies
Act,
1956
Increa
se
%
change
Single shift (St.line)
Useful
Life
Deemed
rate
General Plant and Machinery
other than continuous process
plant 15 6.33% 4.75% 1.58% 33.26%
Continuous process plant * 25 3.80% 5.28% -1.48% -28.03%
General furniture and fittings 10 9.50% 6.33% 3.17% 50.08%
Office equipment 5 19.00% 4.75%
14.25
% 300.00%
Desktops, laptops, etc. 3 31.67% 16.21%
15.46
% 95.37%
Electrical Installations and
Equipment 10 9.50% 4.75% 4.75% 100.00%
Key Provisions Depreciation
• Depreciable amount to be determined after
reducing expected residual value
Residual value generally not more than 5%
of the original cost of the asset
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Key Provisions Depreciation
Where a company uses a useful life other than prescribed by
Schedule II or residual value other than 5% of the original cost
of the asset, justification for the difference shall be disclosed
in financial statement.
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Key Provisions Depreciation – Shift basis
Useful lives have been determined on the
basis of single shift. For assets working on
double shift, depreciation will increase by 50
percent and in case of triple shift working by
100 percent in respect of specified assets.
(other than where NESD useful life is given)
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Key Provisions Depreciation
• Transitional provisions
Carrying value (net of residual value) to be
depreciated over the remaining revised useful life
of the asset
• Depreciation in respect of each asset
(existing on March 31, 2014) has to be
worked out separately (this is because the
remaining useful life for each asset can be
different.
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Depreciation – Example for assets on March 31, 2014
• Old act – say 10 yrs is useful life. Already 2 yrs got
completed on 31.3.2014
• New act say 6 yrs is useful life.
• WDV on 31.3.2014 is to be depreciated over 4 yrs
(6 – 2yrs)(after adjusting residual value)
• Applying new rate in place of old rates will not be
possible.
• Depreciation for each asset is to be computed for
2014-15 in respect of assets existing on April 1,
2014 based on revised useful life.
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Key Provisions Depreciation
• Transitional provisions
If the remaining revised useful life is nil, the
carrying value net of residual value should be
recognised in the opening balance of retained
earnings
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Key Provisions Depreciation
• Depreciation / amortisation of intangible assets
should be as per the Accounting Standards
‒For Intangible assets such as toll roads, etc.,
these can continue to be amortised based on the
expected revenue from operating such assets
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Key Provisions Depreciation
• Incremental depreciation relating to surplus on
revaluation of assets would need to be charged to
the Profit & Loss Account and will impact Profits
Depreciable amount is the cost of an asset or
other amount substituted for its cost less residual
value
(Impact of utilisation of revaluation reserve to be
considered)
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Key Provisions Depreciation
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Consequential implications
• Changes to the amount of depreciation charge will impact
profits for managerial remuneration, profits available for
distribution as dividend
• Componentisation of assets involves judgment and
establishing thresholds. Critical to evaluate
appropriateness of criteria since it would have an impact
on the profits of the Company
• Information Systems, including the Accounting application,
would need to be modified to meet the new requirements
for calculating depreciation
Key Provisions Depreciation
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Consequential implications
• Changes in the profits consequent to changes in
depreciation could impact terms of conversion of
convertible instruments if the conversion is based on book
profits
• Evaluation of lease as operating or finance lease will need
to consider the estimated useful lives as provided in the
Schedule II to the new Act
• Impact of transitional provision likely to be significant
where the expired life (to date of transition) is less than that
under 2013 Act.