02 July 2020
We have changed the constitution from LLP to Private Limited Company w.e.f. 01.01.2020 in the LLP, we were following the depreciation rate as per income tax act.
In the Private Limited, we have to follow the companies act compulsorily. How to adjust the difference in values of fixed assets due to change in the depreciation rate?
09 August 2020
Keep everything as per Companies Act and show Entire Accumulated Depreciation alongwith Gross Fixed Assets Values in BS. For paying Income Tax Depreciation calculations needs to be worked separately.
10 August 2020
But what about change in accumulated depreciation due to change in useful life? should it be debited / credited to Profit & Loss account?
19 July 2024
When there is a change in the depreciation method due to a change in the constitution (from LLP to Private Limited Company), and you are now required to follow the Companies Act depreciation rates instead of the Income Tax Act rates, it affects both the carrying amount of fixed assets and the accumulated depreciation.
### Adjusting Fixed Assets and Accumulated Depreciation:
1. **Change in Carrying Amount of Fixed Assets:** - Calculate the difference between the carrying amount of fixed assets as per the Income Tax Act depreciation and the carrying amount as per the Companies Act depreciation method. - This difference is typically adjusted directly against the opening balance of retained earnings (or accumulated profits) in your financial statements as of the date of transition (01.01.2020 in your case).
2. **Adjustment of Accumulated Depreciation:** - Accumulated depreciation under the Income Tax Act would differ from what would have been accumulated under the Companies Act due to different depreciation rates and methods. - The adjustment in accumulated depreciation should be made to align with the Companies Act rates from the date of transition (01.01.2020). - Calculate the difference between the accumulated depreciation as per the Income Tax Act and the Companies Act methods. - This adjustment impacts the opening retained earnings or accumulated profits as of the transition date.
### Treatment in Financial Statements:
- **Impact on Retained Earnings/Accumulated Profits:** - Debit or credit the difference in carrying amounts of fixed assets and accumulated depreciation to retained earnings or accumulated profits as of 01.01.2020. - This adjustment is considered a prior period adjustment and should be disclosed in the financial statements as such.
- **Disclosure:** - Provide adequate disclosure in the notes to your financial statements explaining the nature of the change in depreciation method and its impact on fixed assets and accumulated depreciation. - Disclose the amount of adjustment made to retained earnings or accumulated profits due to the change in depreciation policy.
### Example Adjustment Entry:
Assume: - Carrying amount of fixed assets as per Income Tax Act depreciation: ₹1,000,000 - Carrying amount of fixed assets as per Companies Act depreciation: ₹950,000 - Accumulated depreciation as per Income Tax Act: ₹300,000 - Accumulated depreciation as per Companies Act: ₹280,000
The adjustment due to the change in depreciation method should be recorded in the retained earnings or accumulated profits as of the transition date (01.01.2020). This ensures that your financial statements reflect the correct carrying amounts of fixed assets and accumulated depreciation as per the Companies Act requirements. Always consult with a qualified accountant or financial advisor to ensure compliance with relevant accounting standards and regulations applicable to your jurisdiction.
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