fin acc project depriciation

8/7/2019 Fin Acc Project depriciation

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DEPRECIATION ACCOUNTING -1/33-

DEPRECIATION ACCOUNTING

SUBMITTED BY :

S.NO. ROLL. NO. NAME

1 131 JUDE DSOUZA

2 160 SERENA PEREIRA

3 149 SYLVIA LEWIS

4 151 SARITA LEWIS

A REPORT SUBMITTED TO THE MET INSTITUTE IN PARTIAL

FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF MHRDM FORTHE YEAR 2008-2011.

UNDER THE GUIDANCE OF

PROF. L.N CHOPDE

MET INSTITUTE

BANDRA, MUMBAI


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PREFACE

The main goal of this project is to present the scope and the objective ofdepreciation accounting, the different methods employed in the process ofdepreciation and to illustrate how to determine depreciation with the assistanceof various cases.

We have also used instances of calculation of depreciation in organizations toadd more practicality to the project.


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ACKNOWLEDGEMENT

We would first and foremost thank our professor Prof. L.N. Chopde for his ableguidance and being our mentor through out the semester and we also wish tothank all those who have immensely contributed to the project and enhanced ourknowledge and understanding of the subject along the way.


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EXECUTIVE SUMMARY

This project has commenced with the definition of depreciation, extending to thescope and objective, the determination of depreciation, the method to beemployed for calculating depreciation, determination of useful life,determination of residual value, queries and responses, balance sheet, scheduleto the balance sheet and instances of calculation of depreciation in one particularorganisation. A neat form of contents follows which acquaints all the readers

with the flow of the project.


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CONTENTS

S.No. Topic Page Nos.

1 Depreciation Definition, Scope & Objective 6

2 Determination of Depreciation & Depreciation method 7

3 Determination of Useful Life 8

4 Different depreciation method for different class offixed assets

11

5 Is Income Tax basis of depreciation acceptable undercompanies act

12

6 Depreciation on Idle Assets & on additions/extensionsto an existing asset

14 & 15

7 Depreciation on building for factory and office purpose& Proportionate depreciation on purchase/sale of assetsduring the year

16 & 17

8 Disclosure of Central Government approval for not

providing depreciation &Commentary Depreciation, Recognition, Measurementand disclosure practices

19

9 Depreciation Calculation (Working Eg. 1) 22

10 Balance Sheet (Working Eg. 2) 24

11 Schedule annexed to Balance Sheet (Working Eg. 3) 25

12 Hard furnishing (Working Eg. 4) 27


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Depreciation Accounting

Scope & ObjectiveDepreciation is a measure of the wearing out, consumption or other loss of valueof a depreciable asset arising from use, efflux of time or obsolescence throughtechnology and market changes. Depreciation includes amortization of assetswhose useful life is predetermined.

Depreciable assets are assets which: Are expected to be used during more than one accounting period

Have a limited useful life; and Are held by an enterprise for use in the production or supply of goods

and services, for rental to others, or for administrative purposes and notfor the purpose of sale in the ordinary course of business.

To qualify as a depreciable asset all three conditions are required to be fulfilled.Even if a single condition is not fulfilled the same will not qualify as adepreciable asset. For example, though land would fulfill two of the aboveconditions, it does not fulfill the condition of a limited of useful life and thereforeis not a depreciable asset.

Accounting standard 6 deals with depreciation accounting and applies to alldepreciable assets, except the following items to which special considerationsapply:

Forests, plantations and similar regenerative natural resources; Wasting assets including expenditure on the exploration for and

extraction of minerals, oils, natural gas and similar non-regenerativeresources;

Expenditure on research and development Goodwill Live stock

Recognition of Depreciation Charge

The depreciation charge for a period is usually recognized as an expense.However, in some circumstances, the economic benefits embodied in an asset are


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absorbed by the enterprise in producing other assets rather than giving rise to anexpense. In this case, the depreciation charge comprises part of the cost of theother asset and is included in its carrying amount. For example, the depreciationof manufacturing plant and equipment is included in the costs of conversion ofinventories. Similarly, depreciation of property, plant and equipment used fordevelopment activities may be included in the cost of an intangible asset or as acapital research and development item.

Determination of DepreciationAssessment of depreciation and the amount to be charged in respect thereof inan accounting period are usually based on the following three factors:

Historical cost or other amount substituted for the historical cost of thedepreciable asset when the asset has been revalued.

Expected useful life of the depreciable asset; and Estimated residual value of the depreciable asset.

Depreciable amount of a depreciable asset is its historical cost, or other amountsubstituted for historical cost in the financial statements, less the estimatedresidual value. In case the depreciable assets are revalued, the provision fordepreciation is based on the revalued amount on the estimated of the remaininguseful life of such assets. Depreciation is charged in each accounting period byreference to the extent of the depreciable amount, irrespective of an increase inthe market value of the assets. This is based on the concept of historical cost.

Historical cost of a depreciable asset represents its money outlay or its equivalentin connection with its acquisition, installation and commissioning as well as foradditions to or improvement thereof. The historical cost of a depreciable assetmay undergo subsequent changes arising as a result of increase of decrease inlong term liability on account of exchange fluctuations; price adjustmentschanges in duties or similar factors. In case the depreciable assets are revalued,the provision for depreciation is based on the revalued amount on the estimate ofthe remaining useful life of such assets.

Depreciation MethodThere are several methods of allocating depreciation over the useful life of theassets. Those most commonly employed in industrial and commercial enterprisesare the straightline method and the reducing balance method. The straightlinemethod of depreciation is appropriated when the use of the asset is expected tobe relatively even over its estimated useful life or there is not discernible patternof decline in service potential. However, if the expected productivity or revenue-


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earning power of the asset is relatively greater during the earlier years of its life,or where maintenance charges tend to increase during later years, the written-down value method is more appropriate.

The management of a business selects the most appropriate method(s) based on

various important factors eg. Type of asset The nature of the use of such asset and Circumstances prevailing in the business.

A combination of more than one method is sometimes used. In respect ofdepreciable assets, which do not have material value, depreciation is oftenallocated fully in the accounting period in which they are acquired. The methodused for an asset is selected based on the expected pattern of economic benefits

and is consistently applied form period to period unless there is a change in theexpected pattern of economic benefits from that asset.

The straightline method and the reducing balance method are two acceptablemethods under the Companies Act.

Depreciation to be determined for each component of an asset Under IAS 26 it is expressly provided that depreciation should be determinedand charged separately for each significant part of an item of plant, property andequipment. AS 10 requires in certain circumstances significant components to be

identified and recognized separately, for example, in the case of an air-craft, thebody of the air-craft and its engine are recognized as separate assets, since theyhave different useful lives. Therefore, in such cases depreciation for these twoidentified components of the same asset would be computed separately. The twocomponents would have different useful lives and residual value and thedepreciation method to be applied on these two components need not be thesame.

Determination of Useful LifeAs the economic benefits embodied in the asset are consumed by the enterprise,the carrying amount of the asset is reduced to reflect this consumption, normallyby charging an expense for depreciation. A depreciation charge is made even ifthe value of the asset exceeds its carrying amount. The economic benefitsembodied in an item of property, plant and equipment are consumed by theenterprise principally through the use of the asset. However, other factors suchas technical obsolescence and wear and tear while an asset remains idle often


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result in the diminution of the economic benefits that might have been expectedto be available from the asset.

Useful life is either

1. The period over which a depreciable asset is expected to be used by theenterprise; or

2. The number of production or similar units expected to be obtained formthe use of the asset by the enterprise.

The useful life of a depreciable asset is shorter than its physical life and is:

1. Pre-determined by legal or contractual limits, such as the expiry dates ofrelated leases

2. Directly governed by extraction or consumption

3. Dependant on the extent of use and physical deterioration on account ofwear and tear which again depends on operational factors, such as, thenumber of shifts for which the asset is to be used, repair and maintenancepolicy of the enterprise etc; and

4. Reduced by obsolescence arising from such factors as:

a) Technological changesb) Improvement in production methodsc) Change in market demand for the product or service output of the

asset; ord) Legal or other restrictions

Determination of the useful life of a depreciable asset is a matter of estimationand is normally based on various factors including experience with similar typesof assets. Such estimation is more difficult for an asset using new technology or

used in the production of a new product or in the provision of a new service butis nevertheless required on some reasonable basis.

The useful life of an asset is defined in terms of the assets expected utility to theenterprise. The asset management policy of an enterprise may involve thedisposal of assets after a specified time or after consumption of a certainproportion of the economic benefits embodied in the asset. Therefore, the usefullife of an asset may be shorter than its economic life. The estimation of the useful


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life of an item of property, plant and equipment is a matter of judgment basedon the experience of the enterprise with similar assets.

Review of Useful LifeThe quantum of depreciation to be provided in an accounting period involvesthe exercise of judgment by management in the light of technical, commercial,accounting and legal requirements and accordingly may need periodical review.The useful life of an item of property, plant and equipment should be reviewedperiodically and, if expectations are significantly different from previousestimates, the unamortized depreciable amount should be charged over therevised remaining useful life. During the life of an asset it may become apparentthat the estimate of the useful life is inappropriate. For example, the useful lifemay be extended by subsequent expenditure on the asset which improves thecondition of the asset beyond its originally assessed standard of performance.

Alternatively, technological changes or changes in the market for the productsmay reduce the useful life of the asset. For example, due to certain changes in thedesign of the finished product, a company may intend to discontinue using themoulds much before the expiry of their useful life.

AS-6 requires a periodic review of the useful lives of fixed assets. If such a reviewresults in the revision of the useful life, depreciation is to be charged over theremaining useful life. The repair and maintenance policy of the enterprise mayalso affect the useful life of an asset. The policy may result in an extension of theuseful life of the asset or an increase in its residual value. However, the adoption

of such a policy does not negate the need to charge depreciation. It is importantthat the above reassessment of useful life does not result in depreciation lowerthan that required under Schedule XIV, as that would result in contravention ofSection 205 (2) of the Companies Act.

Determination of Residual ValueDetermination of residual value of an asset is normally a difficult matter. Ifsuch value is considered as insignificant, it is normally regarded as nil. On thecontrary, if the residual value is likely to be significant, it is estimated at the timeof acquisition/installation or at the time of subsequent revaluation of the asset.One of the bases for determining the residual value would be the realizable valueof similar asset, which have reached he end of their useful lives and haveoperated under conditions similar to those in which the asset will be used.


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Different Depreciation Method for Different Class of Fixed AssetsThe management of a business selects the most appropriate method(s) based onvarious important factors e.g.

1. Type of asset

2. The nature of the use of such asset and

3. Circumstances prevailing in the business.

A combination of more than one method is sometimes used. The method usedfor such an asset is selected based on the expected pattern of economic benefitsand is consistently applied from period to period unless there is a change in theexpected pattern of economic benefits from that asset. For eg. A motor vehiclemay provide higher economic benefits in the initial years as compared to abuilding which may provide uniform economics benefits over several years.

Therefore, some enterprises may choose to apply the WDV method in the case ofa motor vehicle and SLM method in the case of buildings.

Different Depreciation Method for Different Class of Fixed AssetsThe management of a business selects the most appropriate method(s) based onvarious important factors e.g.

1. Type of asset

2. The nature of the use of such asset and

3. Circumstances prevailing in the business.

A combination of more than one method is sometimes used. It is thereforepossible that plant and machinery be depreciated on WDV basis and all otherassets on SLM basis. Sometimes, different methods of depreciation for the sameclass of assets used in different plants of the company can be applied if themanagement considers it appropriate to do so after taking into accountimportant factors such as the type of assets, the nature of the use of such assetand circumstances prevailing in the business. For example, if an enterprise is inthe business of letting out vehicles on hire it may depreciate the hired vehicles ata higher rate than compared to the vehicles which are used by its employees foroffice purposes. These situations are however expected to be rare. Thereforenormally an uniform deprecation rate and method is applied for the same classof fixed assets.


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Is Income-tax Basis of Depreciation Acceptable under companies Act?

QueryWhether adoption of block concept of charging depreciation in accounts, as perthe Income-tax Act, is justified in the case of a company? If so, whether theconcept of true and fair view of accounts is affected when the profit on sale ofassets is not credited to profit and loss account but to the concerned block ofassets?

ResponseAfter Schedule XIV coming into force, rates higher than those under thatSchedule can only be adopted on the basis of a bonafide determination of thecommercial life of an asset, which is a technical matter. Also, in such a case,proper disclosure has to be made. Therefore, a company can follow rates

prescribed under the Income-tax Act/Rules only if these rates represent bona fidecommercial depreciation and are higher than Schedule XIV rates. Also Note No.4to Schedule XIV to the Companies Act, 1956 requires where, during anyfinancial year, any addition has been made to any asset, or where any asset hasbeen sold, discarded, demolished or destroyed, the depreciation on such assetsshall be calculated on a pro-rata basis from that date of such addition or, as thecase may be , up to the date on which such asset has been sold, discarded,demolished or destroyed. Therefore for purposes of companies Act, it is notappropriate to determine depreciation, after crediting profit on sale of assetsagainst the concerned block of assets. In fact profit on sale of assets needsseparate recognition and disclosure under the Companies Act.

Minimum Depreciation

The statue governing an enterprise may provide the basis for computation of thedepreciation. For example, the Companies Act, 1956 lays down the rates ofdepreciation in respect of various assets. Where the managements estimate ofthe useful life of an asset of the enterprise is shorter than that envisaged under

the provisions of the relevant statute, the depreciation provision is appropriatelycomputed by applying a higher rate. If the managements estimate of the usefullife of the asset is longer than that envisaged by the statute, depreciation ratelower than that envisaged under the stature, depreciation rate lower than thatenvisaged by the statute can be applied only in accordance with requirements ofthe statute. In a large number of cases, the rates of depreciation under Schedule


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XIV of the Companies Act are low, and therefore enterprises that have anappreciation for good corporate governance and accounting practices, use muchhigher rates than the prescribed under the Schedule. For example, Infosys usesmuch higher rates than that prescribed under Schedule XIV on computers owned

by them. It is important for financial statements to be true and fair thatmanagement estimate the useful lives of assets and determines depreciation athigher rates if the useful lives are lower than the one set out in Schedule XIV.

Rates higher than Schedule XIV should be used provided such rates are based onsound commercial and technical considerations. For example, higherdepreciation rates are used where technological obsolescence is prevalent, eg.Computers. In such a case, the auditor should broadly satisfy himself that therates are determined in an appropriate manner. Since the determination ofcommercial life of an asset is a technical matter, the decision of the Board ofDirectors is normally accepted by the auditor unless he has reason to believe thatsuch decision is grossly incorrect.

Query

The company had set up a factory on coastal land. In view of the corrosiveclimate, the machine life was reducing faster and, therefore, it wanted to charge ahigher rate of depreciation than those prescribed under Schedule XIV.

Response

The statute governing an enterprise may provide that basis for computation ofthe depreciation. For example, the Companies Act, 1956, lays down the rates ofdepreciation in respect of various assets. In accordance with AS-6, DepreciationAccounting, where the managements estimate of the useful life of an asset ofthe enterprise is shorter than that envisaged under the provisions of the relevantstatute, the depreciation provision is appropriately computed by applying a

higher rate. If the managements estimate of the useful life of the asset is longerthan that envisaged under the statute, depreciation rate is lower than thatenvisaged by the statute can be applied only in accordance with requirements ofthe statue. It is important for financial statements to be true and fair thatmanagement estimate the useful lies of assets and determines depreciation athigher rates if the useful lives are lower than the one set out in schedule XIV.


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Rates higher than schedule XIV should be used provided such rates are based onsound commercial and technical considerations. For example, a facory buildingsituated in a coastal are may be subject to higher depreciation due to corrosion.In such a case, the auditor should broadly satisfy himself that the rates are

determined in an appropriate manner. Since the determination of commercial lifeof an asset is a technical matter, the decision of Board of Directors is normallyaccepted by the auditor unless he has reason to believe that such decision isgrossly incorrect. The department of company affairs has also clarified that therates contained in Schedule XIV should be viewed as the minimum rates, and,therefore, the company cannot charge depreciation at rates lower than specifiedin the schedule in relation to the assets. However, if on the basis of a technicalevaluation higher rates of depreciation are justified, which may be true in this

case, the higher rates should be applied. Where rates other than Schedule XIVrates are applied, appropriate disclosure in the notes to the accounts would berequired.

Depreciation on Idle Assets

Section 205(2) of the Companies Act, 1956, does not deal with the manner ofprovision for depreciation on assets remaining idle owing to labour trouble etc.However, since depreciation also arises out of efflux of time, it would be

necessary for the purpose of Section 205 to provide for depreciation even inrespect of assets which are not in use during any financial year, if it plans todeclare any dividend. It may be possible due to assets lying idle the remainingusable life is extended, in which case a reassessment of useful life can be made.On this basis the unamortized depreciable amount should be charged over therevised remaining useful life, which would result in a lower annual charge ofdepreciation in the future years. However, as cautioned above, depreciationamount should not be lower than that determined under Schedule XIV for thepurposes of Section 205(2) of the CompaniesAct. Full depreciation is providedfor even if the asset is kept in the best working condition or its market price hasgone up since depreciation is also a factor of efflux of time.


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A point to be noted that there is a difference between an idle asset that isinstalled and an idle asset that is not installed. An asset that is installed but isnot being used requires depreciation to be provided on it because depreciation isalso caused by efflux of time. No depreciation is required on an asset that is lying

idle but waiting installation. However, in such cases one will have to determinewhether it is impaired. Further, if the asset is not going to be used, one mustdetermine if the asset can be classified as an asset held for sale or disposal andvalue it at lower of cost and net realizable value.

Depreciation On Additions/Extension To An Existing Asset

Any addition or extension to an existing asset which is of a capital nature andwhich becomes an integral part of the existing asset is depreciated over

remaining useful life of that asset. As a practical measure, however, depreciationis sometimes provided on such addition or extension at the rate, which isapplied, to an existing asset. Any addition or extension which retains a separateidentity and is capable of being used after the existing asset is disposed of, isdepreciated independently on the basis of an estimate of its own useful life.Where the historical cost of a depreciable asset may undergo subsequent changesarising as a result of increase or decrease in long term liability on account ofexchange fluctuations, price adjustments, changes in duties or similar factors the

depreciation on the revised unamortised depreciable amount is providedprospectively over the residual useful life of the asset. For example, lets say theuseful life of an asset of Rs.6,00,000 is 5 years. In the second year when the netvalue of the asset was Rs.4,80,000 an additional amount of Rs.20000 is capitalisedon account of foreign exchange difference. The revised unamortised amount ofRs.5,00,000 would be depreciated over the remaining useful life of 4 years.Therefore, depreciation each year for the next 4 years would be Rs.1,25,000.

If the company was using the written down value method the computation gets

slightly complicated. In the above case the straight line depreciation rate is 20%which translates to roughly 60% on the reducing balance method. Now if thestraight line method it works out to 25%, which under WDV would work out toroughly 75%. Thus depreciation on the original amount would be provided at60% and on the addition at 75%. To make the computations easier, a weightedaverage can be worked out.


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Query

The company procured ocean going dredgers which were cleared by the customswithout levy of custom duty in the year 2000. However in 2003 the custom

authorities alleged willful misstatement and suppression of facts. The companydisputed the allegations but believes that the liability will fructify. Therefore, theamount of customs duty sought to be levied on the respective dredgers has beencapitalised and a provision for customs duty was made in the books. We checkthe method on how to charge depreciation on the addition to fixed asset in 2003caused by capitalisation of the customs duty.

Response

As per AS-6, where the historical cost of a depreciable asset has undergone achange due to increase or decrease in long term liability on account of exchangefluctuations, price adjustments, changes in duties or similar factors, thedepreciation on the revised depreciable amount should be providedprospectively over the useful life of the asset. In the given case, the nature ofchange in historical cost of the fixed asset is different i.e. it is not a situation of achange in the duty as such, but it is a case of an asset escaping payment of duty.Accordingly, the depreciation should be worked out on restrospective basis i.e.the depreciation in respect of the past years since the acquisition of the dredgersshould be charged in the profit and loss account of the current year and shouldbe disclosed as a prior period item.

Depreciation On Building Used For Factory And Office Purposes

Query

Snowbright Ltd. , a newspaper company owns a building. The basement of thebuilding is used for printing, whereas the rest of the building is used for office

purposes. As per Schedule XIV, SLM depreciation on office buildings is 1.63%and factory buildings is 3.34%. For calculating depreciation, can Snowbrightapply 1.63% for office portion and 3.34% for basement? Assume two scenarios useful life of a building is (a) 25 years (b) 75 years.


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Response

As per as-6, depreciation accounting, depreciation is based on the useful life ofan asset. If based on an assessment of the useful life, depreciation is higher than

the statutory rates, higher depreciation should be applied. If based on the usefullife assessment depreciation is lower than the statutory rate, minimumdepreciation based on the statutory rate should be followed. In the given case,the building is used for office s well as factory purposes; however, the entirebuilding can only have one useful life.

In the scenario where the useful life is 25 years, the entire building is depreciatedon SLM basis over 25 years. In the scenario where the useful life is 75 years, theminimum statutory depreciation should be provided the following alternatives

may be permissible:

(a) 3.34% SLM depreciation is provided on the entire building since one buildingcan only have one rate of depreciation or one useful life and therefore the higherrate is applied

(b) 1.63% can be applied on office portion and 3.34% can be applied on factoryportion- this could be justified on the grounds that it should achieve properallocation of deprecation to future years based on Schedule XIV requirement.

The view in (a) is the preferred view and the one in (b) is an alternative view.

Proportionate Depreciation On Purchase / Sale Of Assets During The Year

Note no. 4 in Schedule XIV to the Companies Act, 1956, prescribes that Whereduring any financial year, any addition has been made to any asset, or where anyasset has been sold, discarded, demolished or destroyed, the depreciation on

such assets shall be calculated on a pro rata basis from the date of such additionor, as the case may be, up to the date on which such asset has been sold,discarded, demolished or destroyed. A company may group additions anddisposals in appropriate time period (s), eg. 15 days or a month, for the purposeof charging pro rata depreciation in respect of additions and disposals of itsassets keeping in view the materiality of the amounts involved.


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Depreciation should be provided when the asset is installed even though not inuse (but is ready for use) for the whole or part of any financial year, due toreasons like strike, lock-out, shortage of raw materials etc. However, if the assetis not installed and is thus not ready for being put to use, depreciation should

not be provided on them. If a company has purchased certain equipments whichare in capital WIP, since civil work has been delayed for a long period, thecompany should not provide depreciation on the equipments.

Disclosure

The following information should be disclosed in the financial statements:

(1) The historical cost or other amount substituted for historical cost of eachclass of depreciable assets

(2) Total depreciation for the period for each class of assets(3) The related accumulated depreciation

The following information should also be disclosed it eh financial statementsalong with the disclosure of other accounting policies

(1) Depreciation methods used(2) Depreciation rates or the useful lives of the assets if they are different from

the principal rates specified in the statue governing the enterprise.

If any depreciable asset is disposed of, discarded, demolished or destroyed, thenet surplus or deficiency, if material should be disclosed separately.

A change in the method of depreciation is treated as a change in accountingpolicy and is disclosed accordingly.

In case the depreciable assets are revalued, the provision for depreciation isbased on the revalued amount on the estimate of the remaining useful life of

such assets. In case the revaluation has material effect on the amount ofdepreciation, the same is disclosed separately in the year in which revaluation iscarried out.


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Disclosure Of Central Government Approval For Not Providing Depreciation

An example of this can be found in the 2001 02 financial statements of centurytextiles and industries Ltd. arrears of depreciation for the accounting years

1999 2000 and 2000 2001 remaining to be provided in respect of the threedivisions, namely, Maihar cement unit ii, century pulp & paper and centurydenim, pursuant to the approval of the central government under section 2005 (2)(c) of the companies act, 1956 as at 31 st march, 2002 aggregates Rs. 115.42 crore(previous year rs. 130.13 crore).

Commentary On Depreciation Recognition, Measurement And DisclosurePractices

The authors observation in respect of depreciation practices based on anindependent review of financial statements are set out below:

1. AS 6 and Schedule XIV requires depreciation to be provided eitherunder the straight line method or the written down value method;however, a few enterprises have applied other methods such as the unit ofproduction method which is not appropriate. Further in those situationsit is not clear whether the unit of production charge is equal to or higherthan the Schedule XIV charge.

2. Most enterprises have followed the minimum depreciation rates set out inSchedule XIV rather than applying the greater of Schedule XIV rate andthe rate determined based on managements estimate of useful life of theasset in accordance with AS 6. However many enterprises haveconsidered accelerated depreciation in respect of computers.

3. Continuous process plants are subject to single shift depreciation, whereasin the case of non-continuous plant multiple shift depreciation is requiredto be provided. It is generally been observed that there is very little

disclosure on how a continuous process plant has been defined by anenterprise, wherever it is applicable.4. Many enterprises have not disclosed the depreciation policy in respect of

additions / deletions during the year, which needs to be disclosed if theamounts involved are significant.


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5. Many enterprises have not defined if they have a separate policy for lowvalue items and the threshold amount that defines what a low value itemis.

6. Most enterprises have disclosed differences in depreciation rates as set out

under Schedule XIV and those applied in the preparation of the financialstatements. This disclosure is required by Schedule XIV.

7. Changes in depreciation method and rates applied are common andwithout due regard to (i) the useful life of the asset (ii) the mostappropriate depreciation method (iii) justification for change in themethod.

8. Changes in depreciation basis has been achieved by using several options,eg.

a. Change in economic useful life (or depreciation rate)b. Change in depreciation methodc. Change in classification of the item being depreciatedd. Change in classification of plant from continuous to non

continuous and vice versae. Change in determining extra shift charge for eg. By determining

extra shift at performance unit level rather than for the companyas a whole has reduced depreciation impact.

9. A few enterprises have applied innovative accounting for eg., theadditional burden on change in method of depreciation has bee recoupedfrom general reserve such a practice ensures that additional burden ofdepreciation does not reduce profits and EPS, though for MATt purposethe recouping out of general reserves will be ignored. Further, byincreasing the depreciation in the financial books there is a reduction indeferred tax liability the credit for which is directly taken to the profit andloss account. For MAT purposes this credit is ignored. In other words,MAT profit have been kept minimum and book profits have beenmaximised.

10. Some enterprises have applied different depreciation rates for the sameclass of assets depending on when the asset was capitalized, for example,pre 2000 10% and post 2000 15%. Whilst this approach seems to havegained acceptance in the Indian industry, it may be non compliant with


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as 6. Under AS 6, depreciation is provided at greater of schedule xiv ratesand rates estimated by management based on the assets economic usefullife. It is impossible to conceive that the same asset would have differenteconomic useful life depending on when they were capitalised. Hence in

the authors view, depreciating the same class of asset using two differentdepreciation rates depending on a cut off of capitalisation is notpermissible.

11. Some enterprises have not provided for depreciation pursuant to a centralgovernment order under section 205 (2) (c) of the companies act; a factadequately disclosed in the financial statements.

12. Some enterprises have provided depreciation on investment propertieswhereas others have not. Under section 205 and 350 read with Schedule

XIV of the Indian companies act, no distinction is made between fixedassets and investment properties and hence depreciation would berequired on all assets owned by the company irrespective of how theyhave been disclosed in the financial statements. As to whether it would benecessary to provide for depreciation in respect of immoveable propertywhich has been acquired as an investment for the purpose of earningsupplementary income and not for the use of the company, thedepartment of company affairs has opined that as such immovable

properties unless they are acquired for resale represent fixed assets, itwould be obligatory to provide depreciation thereon. (Circular no (10) CL VI/61, dated 27-9-1961). Even under AS 6, depreciation would berequired to be provided on investment properties.

13. In one instance the following policy was disclosed no depreciation hasbeen charged on the assets, which have not been put to use during theperiod. The point here is that depreciation should commence when theasset is ready for its intended use rather than when the enterprise is readyto use the asset. Therefore the above policy may not be in strictcompliance with AS 6. However if the assets were not installed and notready for its intended used, but were lying idle, then depreciation shouldnot be provide.

14. There were few interesting examples, where the depreciation rate appliedfor a class of asset was lower than that set out under Schedule XIV but on


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an overall basis the aggregate depreciation was higher than Schedule XIVdepreciation. This in the authors view is non-compliance with ScheduleXIV, since compliance should be determined with respect to each class ofassets and not the entire fixed assets of the company.

Depreciation Calculation

(Working Example I)

A working of Depreciation followed at Future Capital Real Estate.(The real estate arm of Future Capital Holding)

Original Cost 30-Apr-05 2,039,844Depreciation Upto 31.3.08 565,428WDV as on 31.3.08 31-Mar-08 1,474,416

If Sale date 31-Aug-08Depn from April 08 to Aug 08

Days 154Rate of Depreciation 9.50%Depn Amount for April 08 toAug 08 81,761

Total Depreciation as on 31.8.08 647,189

Original Cost 2,039,844Depreciation upto 31.8.08 647,189WDV as on 31.8.08 1,392,655Sales consideration 101,992Loss 1,290,662


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The above table presents the depreciation calculation for an x asset followed atFuture Capital Real Estate the real estate arm of Future Capital Holding.

Depreciation is followed at Straightline MethodElucidation

The Original Cost of the asset is(date of purchase of asset is 30-April-2005) Rs. 2,039,844

Depreciation upto 31.3.2008 (A) Rs. 5,65,428(Includes depreciation for 3 years starting May 05 onwards - 05-06, 06-07 & 07-08)

Written down value as on 31-March-2008 Rs. 1,474,416

If the sale date is 31-Aug-2008Then depreciation from April 2008 to August 2008For 154 days @ 9.50% (B) Rs. 81,761

Total Depreciation (A) + (B) Rs. 647189

Original Cost Rs. 2,039,844Depreciation upto date of sale Rs. 647189WDV as on 31-Aug-2008 Rs. 1,392,655Sales consideration Rs. 101,992Loss Rs. 1,290,662


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(Example 2)

Balance Sheet of Future Capital Holdings Ltd.


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Schedule Annexed to and forming part of Consolidated Balance Sheet

(Example 3)

Fixed Assets and Depreciation

Tangible AssetsFixed Assets are stated at cost less accumulated depreciation and impairmentlosses, if any. Cost comprises the purchase price and any other directlyattributable costs of bringing the asset to its working condition for its intendeduse.


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Leasehold improvements are depreciated on straight line basis over primaryperiod of lease agreements.

Intangible Assets

Intangible assets include goodwill, domain names, trademarks, copyrights andcomputer software, which are acquired, are capitalized and amortized on astraight line basis over the estimated useful lives ranging from 5-10 years.

Expenditure related to and incurred on commissioning of new branch iscapitalized as cost of improvement/cost of network development of the branchand recognized as intangible assets.

Depreciation

Depreciation is provided using Straight Line Method as per the useful lives ofthe assets estimated by the management or at the rates prescribed underSchedule XIV of the Companies Act, 1956, whichever is higher.

Tangible assets and intangible assets costing Rs. 5,000 or less individually are

fully depreciated/amortized in the year of purchase.


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(Example 4)

At Future Capital Real Estate, employees can avail of a benefit termed as HardFurnishing, details on the policy are stated as under:

HARD FURNISHING POLICY

1.

Objective

The objective of this policy is to enable the employees to acquire capitalitem for their personal use.

2.

Applicability

All the confirmed employees in Band 3, 4 & 5 with effect from 1st July2005 (Revised on 1st July 2006).

3.

Guidelines

The Hard Furnishing entitlement is for a period of three years . The three years block period commences from the date of purchase. The employee may avail of his/her entitlement in either one part, by

taking items up to the maximum ceiling at one time, or break it into twoparts, by taking items at two different times. However, the employee mayNOT avail of it in more than two parts.

In case the employee has not claimed his / her full entitlement up at theend of the block period of three years, the remaining amount will lapseand cannot be carried forward to the next block of three years.

On completion of the block of three years, the employee will be eligible to

claim a fresh entitlement, as per the policy, at the start of the next block.This will apply only in case the employee has availed his entitlement fromthe date of eligibility, i.e., confirmation. If the employee avails on a laterdate, the block starts from the date he claims his entitlement.

In case of a promotion, if the entitlement increases, the employee mayavail of the incremental difference.


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4. Entitlement

The entitlement under this policy would vary as follows:

Position Value (Rs.)

(for block of 3 years)

Head 3,00,000/-

Chief 2,25,000/-

Sr. Manager 1,50,000/-

Manager 1,20,000/-

Manager 90,000/-

Asst. Manager 60,000/-

No option available for encashing this benefit.

4.

Process of Availing Entitlement

The employee is required to fill the Hard Furnishing Form. It is to beapproved by the HOD and sent to HR. After Head HR approval, it issent to Finance.

In order to receive the actual payments for the items purchased theemployee needs to attach the respective Performa Invoice(s) and VATnumbers of the dealer in the name of FUTURE CAPITAL REALESTATE

The cheque(s) will be made in the name of the Registered dealer /agent by the Finance Department. All payments will be made through

cheque only. The employee has to submit the original bill from the dealer withinone month of receiving the cheque or else the amount availed will beshown as an advance in the employee's account.

If an employee has availed of this benefit and if s/he resigns during theblock of three years, he would have to buy the items compulsorily atwritten down value.


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5.

Selection of Hard Furnishing

The employee may select hard furnishing items of his / her choice;however, the items should purely be capital items as defined under theIncome Tax Act.

The typical items included are sofas, furniture, personal computer,fans, air conditioners, refrigerators, washing machine, microwave,oven, cooking range, water purifier, dish washer, mixer / grinders, TV,VCR, music systems, inverters etc.

6.

Purchase Of Items

The items will be purchased by the company on the employees

request and will be assets in the companys name. At the end of three years, it is mandatory for the employee to buy offthe asset from the company. As per the policy this will be at 5% of theoriginal cost at which the company bought them.

In case, employee resigns from the company before three years fromthe date of the purchase of assets, then the employee is required topurchase the assets from the company at the cost, reduced bydepreciation calculated at the rate of 31.67% per annum.

7.

Repair And Maintenance Of Assets

Repair and maintenance of goods purchased under this scheme will bethe employees responsibility entirely. The employee is expected totake good care of the assets and keep them in good working condition.In case the employee wishes to insure these items, it will be at hispersonal cost.

8.

Income Tax

The hard furnishing items will be given as assets to the employee forhis/her use and treated as perquisites under income Tax Act. Thetaxable value of this perquisite will be calculated as mentioned in thebelow attached document.


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Annexure (2) Items & Perquisite Value for Hard Furnishing (Few egs.)

Item Category Yearly Perquisite ValuePerquisite Value at thetime of sale of Assets to

the Employee (After 3years)

Computers Computers &Laptops

Nil 7.50% of the cost of assets

Laptop Computers &Laptops

Nil 7.50% of the cost of assets

Camera Electronics 10% of the cost of assets 7.50% of the cost of assetsThe above perquisite value will be added to the employees annual taxable income .

Attached is the full & final settlement statement of one of the ex-employees whohas left us within three years of purchase of the asset. The amount ofdepreciation is mentioned and the working given:

FULL & FINAL SETTLEMENT

Employee no : xxxDate ofJoining: 17-Jul-07

Employee Name : xxxDate ofResignation: 01-Aug-08

Designation xxxDate ofLeaving 31-Oct-08

Department: xxxBand: xxx

A) Amount Due to Employee Amount Rs Amount Rs

1Salary Payable for the Month( 31 days )

Basic 87,500 87,500

HRA 52,500 52,500Conveyance -


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Adhoc 98,725 98,725Total 238,725

2 Food coupon (Comments) 1,300 1,300

3 Exgratia (Comments) -

4 LTA 38,819 38,819

5 Medical Reimbursement (NonTaxable) 1,250 1,250

6 Leave Encashment (12days) 96,010 96,010

7 Petrol & Car maintenance 232,911 232,911

8 Driver's Salary 100,928 100,9289 Other

Total Amount Due to Employee (A) Total 709,944Less

B) Amount Due From Employee1 Salary Recovery - -

2 Hard furnishing 41,102 41,1023 Company Car Recovery4 Food Coupon Recovery

5 Other RecoveryTotal Amount Due From Employee (B) Total 41,102C) Less Deductions

1 Provident Fund 87,500 10,500 10,5002 Provident Fund on Leave Encashment

3 Profession Tax 200 200

4 Income Tax 22,326 22,3265 Other Misc

Deductions (C ) Total 33,026TOTAL DUES PAYABLE(RECEIVABLE) (A-B-C) 635,816PREPARED BY CHECKED & APPROVED BY

xxxxx xxxxxx


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BIBLIOGRAPHY

Indian Accounting Standards The finance team of Future Capital Real Estate and Future Capital

Holdings

fin acc project depriciation

Documents