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Depreciation accounting- urgent query !! pls help !!

Nehal (CA Final Student) (38 Points)

10 May 2011

Suppose, On 1 jan,2010 , a bank created Rs. 100 of assets -software. But on 31st March,2011 the bank depreciates full value (Rs 100)as the bank thought that software generated is of no use. (As it was not serving the purpose for which it was created)
Then in the next year on 10th april,2011 (After balance sheet was signed) bank reversed the depreciation to the extent of 30% (rs 30 ) on the ground that that software can be used for Some other purpose to the extent of 30% .
So whether any AS deals with the same?

Is this a valid practice under any of the applicable AS for year 2010-2011 ? Pls clarify .

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11 Replies

Ankita Benegal (CA Final) (66 Points)
Replied 10 May 2011

Accounting Standard 6 deals with Depreciation.
Since depreciation is fully charged,it amounts to writing off of the asset and hence balance becom

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Nehal (CA Final Student) (38 Points)
Replied 10 May 2011

Ya. I need reply to my full query pls !

CA. Arvind Shrivastva (Chartered Accountant) (278 Points)
Replied 10 May 2011

I think its cover in provision made for change in estimate under AS-6.

Nehal (CA Final Student) (38 Points)
Replied 10 May 2011

Hi,

I have gone through AS 6 and AS 26. Both had no answer for my query. There is no such provision in AS 6 !

CA. Arvind Shrivastva (Chartered Accountant) (278 Points)
Replied 10 May 2011

The applicable AS on d issue is AS-26 & AS-5. Bank cannot reverse the amortisation on software already chargd in earlier years. Changes in amortisation amount due 2 chnge in useful life of intangible assest can be made only on prospective basis and nt on retrospective basis.

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Nehal (CA Final Student) (38 Points)
Replied 11 May 2011

Hi Arvind,

Could you please tell me which AS says that it can be made on prospective basis ?

thanks

CA. Arvind Shrivastva (Chartered Accountant) (278 Points)
Replied 11 May 2011

Hi nehal, AS- 6, 5, & 26 provides that the effect of changes in accounting estimates made on prospective basis. However, one aspects is also possible dat if the bank has amortized total value of software in pursuant to AS-28, it can reverse the impairment loss on the basis of change in its recoverable amount of software. Bt for dis purpose calculation nd disclosure mst b required.

CA NITUL MEHTA (KPMG-Senior Consultant-International Tax ) (236 Points)
Replied 02 June 2011

A software can never be treated as a fixed asset so AS 10 and AS 6 can not be applied, softwares developed are always intagibles where on every balance sheet its net realizable value and value in use is compared and which ever is lower is taken and balance is amortized which is genrally down wards only unless the bank is having some exceptional reason to beleive that the software has some value then it can revalue the intangible upwards also, i dont think AS26 specifically prohibits any one to revlaue the assets upwards, if it is please let me knwo the exact paragraph where i can find it.
(. where net realizable value is market value ALP in free market , value in use is PV of future benifits expected or its existing book value which ever is lower )

CA NITUL MEHTA (KPMG-Senior Consultant-International Tax ) (236 Points)
Replied 02 June 2011

Mr Arvind is right in one thing about what he said for AS 28

prerna (student) (91 Points)
Replied 12 June 2011

yes u are changing an acounting estimate regarding life of the software , reverse the entry by the appro amount

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CA Karnik Pandya (Chartered Accountant) (36 Points)
Replied 14 July 2011

Dear Nehal,

Every compnay has to follow depreciation rates and method as prescribed in the Companies Act,1956. These rate are the minimum rates given under the statute.

Moreover, every compny at the time of purchase of any fixed asset has to make estimate of the useful life of the asset being used and decide the method of depreciating the same keeping in mind the requirement of the statute.

However, if compnay wants to depreciate its assets at higher rates than givan in cos. Act or at full value in the first year itself then it must provide justification for providing the same. If an auditor is satisfied with the justification given by the company and method of depre. employed he will not qualify his report u/s227(3).

METHOD OF DEPRECIATION ADOPTED BY THE COMPNY IS THE POLICY OF THE CO. WHERE RATE OF DEPN. IS THE ESTIMATE MADE BY THE COMPANY AT THE BALANCE SHEET DATE SINCE IT IS THE ULTIMATE AUTHORITY AND RESPONSIBILITY OF THE COMPANY FOR PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS FOR WHICH BOD TAKE RESPONSIBILITY THROUGH DIRECTORS RESPONSIBILITY STATEMENT. WE ARE ONLY WATCHDOGS.

As per the requirement of the relevent AS, Accounting policy can be changed only in the following cases:

1. It is requirement of statute

2. It is required for better presentation of financial statements

3. It is the requirement of AS by ICAI

with the proper justification to the notes to accounts. AS 1 requires to disclose details regarding depreciation on FA otherwise Co. Statutory auditor has a right to qualify his audit report.

In case of accounting estimates (Rate of Dep,.), if co. justifies the same it can change the same with due explanation in the notes to accounts. So Depn can be reversed.

E.g, the same is the case with BDR (Bad Debt Reserve)

Thus, 30% Depn can be reversed keeping in mind the above discussion.