1. DEPRECIATION UNDER SCHEDULE II TO THE COMPANIES ACT, 2013 CA Mohit Bhuteria

2. As per Accounting Standard, AS 6 -  Depreciation is measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, efflux of time or obsolescence through technology and market changes.  Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset.  Depreciation includes amortisation of assets whose useful life is predetermined. As per Corporate Law -  The term “depreciation” was not defined in the Companies Act 1956.  For the first time, “Depreciation” and “Depreciable amount” has been defined in the Companies Act 2013 Para 1 of Part A to Schedule II of the Companies Act, 2013 defines: “Depreciation” as a systematic allocation of the depreciable amount of an asset over its useful life; “Depreciable amount” of an asset is the cost of an asset or other amount substituted for cost, less its residual value. As per Sec 123 of the Companies Act 2013, depreciation shall be calculated as per Schedule II and these provisions have been bought into force from 1 April 2014 DEFINITION

3.  Depreciation over useful life of asset, prescribed under Part C of Sch. IIuseful life  Residual value not to be more than 5% of the original cost of the asset  Extra shift depreciation to be increased by 50% for double shift and 100 % for triple shift Extra shift depreciation  No specific provision for 100% rate on assets < Rs. 5,000  Explicitly prescribes Component approachComponent approach  Additional depreciation on revaluation to be charged to P&L  Prospective depreciation on revalued asset or on addition on account of fluctuation in foreign exchange PARADIGM SHIFT PARADIGM SHIFT  Depreciation over life of asset (AS 6) or rates prescribed under Sch. XIV  No explicit concept of residual value  Separate rates for Double/Triple shift  Assets costing < 5,000  100 % depreciation  No mandatory concept of component approach  Schedule XIV prescribed the minimum rates  Additional depreciation on revaluation could be charged to Revaluation Reserve  Prospective depreciation on revalued asset or on addition on account of fluctuation in foreign exchange

4.  Part C to Schedule II lays down useful life to compute depreciation  Useful life may be considered as a period over which:  an asset is available for use; or  as the number of production or similar units expected to be obtained from the asset by the entity; or  specified time after which the assets are planned to be disposed off; or  after consumption of a specified proportion of the future economic benefits embodied in the asset.  The useful life of the asset may be shorter than its economic life  Financial Statements to disclose any deviation where the company adopts a different useful life or residual value from prescribed useful life or residual value and provide justification supported by technical advice [vide Notification no. G.S.R. 627(E) dated 29 th August, 2014] USEFUL LIFEUSEFUL LIFE: A NEW CONCEPT USEFUL LIFE

5. USEFUL LIFE AS PER COMPANIES ACT 2013 Nature of Assets Useful Life Rate [SLM] Rate [WDV] (a) Building RCC Frame structure60 Years 1.58% 4.87% (b) Building other than RCC Frame Structure30 Years3.17%9.50% (c) Plant and Machinery other than continuous process plant not covered under specific industries 15 Years6.33%18.10% (d) General furniture and fittings10 Years9.50%25.89% (e) Furniture and fittings8 Years11.88%31.23% (f) Motor cycles, scooters and other mopeds10 Years9.50%25.89% (g) Motor buses, motor lorries, motor cars and motor taxies used in a business of running them on hire 6 Years15.83%39.30% (h) Motor buses, motor lorries, motor cars and motor taxies other than those used in a business of running them on hire 8 Years11.88%31.23% (i) Office equipments [NESD]5 years19.00%45.07% (j) Electrical Installations and Equipment [NESD]10 Years9.50%25.89% (k) End User Devices like Desktops, Laptops3 Years31.67%63.16%

6. SCHEDULE II V/S SCHEDULE XIV Nature of Assets Useful Life as per SCHEDULE II Useful Life as per SCHEDULE XIV A. General Plant & Machinery 15 21 B. General Furniture and Fittings1015 C. Computers36 D. Roads10/5/360 E. Bridges3060 F. Continuous Process Plant818 G. Desktops, Laptops36 H. Buildings other than factory buildings and other than RCC frame structure 3058

7. METHODS OF CHARGING DEPRECIATION  The depreciation method used shall reflect the pattern of consumption of the asset. The depreciable amount of an asset can be allocated on a systematic basis over its useful life through: A. Straight-line Method (SLM) B. Diminishing Balance Method/ Reducing Value Method/ Written Down Value Method (WDV) C. Units of production method  Method chosen to be applied consistently from period to period unless there is a change in the expected pattern of consumption of those future economic benefits.  In SLM, the amount of annual depreciation remains uniform. The amount of annual depreciation is calculated as: Capitalized Cost-Estimated Residual Value Estimated Useful Life  In WDV Method, the amount of annual depreciation is calculated as: 1- n  Estimated Residual Value Capitalized Cost Where n= useful life (in years) For first implementation for assets as on 01/04/2014, capitalized cost will be substituted by WDV as on 01/04/2014 and estimated useful life with remaining useful life.

8. Year of Acquisiti on of asset Original Cost No of year used as on 31/03/ 2014 Total Depreciation Charged till date (as on 31/03/2014) @ 6.33% (Sch-XIV CA-1956) Net Carrying Amount as on 31/03 /2014 Residual Value 5% of cost Useful life as per CA 2013 Remaining Useful life as on 31/03/ 2014 Amount to be charged to Opening Retained earnings/ Statement of Profit and Loss on 01/04/2014 Depreciation to be provided for 2014-15 (1)(2)(3)(4)(5)=2-4(6)=2* 5%(7)(8)(9)=5-6 (10)= (5-6)/8 2002-0310,00011 6,963.00 3,037.005001002,537 2003-0410,000106,330.003,670.005001003,170 2004-0510,00095,697.004,303.00500101 3,803 2005-0610,00085,064.004,936.00500102 2,218 Example: Furniture & Fixture

9. Effect of change in the rates of depreciation from the 1956 Act to 2013 Act The following table illustrates the effect of change in the rates of depreciation in case of Computer from WDV rate of 40% and SLM rate of 16.21% under the 1956 Act, on an asset cost of Rs.1,000 and having 5% residual value, to a new useful life of 3 years under the 2013 Act. For determining the WDV rate under the 2013 Act, a computation would be required to arrive at the rate (63%), which would depreciate the asset to 95%: DEPRECIATION CHARGE AND WDV AS PER 1956 ACTDEPRECIATION CHARGE AND WDV AS PER 2013 ACT Beginning of Written Down value under WDV Method Depreciation charge as per WDV Method @ 40% Written Down value under SLM Method Depreciation charge as per SLM Method @ 16.21% Written Down value under WDV Method Depreciation charge as per WDV Method @ 63% Written Down value under SLM Method Depreciation charge as per SLM Method @ 31.67% Year 11000400100016210006301000317 Year 2600240838162370233683317 Year 336014467616213787366316 Year 42168651416250 Year 513052352162 Year 67828190140 Year 750

10. Particulars Definition of the term “depreciation”, “depreciable amount” and “useful life” Companies Act 2013 Para 1 of Part A to Schedule II of the Companies Act, 2013 defines: “depreciation” as a systematic allocation of the depreciable amount of an asset over its useful life; “depreciable amount” of an asset is the cost of an asset or other amount substituted for cost, less its residual value. “useful life” of an asset is the period over which an asset is expected to be available for use by an entity, or the number of production or similar units expected to be obtained from the asset by the entity. Companies Act 1956 Not Defined DETAILED COMPARISON BETWEEN 1956 ACT AND 2013 ACT

11. Particulars Mode of Depreciation Shift Based depreciation Asset costing less than Rs. 5000 Companies Act 2013 Useful Life regime i.e. Schedule II lays down useful life to compute depreciation. Useful lives have been determined on the basis of single shift. For specified assets working on double shift, depreciation will increase by 50% and in case of triple shift by 100% proportionately for number of days used as such. No such Concept Companies Act 1956 As per life of the assets (AS 6) or rates prescribed by Schedule XIV. No such concept 100% Depreciation except in certain cases.

12. Particulars Depreciation on revalued assets Residual life Component Approach Companies Act 2013 Entire charge to Statement of Profit and Loss. Residual life not to be more than 5 % of original cost. Schedule II introduced a new concept to estimate useful life of each component in an asset and depreciate that specific component over its estimated useful life Companies Act 1956 Incremental depreciation on revalued portion can be adjusted against revaluation reserve by transfer of an equivalent amount to the Statement of Profit and Loss based on the Guidance Note of the Institute of Chartered Accountants of India. [now amended to charge additional depreciation against Profit & Loss] No such concept No such concept.

13. DEPRECIATION FOR INTANGIBLE ASSETS:  No separate depreciation rate is prescribed for intangible assets. Rather, for the time being the same will be governed by notified Accounting Standards, AS-26 “Intangible Assets”.  However, in case of intangible assets (Toll Roads) created under ‘Build, Operate and Transfer’, ‘Build, Own, Operate and Transferor any other form of public private partnership route in case of road projects, amortisation in such cases may be done as follows:- Mode of amortisation : Amortisation Rate = Amortisation Amount * 100 Cost of Intangible Assets (A) Amortisation Amount = Actual Revenue for the year (B) Projected Revenue from Intangible Asset (till the end of the concession period) (C) Where, Cost of Intangible Assets (A) = Cost incurred by the company in accordance with the accounting standards Actual Revenue for the year (B) = Actual revenue (Toll Charges) received during the accounting year Projected Revenue from Intangible Asset (C) = Total projected revenue from the Intangible Assets as provided to the project lender at the time of financial closure / agreement

14. COMPONENT APPROACH COMPONENT APPROACH  Schedule II states that the useful life specified is for whole of the asset. However, where cost of a part (component) of the asset is significant to total cost of the asset and the part’s useful life is different from the useful life of the remaining asset, useful life of that significant part shall be depreciated separately  Useful life of such components is not prescribed under Schedule II. It has to be estimated by the Companies  To apply the component approach, it is crucial to identify the various significant parts of an asset. There are two reasons for identifying the parts: Depreciation The replacement of parts  Generally, it is done by looking for items that will require replacement before the end of the asset's useful life, and to treat these items as separate components.  Upon replacement of a part, the remaining book value of the replaced part is derecognized and the cost of the new part recognized, irrespective of whether the replaced part was depreciated separately or not.  This requirement is voluntary for F.Y. 2014-2015 but mandatory from F.Y. 2015-2016 and onwards [vide Notification no. G.S.R. 627(E) dated 29 th August, 2014]

15. EXTRA SHIFT DEPRECIATION EXTRA SHIFT DEPRECIATION  No separate rates have been prescribed for extra shift depreciation  Simply provided that, depreciation will increase by 50% in case of double shift working and by 100% in case of triple shift working  The term “shift” has not been defined in the Companies Act 1956 or Companies Act 2013. So it is understood in the common parlance. Section 2(r) of the Factories Act 1948 defines “Shift” as: Where work of the same kind is carried out by two or more sets of workers working during different periods of the day, each of such sets are called “group” or “relay” and each of such periods is called a “shift”  The extra hours worked by the same set of workers is generally termed and treated as overtime and not as shift.  The calculation of extra depreciation for double shift working and for triple shift working would be made separately in the proportion which the number of days for which the concern worked double shift or triple shift, as the case may be, bears to the normal number of working days during the year

16. SOME IMPORTANT NOTES SOME IMPORTANT NOTES  "Factory buildings" does not include offices, godowns, staff quarters.  Where, during any financial year, any addition has been made to any asset, or where any asset has been sold, discarded, demolished or destroyed, the depreciation on such assets shall be calculated on a pro rata basis from the date of such addition or, as the case may be, up to the date on which such asset has been sold, discarded, demolished or destroyed.  The following information shall also be disclosed in the accounts, namely:— (i) depreciation methods used; and (ii) the useful lives of the assets for computing depreciation, if they are different from the life specified in the Schedule  ‘‘Continuous process plant’’ means a plant which is required and designed to operate for twenty- four hours a day

17. The Depreciation on fixed asset as per Schedule-II of Companies Act, 2013 became operational from 01/04/2014 vide MCA notification no S.O.902(E) dated 26/03/2014. Transitional Provision From the date this Schedule comes into effect, the carrying amount of the asset as on that date— (a) shall be depreciated over the remaining useful life of the asset as per this Schedule; (b) after retaining the residual value, may be recognized in the opening balance of retained earnings where the remaining useful life of an asset is NIL Where useful remaining life exists, however the residual WDV at the time of the first application of the Schedule, falls below the residual value calculated @ 5% of the original cost of the asset, depreciation charged during the year should be NIL. The remaining WDV shall be removed from the books when the assets is sold, demolished or discarded. THE TRANSITION

18. ISSUES ISSUES  The useful life of an asset can be the number of production or similar units expected to be obtained from the asset. This indicates that a company may be able to use Units of Production (UOP) method for depreciation, which was previously prohibited for assets covered under Schedule XIV.  Significant components needs to be identified. The application of component accounting is likely to cause significant change in accounting for replacement costs. Previously, companies needed to expense such costs in the year of incurrence. Under the component accounting, companies will capitalize these costs, with consequent expensing of net carrying value of the replaced part.  As per the amendment in ICAI guidance note on treatment of Revaluation Reserve, additional depreciation on revaluation now cannot be charged against Revaluation Reserve but only charged against Statement of Profit & Loss. This is expected to have significant impact on the statement of profit and loss. This is a major change unnoticed at large. Dividend distribution and managerial remuneration may be significantly affected.  In case of assets with a nil remaining useful life on the date the Schedule II comes into effect, the transitional provisions require that the carrying amount may be charged to retained earnings. The word 'shall' has been replaced by the word 'may' by a beneficial notification which provides scope for charging the carrying amount in such case to revenue as well. This will be a welcome relief to companies subject to Minimum Alternate Tax.

19. ISSUES (contd…) ISSUES (contd…)  Overall, many companies may need to charge higher depreciation in the P&L because of pruning of useful lives as compared to the earlier specified rates. However, in some cases, the impact will be lower depreciation, i.e. when the useful lives are much longer compared to the earlier specified rates.  The Companies will have to ascertain rates of depreciation for each individual item of fixed asset as on 01.04.2014 and the rate of depreciation may vary significantly depending on balance residual life as on the said date. This will be a very cumbersome exercise and proper maintenance of fixed asset register will be a pre requirement for the same.  Companies also need to assess the impact from implementation of Schedule II vis a vis depreciation as presently charged and disclose the financial impact of the same in Financial Statements. Thus, for the first year depreciation, both as per Companies Act, 2013 and Companies Act, 1956, needs to be calculated.  Companies may charge depreciation as per the Income Tax Act, however the same shall be disclosed in Financial Statements and supported by technical advice.

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