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Depreciation

Vinny (CA [Self-Employed]) (101 Points)

18 March 2016

A Sever is purchased, for which advance payment is made on 10.12.2015 and balance full amount paid on 04.01.2016.

So the depreciation would be calculated from the date when the Server is delivered (even if it is not put to use that day) or the payment dates above has any relevance regarding the date from which Deprecetiation would be chargeable.

Clarify.

Regards.

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9 Replies

Ravi kumar agarwal (CA Student) (48 Points)
Replied 18 March 2016

In this case the depreciation will be charged from the date of bill of purchase.

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(Guest)

Depreciation according to AS 6 should be calculated when the asset is "READY TO USE"..

in ur case, when u purchased the asset, it is not "ready to use" as u dont have the asset itself..by applying income tax provisions and accounting standards together, u should start the depreciation from the date of delivery to ur premise..

u should consult to an expert still if u want

3 Like

Amit Kanunga (Article Assistant and Post Gradute) (644 Points)
Replied 18 March 2016

Depreciation will start from The date of Invoice.

No matter when u have made payment for such.

(Guest)

what if the date of invoice is earlier than the date of delivery ? if u dont have the asset and only the invoice, wud u still charge depn?

Amit Kanunga (Article Assistant and Post Gradute) (644 Points)
Replied 18 March 2016

yes u have to charge Deprecition on th basis on Invoice.

The monetary value of an asset decreases over time due to use, wear and tear or obsolescence. This decrease is measured as depreciation.

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(Guest)

i agree with u that monetary value decreases due to time...but AS6 says that the asset should be "ready to use"...and undelivered assets are not "ready to use"...lets see if an expert answers our doubts

Abhimanyu (CA) (316 Points)
Replied 19 March 2016

By the definition of Depreciable asset, Para 3.2.iii "It is an asset HELD by an enterprise for use......" Now As per Framework on AS's issued by ICAI in 2006 Para 57-58 Explain "what is an asset" which should be read with the def. of Depreciable Asset given in AS 6 Para 3.2.i to iii which both explain the following, "1. Asset of an enterprise result from past transaction or other past events. 2. Transactions or other EVENTS (here expected delivery of asset) does not give rise to asset eg. An intention to buy asset or advance given to buy machinery does not give rise to asset i.e. Machinery, we will write advance for Machinery and can not debit Machinery itself unless we have taken its possession or related risks and rewards, which by far usually are transfered when servers etc. are installed or atleast put to test run. 3. There is a close association between incurring expenditure and obtaining assets but the two do not necessarily coincide. Hence, when an enterprise incurs expenditure, this may provide evidence that future economic benefits were sought but it is NOT conclusive proof that an item satisfying the def. of an asset has been obtained. Note. Asset means Something which has some cost, its OWN identity, has potential of some future economic benefit, it gives entity distinct identity, loss of which will cause entity outflow in a manner of acquisition of a replacement to keep enjoing the benefit, and most importantly HELD for use in production of goods or rendering of services or admin. purpose or rental to others or may be held for sale but not in ordinary course of business. 4.Now, from above discussion it is clear that we can not charge depreciation on something which is not asset yet. Also, it is fairly clear that to be a Depreciable asset it has to be held in its form in which we want to charge depreciation i.e. if we want to charge depreciation on Machinery it has to be in possession in the form of Machinery itself and not Advance for Machinery and since servers are technological equipments which are normally required to be setup in an ecosystem to test first and risk and rewards are only transfered on its delivery in one piece. Thus, concluding it, Depreciable asset is acquired when risk and rewards plus applying the rule of conservatism and prudence the probability of an asset to produce Future Economic Benefit can be ascertained only when it is put to use. Thus, it is best to capitalize asset when it is put to use, although it would not be straight forward wrong if we capitalize machinery when risks and rewards relating to it are transfered to entity. Now coming to the Income tax provisions, Section 32 In order to claim Depreciation, an assessee has to fulfil following conditions: a. Asset should be owned by the assessee. b. The asset in respect of which depreciation is claimed, must have been USED for the purpose of business. Here act clarifies everything by simply writing one word USED, thus if asset is not put to use it can not be depreciated at all. Also, Accounting Standards does not have application on Income tax. Thus, answer to your query would be to charge depreciation from the date it is put to use. P.S. If server equipment is meant for standby it can be charged to depreciation in that status, no need to fulfil the condition of Putting it to use. Thanks.

1 Like

NEERAJ SHARMA (CA IPCC ) (113 Points)
Replied 19 March 2016

Depraciation should be calculated from the Date on which Asset was ready for use, Suppose you purchased a Asset and it was immediately ready for use than you should depreciate from the date of purchase, and if the asset was not ready for use that time (i.e. it takes 1 or 2 month for installation) than you should calculate dep on the date from it was ready for use only.

Ravi Jadhav (Account Executive) (30 Points)
Replied 20 March 2016

Dear Vinny, I got your point, there will be two points on the capitalization of server 1- If the server first time intallation - cabling & fixing charges, & all other related expenses should be the part of server cost then the final installation date will be D.O.C. from that Dep. Will charge. 2- If it is individual addinal server then the actual recognition date i.e. Gate entry date will be d.o.c. from this date dep. will applicable.