Overview of Schedule II of Companies Act 2013

The Schedule II of the Companies Act, 2013 namely, Useful lives to compute Depreciationhave been brought into effect from 1st April, 2014 with a General Circular 08/2014 dated 4th April, 2014, replacing the Schedule XIV of the Companies Act, 1956 where the rates for providing depreciation were specified as per the SLM and WDV method.

For better understanding of the Schedule II of Companies Act, 2013 the terms used in this Schedule shall be discussed.

Terms used in Schedule:

1. Depreciation: In common parlance, As per AS-6 “Depreciation Accounting” as issued by ICAI, It is a measure of 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. As per Schedule II, It is the systematic allocation of the depreciable amount of an asset over its useful life.

2. Depreciable Amount: It is the cost of an asset or other amount substituted for cost, less its residual value.

3. Useful Life:(i) It is the period over which an asset is expected to be available for use by an entity, or (ii) the number of production or similar units expected to be obtained from the asset by the entity.

4. Residual Value: As per Schedule II of Companies Act, 2013 the residual value of the asset shall not be more than 5% of the original cost of the asset.

5. Amortisation: As per AS-26 “Intangible Assets” as issued by ICAI, amortisation means the systematic allocation of the depreciable amount of intangible asset over its useful life. For the purpose of Schedule II the term depreciation includes amortisation.

The Schedule gives the utmost importance to the Useful lives and Residual Value of the different assets. In order to understand the provisions related to Useful Lives in the Schedule the same are discussed in detail.

Schedule about Useful Life and Residual Value

The Schedule clarifies that the Useful Life of an asset shall not be longer than the useful life specified in ‘Part C’of the ScheduleandResidual value shall not be more than 5% of the original costbut in case where the company uses a useful life or residual value of an asset which is different from the above limits, justification for the difference shall be disclosed in financial statement.

Example for Useful Life:If the management has estimated the useful life of an asset to be 10 years and life as specified in Schedule II is 8 years only. Schedule II requires the disclosure of justification for using the higher life and similar position will apply if the Schedule II specifies the useful life to be 12 years.It requires the disclosure of justification for using the lower life.          

Example for Residual Value: If the management has estimated the residual value of an asset to be 10% of the original cost as against 5% of the original cost. Schedule II requires the disclosure of justification for using the higher residual value.

Useful Life or residual value governed by other regulatory authority

‘Part B’ of the Schedule states that if the useful life or residual value of any specific asset is notified for accounting purposes by a Regulatory Authority constituted under an Act of Parliament or by the Central Government shall be applied in calculating the depreciation irrespective of the requirements of the Schedule.

For example: The MCA had issued a General Circular dated 31 May 2011, which states that for companies engaged in generation/supply of electricity, rates of depreciation prevail over the Schedule XIV to the Companies Act, 1956.

Amortisation of Intangible Assets

Schedule II requires that the provisions of the accounting standard shall be applicable for the amortisation to be provided to the intangible assets i.e. the provisions of AS-26 “Intangible Assets” shall be applicable to amortise the intangible assets.

But, MCA had notified by the amendment on March 31, 2014 providing the manner to amortise the ‘Build, Operate and Transfer’ (BOT), ‘Build, Own, Operate and Transfer’ (BOOT) or any other form of ‘Public Private Partnership Route’ (PPP) in case of Road Projects. According to it, the company may use the Revenue Based Amortisation for such assets.

Mode of Amortisation

Amortisation Amount = Amortisation Rate / Cost of Intangible Assets X 100 OR

 = Cost of Intangible Assets x  Actual Revenue for the year / Projected Revenue from Intangible Asset                                                                                                                                                                                 Example:

Cost of Creation of Intangible Assets: 50 Crores

Total Period of Agreement: 4 Years

Time Used for Creation of Intangible Asset:1 Year

Intangible Asset to be amortised in: 3 Years

*Will be actual at the end of financial year

Based on this, Amortisation amount for the first year would be (50 Crores x 60/300) 10 Crore which would be charged to profit and Loss and Amortisation Rate would be (10/50 x 100) 20% for the first year.

After discussing the provisions as provided in Schedule, the practical application of these provisions have to beknown regarding the transition from Schedule XIV of the Companies Act, 1956 to the Schedule II of the Companies Act, 2013.

Transitional Provisions under Schedule II

Schedule II specifies that the carrying amount of the asset as on1st April, 2014:-

1. Shall be depreciated over the remaining useful life of the asset as per this Schedule.
2. After retaining the residual value, shall be recognised in the Opening balance of retained earnings where the remaining useful life is nil.

For this purpose, company needs to identify the date of acquisition of each existing asset and assess the remaining useful life of that asset in accordance with the useful lives specified in ‘Part C’ of the Schedule.

For instance: Schedule II specifies the life of General Plant and Machinery to be 15 Years and if a company had purchased the machinery on 2nd April, 2001. The remaining life of such machinery as on 1st April, 2014 (the date of its applicability) will be 2 Years.

 The company may use both the methods of Depreciation:

1. Straight Line Method (SLM)
2. Written Down Value Method (WDV)

The use of above provision is different in both the methods of the depreciation:

a. Straight Line Method (SLM)

In this method of depreciation, the carrying amount of the asset shall be depreciated over the remaining useful life of the asset after retaining the 5% value of original cost (Residual Value). The application of transitional provision is simple as the asset is depreciatedequally over the remaining useful life.

For Example: The Company purchased the Machinery on 1st April, 2002 for Rs. 1,00,000. Now, as per Companies Act, 1956 the company used the rate of depreciation as specified there which is 6.33% on SLM basis. So, the Depreciation for every year till 2013-14 would have been Rs.6,330. Therefore, WDV as on 1st April, 2014 will beRs. 24,040.  The useful life specified for Plant and Machinery in Schedule II is 15 Years. So, the remaining useful life on 1st April, 2014 would be 3 Years and Residual Value Shall be 5% of original Cost i.e. (1,00,000 x 5%) Rs.5,000.

In this Case, Depreciation for each year till 3 years shall be=(24,040-5,000) /3 = Rs.6,347

b.  Written Down Value Method (WDV)

In this method, a rate needs to be derived to be applied each year on the carrying amount of the asset for the depreciation to be provided considering the useful lives as specified in the Schedule to depreciate the asset over the remaining useful life of that asset.
The above rate can be derived using the formula:

Rate=1- [Residual value/Cost of the Asset or Written Down Value*]^(1/Remaining useful Life of Asset)x 100

* Cost is used for the asset newly purchased and Written Down Value is used for existing asset

Taking the same example as above:

The Company purchased the Machinery on 1st April, 2002 for Rs. 1,00,000. Now, as per CompaniesAct, 1956 the company used the rate of depreciation as specified there which is 18.10% on WDV basis. Therefore, WDV as on 1st April, 2014 will be (1,00,000 X (1-0.1810)^12) Rs.9,108 (approx).  The useful life specified for Plant and Machinery in Schedule II is 15 Years. So, the remaining useful life on 1st April, 2014 would be 3 Years and Residual Value Shall be 5% of original Cost i.e. (1,00,000 x 5%) Rs.5,000.

In this Case, Depreciation Rate = 1-{5,000/9,108}^(1/3) X 100 = 18.12% (approx.)

Depreciation Amount for the 13th Year =9,108 x 18.12% = 1,650; WDV = 9,108-1,650 = 7,458

Depreciation Amount for the 14th Year = 7,458 x 18.12% = 1,351; WDV = 7,458-1,351 = 6,107

Depreciation Amount for the 15th Year = 6,107 x 18.12% = 1,107; WDV = 6,107-1,107 = 5,000

So, WDV at the end of 15th Year = Residual Value

This shows that at the end of the useful life of the asset i.e. 15 Years, only the residual value is left as the Written Down Value of the Asset till it is used after lapsing of its useful life.

Where the Remaining useful life of asset is Nil

In case, the Useful life of the asset is lapsedas on 1st April, 2014, the difference between the Opening WDV as on 1st April, 2014 and Residual value (5% of the original cost) shall be adjusted from the Opening Reserve and Surplus existing on 1st April, 2014.

For Example: If the Machine is purchased before 1st April, 1999 for Rs.1,00,000 and the WDV as on 1st April, 2014 is say, Rs. 18,000 and the Useful life as specified in Schedule II is say 15 years which is lapsed as on 1st April, 2014.

In this case, the difference between WDV as on 1st April, 2014 i.e. Rs. 18,000 and Residual Value (5% of Cost) i.e. (5% of 1,00,000) Rs.5,000 shall be adjusted from the Opening Reserve and Surplus for the year 2014-15. So, Difference of (18,000-5,000) Rs.13,000 shall be adjusted from Opening Reserve and Surplus.

Where the WDV of an asset is less than 5% of its original cost no adjustment shall be done. 

As per the ICAI announcement:

If the Company opts to adjust the carrying amount of the assets to the retained earnings in accordance with the transitional provisions of the Schedule II, the tax effect of the same has to be also adjusted directly against the retained earnings. “Tax effect of expenses/income adjusted directly against the reserves and/ or Securities Premium Account.”.

Some Other Important Points

1. Component Accounting:

The useful life of an asset specified in Part C is for whole of the asset. Where the cost of part of asset is significant to the total cost of the asset and useful life of the part is different from the useful life of the remaining asset, useful life of that significant part shall be separately determined. The above requirement is known as Component Accounting.

For instance:

Building may be split into:

1. Structural Design
2. Elevators
3. Heating System
4. Water System

2.  Double/triple Shift Working:

The useful lives in Part C of the Schedule are based on single shift working, if an asset is used for the time during the year for double shift, the depreciation shall increase by 50% for that period and in case of triple shift the depreciation increase by 100% for that period.

At last, the key changes between Schedule II of Companies Act, 2013 and Schedule XIV of Companies Act, 1956 should be reviewed:

• Schedule II of Companies Act, 2013 prescribes the useful lives for different assets as compared to Schedule XIV of Companies Act, 1956 which provided different rates on SLM and WDV basis for calculating depreciation.
• No separate rate for double/ triple shift; depreciation to be increased based on the double shift/triple shift use of the assets whereas in Companies Act, 1956 different rates were specified for double/triple shift.
• No reference is given in Schedule II is given to depreciation on low value assets.

Schedule II of Companies Act, 2013 can be veiwed on MCA site