The entire concept of charging depreciation to fixed assets has been evolved as per the new act. Schedule XIV of the old Act specified minimum rates of depreciation to be provided by a company. Unlike that, Schedule II to the 2013 Act requires systematic allocation of the depreciable amount of an asset over its useful life. The Ministry of Corporate Affairs (MCA) vide its Notification dated 26-03-2014 has appointed 1.04.2014 as the date from which Schedule II comes into force. Let's have a brief of the salient features of this Schedule.
Useful Life
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. All companies shall be classified into three categories to determine the application of useful lives.
o In prescribed class of Companies who comply with Accounting Standards prescribed for them, such companies can opt either to use useful lives and residual values prescribed in Schedule II or different useful lives or residual value for their assets, provided they disclose justification for the same. This class of companies is yet to be notified.
o Class of Companies or Class of assets, whose useful lives or residual values are prescribed by any statutory authority or legislation (Electricity companies, Insurance companies etc.,): These companies will use depreciation rates or useful lives and residual values prescribed by relevant authority or legislation for depreciation purposes.
o Other companies: The useful life of an asset will not be longer than the useful life and residual value will not be higher than that prescribed in the schedule.
The crux to the above discussion says that, whether as per the schedule or not, depreciation will be based on the useful life of assets.
Component Approach
The useful lives prescribed in Part C of Schedule II pertain to whole of the assets. Where cost of a component of the asset is significant to the total cost of the asset and useful life of that component differs from that of the asset, then the useful life of that component shall be determined separately and depreciation is calculated accordingly. This is called Component Approach. This concept of accounting which was hitherto not there has been introduced with the Companies Act, 2013. This approach is in consonance with the depreciation computation prescribed in Indian Accounting standards (Ind AS16).
Depreciation on Revalued Assets
As of now, in case of Revaluation of Assets the following accounting treatment was in vogue; depreciation arising on account of upward revaluation of Fixed Assets is to be transferred from Revaluation Reserve to Profit & Loss account. The aforesaid accounting treatment is prescribed as per Guidance note given by our Institute (ICAI) on “Treatment of Reserve created on Revaluation of Fixed assets”, which specifies that only depreciation pertaining to historical cost needs to be provided out of current profits of the company.
But now the concept is altogether different.
The depreciable amount of an asset is the cost of an asset or other amount substituted for cost, less its residual value.
Therefore, in case of revaluation, depreciation will be based on the Revalued amount. Consequently, the ICAI Guidance Note may not apply and full depreciation on revalued amount is expected to be provided.
Transitional Provisions
The carrying amount of the asset as on 01.04.2014 will be depreciated over the remaining useful life of the asset according to the Companies Act, 2013 and if the remaining useful life is nil, then any carrying cost remained apart from Residual Value will be recognized in the opening retained earnings.
Some other provisions
In case, any addition has been made to any asset, or where any asset has been sold, discarded, demolished or destroyed during any financial year, the depreciation on such assets shall be calculated on a pro rata basis from the date of such addition or, as the case may be, up to the date on which such asset has been sold, discarded, demolished or destroyed.
This provision is same as contained in the old act.
Under the old Act assets whose actual value does not exceed ₹ 5000 shall be provided depreciation at 100%. But there is no such specific provision under the Companies Act, 2013.
Apart from Straight Line and Written Down Value Methods of Depreciation, Unit of Production Method is also an acceptable method of depreciation under the new Act.
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Submitted By: Aashish Sachdev
Email-id: aashishsch@gmail.com
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