09 July 2015
In case of Depreciation as per Companies Act 2013, Sch II specifies the useful Life of all the assets and in case the actual Useful life exceed the life as per Sch II then we need to provide justification along with Technical advice. So, do we need a Certificate from Technical Experts certifying the useful life or just a disclosure in Significant Accounting Policy is Sufficient?
21 July 2024
Under Schedule II of the Companies Act, 2013, if the useful life of an asset as determined by the company exceeds the useful life specified in the Schedule, the company is required to provide justification for using a different useful life. Here's how this requirement can be interpreted and implemented:
1. **Justification Requirement:** - The law requires justification for using a different useful life, especially if it exceeds the one specified in Schedule II. - The justification should ideally include technical advice or reasoning supporting why the company believes the asset's useful life is different from the Schedule II prescribed life.
2. **Form of Justification:** - While the Act does not explicitly mandate a certificate from a technical expert, it does require a reasoned justification. - Typically, companies disclose their accounting policies, including depreciation policies, in their financial statements' Significant Accounting Policies (SAP) section. - The justification should be thorough and based on technical analysis or expert opinion, whether internal or external.
3. **Internal vs. External Certification:** - Whether an internal technical expert's opinion is sufficient or an external certification is required can depend on the complexity and materiality of the assets involved. - If the company has internal technical experts who can provide a credible and substantiated opinion on the useful life of the assets, this may suffice. - For more complex or critical assets, external technical experts might provide an independent validation, which could enhance the credibility of the justification.
4. **Disclosure in Financial Statements:** - Regardless of whether internal or external expertise is used, the justification and any technical advice should be disclosed in the Significant Accounting Policies section of the financial statements. - This disclosure ensures transparency and informs stakeholders about the basis on which the company has determined its depreciation policy.
5. **Compliance Considerations:** - It's important for companies to comply with the spirit of Schedule II by providing a reasoned basis for any deviations in useful life. - The justification should be reviewed periodically to ensure it remains relevant and appropriate based on the asset's performance and industry standards.
In summary, while a certificate from an external expert is not explicitly required under the Companies Act, 2013, a thorough and well-supported justification for any deviation in useful life is essential. Whether the company relies on internal technical expertise or seeks external validation depends on the circumstances and nature of the assets involved. Transparency and adherence to accounting standards are crucial for accurate financial reporting and regulatory compliance.
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