DEPRECIATION ACCOUNTING AS – 6 DEPRECIATION ACCOUNTING

Depreciation is loss of value of an asset It is a measure of wearing out, consumption or other loss of value of depreciable asset arising from use and passes of time

Depreciable Assets Are expected to be used for more than one accounting period Have a limited useful life Are held for use in production of goods & services

Applicability of AS-6 Except the followings: Forests, Plantations Wasting assets, Minerals & Natural Gas Expenditure on research & development Goodwill Live Stock – Cattle, Animal husbandry

Calculation of Depreciation Historical cost or other amount in place of historical cost Estimate useful life of depreciable assets Estimated residual/scrap value

Cost of Depreciable Asset Increase/decrease in long-term liability Price adjustments Changes in duties Revaluation of depreciable assets Other similar reasons

Estimated useful life of Depreciable Asset Pre-determined by legal or contractual limits Depends upon the number of shifts for which the asset is to be used Repair & maintenance policy Other similar reasons

Estimated useful life of Depreciable Asset Technological obsolescence Innovation/improvements Legal or other restrictions

Estimated residual /scrap value of depreciable asset It is estimated value of depreciable assets at the end of its useful life

Depreciable amount Historical Cost Less Residual Value

Method of Depreciation Straight Line Method (SLM) Written Down Value Method (WDVM)

Selection of appropriate method Type of assets Nature of the use of such asset Circumstances prevailing in the business A combination of more than one method may be used

Change in depreciation method For compliance of statute For compliance of accounting standards For more appropriate presentation of the financial statement

Procedure to be followed in case of change in depreciation method Change of depreciation method should be treated as change in accounting policy and its effect should be quantified and disclosed

Change in estimated useful life Should be allocated over the revised remaining useful life of assets

Change in historical cost Provided prospectively over the remaining useful life of the assets

Change in historical cost due to revaluation Estimate of the remaining useful lives of the such assets

Depreciation charge on addition/extension to an existing asset Addition/extension is an integral part of existing asset Remaining useful life of the asset

Depreciation charge on addition/extension to an existing asset Addition/extension is not an integral part of existing assets Estimated useful life of additional assets Depreciable asset is disposed of, discarded, demolished or destroyed

Disclosure Total cost of each class of assets Total depreciation Accumulated depreciation Depreciation method

Disclosure Depreciation rate, useful life of assets, if they are different than the rate specified in governing statute A change in method of depreciation Effect of the revaluation

Significant differences with IAS/IFRS & US GAAP AS-6 allows the depreciation on revalued value however, US GAAP prohibits revaluation. IAS-16 allows fair value accounting.

Significant differences with IAS/IFRS & US GAAP Change in depreciation method under AS-6 is treated as a change in accounting policy; whereas IAS-16 and US GAAP it is change in estimate.

Depreciation on fixed assets where title not clear Issues Depreciation on fixed assets where title not clear Depreciation on the assets not own by the company Depreciation on live stock held as fixed assets

Income-tax rate Vs. Companies Act Vs. AS-6 Issues Income-tax rate Vs. Companies Act Vs. AS-6 Depreciation on Addition to Building with Nil WDV Continuous Vs. Non-continuous process plant Depreciation in case of electricity company

Depreciation on investment property Issues Depreciation on investment property Useful life of asset acquired under amalgamation

THANK YOU D.S. Rawat, FCA Partner, Basal & Co.