2. Applicability
This Statement applies to all depreciable
assets, except :—
– (i) forests, plantations ;
– (ii) wasting assets, Minerals and Natural Gas;
– (iii)expenditure on research and development;
– (iv) goodwill;
– (v) live stock – Cattle, Animal Husbandry.
This statement also does not apply to land
unless it has a limited useful life for the
enterprise.
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3. concept of Depreciation
Depreciation is a measure of the wearing
out, consumption or other loss of value of
a depreciable asset arising from
– use,
– effluxion of time or
– obsolescence through technology and market
changes.
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4. Depreciable assets are assets which
– (i) are expected to be used during more than
one accounting period; and
– (ii) have a limited useful life; and
– (iii) 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 not for the purpose of sale in the ordinary
course of business
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5. Useful life is either
(i) the period over which a depreciable
asset is expected to be used by the
enterprise; or
(ii) the number of production or Similar
units expected to be obtained from the use
of the asset by the enterprise.
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6. Useful life of a depreciable asset should be estimated
based on :
Expected physical wear & tear;
Obsolescence;
Legal & other limits on the use of assets.
The useful life of a depreciable assets is shorter than
its physical life. This is due to:
Legal & contractual limits, such as the expiry of
related leases;
Extent of use & physical deterioration;
Obsolescence arising from technological changes,
change in market demands, legal & other
restriction 6
7. Depreciable Amount
Depreciable amount means historical cost
less estimated residual value. E.g.
– Cost of Asset is Rs. 5,00,000, ERV is Rs. 25,000.
Then, The Depreciable Amount will be Rs.
5,00,000 – Rs. 25,000 i.e. Rs. 4.75,000.
The depreciable amount of a depreciable
asset should be allocated on a systematic
basis to each accounting period during the
useful life of the asset.
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8. Dep. on Addition/Extensions
Any addition or extension which becomes an
integral part of the existing asset should be
depreciated over the remaining useful life of that
asset. The depreciation on such addition or
extension provided at the rate applied to the
existing asset.
Where an addition or extension retains a separate
identity and is capable of being used after the
existing asset is disposed of, depreciation should
be provided independently on the basis of an
estimate of its own useful life.
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9. Method of Charging of Depreciation
There are several method of depreciation:
– Straight Line Method (SLM)
– Written Down Method (WDV)
– Sum of year Digits Method
– Annuity Method
– Machine Hour Method
– Production Hour Method
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10. Chance in Method of Depreciation
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.
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11. Chance in Method of Depreciation
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.
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12. Disclosures
If any depreciable asset is disposed of,
discarded, demolished or destroyed, the net
surplus or deficiency, if material, should be
disclosed separately.
The following information should be disclosed
in the financial statements:
– (i) the historical cost or other amount substituted
for historical cost (i.e. revalued amount) of each
class of depreciable assets;
– (ii) total depreciation for the period for each class
of assets; and
– (iii) the related accumulated depreciation.
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13. Disclosures
The following information should also be
disclosed in the financial statements along
with the disclosure of other accounting
policies:
– (i) depreciation methods used; and
– (ii) depreciation rates or the useful lives of the
assets, if they are different from the principal rates
specified in the statute governing the enterprise.
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14. Change in depreciation amount due to
change in method is to be given
retrospective effect but in all other cases
(like Change in Cost, Life, Revaluation
etc.) Change in depreciation is given
prospective effect
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15. Minimum Depreciation
The Department of Company Affairs has clarified
that the rates contained in Schedule XIV to the
Company Act, 1956 should be viewed as the
minimum rates, and, therefore, company cannot
charge depreciation at rates lower than specified in
the Schedule in relation to the assets. However, if on
technical evaluation, higher rate of depreciation are
justified, the higher rates should be applied.
Where rates other than Schedule XIV rates are
applied, Appropriate disclosers in the notes to the
accounts would be required 15
16. Depreciation on Items Below
Rs. 5000
As per Schedule XIV of the Companies Act, individual
items of fixed assets below Rs. 5000/- should be
depreciated at 100%. For Exp,
An item of furniture such as a chair or table is
capable of being used independently, therefore each
chair or table will have to be provided 100%
depreciation if its individual value does not exceed
Rs. 5000. The 100% provision cannot be avoided by
arguing that the furniture can be used only as a set,
i.e. a set of chairs, which in aggregate cost more
than Rs. 5000. CONTIN……
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17. In case of Plant and Machinery:
– Where the aggregate actual cost of individual
items of plant and machinery costing Rs.
5000 or less constitutes more than 10% of
total actual cost of plant and machinery,
normal Schedule XIV rates should be used.
(Note number 8 of Schedule XIV of the
Companied Act, 1956)
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18. Query
Info ltd. Has acquired on a 999 year lease a huge
piece of land for Rs. 999 lakhs from the
Government. The land along with any
construction thereon will revert to the
Government after 999 years. Since the said
period is very long and is akin to owning the
land, Info Ltd does not wish to amortise the
consideration. Is that acceptable under Indian
GAAP
? 18
19. Response
AS- 19 “Leases” does not apply to lease
agreement to use lands. AS 6 „ Depreciation
Accounting”, does not apply to land unless it has
a limited useful life for the enterprise. In other
words, if the life of land is limited than AS 6
would apply. In the given case, 999 years
though very long is still limited. Therefore, AS 6
would apply. Therefore each year Info Ltd will
have to charge Rs. 1 lakh to the income
statement as amortization expenses.
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