1. DEPRECIATION CA. ( Dr.) Gurmeet S. Grewal B. Com (Hons.), FCA,, PhD. CAL (IIAM) Grewal & Singh Chartered Accountants New Delhi, Chandigarh, Yamuna Nagar, Jammu Phones: 09811242856 & 09266942856 Emails: gsgrewal@cagrewalsingh.com and gsgrewal@cagrewalsingh.com cagsgrewal@gmail.com

2. Depreciation The Companies Act, 2013 does not specifically requires providing depreciation. Section 123 of the Act requires a company to provide depreciation before declaring dividend. If it is a private company to which Section 198 (Managerial Remuneration) does not apply. Is it still mandatory to provide depreciation every year? The answer is “Yes”. 2 CA. (Dr.) G.S. Grewal

3. Why Depreciation should be provided? Depreciation must be provided in financial statement every year due to:  Accounting Standards (Section 129)  Accrual Basis of Accounting (Section 128)  True and Fair View (Section 129)  Declaration of Dividend (Section 123)  Managerial Remuneration (Section 198) 3 CA. (Dr.) G.S. Grewal

4. AS 6 – Depreciation Accounting Para 3.1 Definition of Depreciation: –…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. Para 29- Main Principle: –The depreciable amount of a depreciable asset should be allocated on systematic basis to each accounting period during the useful life of the asset. 4 CA. (Dr.) G.S. Grewal

5. Accounting Standards Section 129 requires that accounting standards notified in section 133 must be followed for preparing the financial statements. In case any of the accounting standard is not followed, it must be disclosed along with reason for not following and its financial effect. 5 CA. (Dr.) G.S. Grewal

6. Accrual Basis of Accounting Section 128 of the Act provides that financial statements shall be prepared following the accrual basis of accounting. Depreciation is the cost of use of asset It is a systematic allocation of cost of the asset over its Useful Life. If depreciation is not provided it will mean that accrual basis of accounting is not followed. 6 CA. (Dr.) G.S. Grewal

7. True and Fair View The expression “True and Fair View” means “True” suggests that the financial statements are factually correct and have been prepared according to applicable reporting framework such as the accounting standards and they do not contain any material misstatements that may mislead the users. Misstatements may result from material errors or omissions of transactions & balances in the financial statements. “Fair” implies that the financial statements present the information faithfully without any element of bias and they reflect the economic substance of transactions rather than just their legal form. 7 CA. (Dr.) G.S. Grewal

8. Depreciation [Section 123(2) and Schedule II] The Companies Act, 2013 has brought major change in depreciation. Schedule II under the Act provides for systematic allocation of depreciable amount of an asset over its useful life against the rate based depreciation charge under the Companies Act, 1956. 8 CA. (Dr.) G.S. Grewal

9. Section 123- Declaration of Dividend Sec 123. (1) No dividend shall be declared or paid by a company for any financial year except— (a) out of the profit of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section (2), or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with the provisions of that sub-section and remaining undistributed, or out of both; or… 9 CA. (Dr.) G.S. Grewal

10. Section 123- Declaration of Dividend Section 123(2): For the purposes of clause (a) of sub-section (1), depreciation shall be provided in accordance with the provisions of Schedule II. 10 CA. (Dr.) G.S. Grewal

11. Section 197 – Managerial Remuneration Section 197(1): Total managerial remuneration payable by a public company, to its directors, including managing director and whole-time director, and its manager in respect of any financial year shall not exceed eleven per cent of the net profits of that company for that financial year computed in the manner laid down in section 198 except that the remuneration of the directors shall not be deducted from the gross profits. 11 CA. (Dr.) G.S. Grewal

12. Section 198 – Computation of Net Profits Section 198(1): In computing the net profit of a company in any financial year for the purpose of section 197…. Section 198(4): In making the computation aforesaid, following sums shall be deducted, namely… (k) depreciation to the extent specified in section 123; 12 CA. (Dr.) G.S. Grewal

13. Schedule II – Useful Lives to Compute Depreciation Part A- Depreciation is a systematic allocation of the depreciable amount of an asset over its useful life. Useful life is the period over which an asset is expected to be available for use by an entity or the number of production units expected to be obtained from the asset by the entity. Useful life of an asset shall not ordinarily be different from the useful life specified in Part C and the residual value of an asset shall not be more than 5% of the original cost (Revised by Notification dated 29.8.2014) 13 CA. (Dr.) G.S. Grewal

14. Schedule II – Useful Lives to Compute Depreciation Part A- Where a company uses a useful life different from that specified in Part C or uses residual value different from that specified above justification for the difference shall be disclosed in its financial statement. Justification in this behalf should be supported by technical advice. 14 CA. (Dr.) G.S. Grewal

15. Schedule II – Useful Lives to Compute Depreciation Part A- For intangible assets, the provision of accounting standards applicable for the time being in force shall apply except for toll roads for which method is prescribed in the Schedule. 15 CA. (Dr.) G.S. Grewal

16. Schedule II – Useful Lives to Compute Depreciation Part B- Useful life and residual value of any specific asset, as notified for accounting purposes by a Regulatory Authority constituted under an Act of Parliament or the Central Government shall be applied in calculating the depreciation to be provided for such asset irrespective of the requirement of this Schedule. 16 CA. (Dr.) G.S. Grewal

17. Schedule II- Useful Lives to Compute Depreciation Part C- Nature of asset and their useful life No Extra-shift depreciation on certain assets. For Double-shift - 50% more number of days worked For Triple-shift – 100% more number of days worked 17 CA. (Dr.) G.S. Grewal

18. Schedule II – Useful Lives to Compute Depreciation Amendment in Part C through Notification dated 29.8.2014 Paragraph 4 is substituted. The new para says: Useful life specified in Part C of the schedule is for the whole of the asset and where cost of a part of the asset is significant total cost of the asset and useful life of that part is different from the useful life of the remaining asset, useful life of that significant part shall be determined separately. This requirement is voluntary for FY 2014-15 but mandatory thereafter. 18 CA. (Dr.) G.S. Grewal

19. Schedule II – Useful Lives to Compute Depreciation Part C- From the date this schedule comes into effect, the carrying amount of asset on that date: – shall be depreciated over the remaining useful life of the asset as per this schedule. –after retaining the residual value, may (replaced from ‘shall’) be recognised in the opening balance of retained earning where the remaining useful life of an asset is nil. 19 CA. (Dr.) G.S. Grewal

20. Action Points to implement Schedule II Determine date of purchase of the asset. Fixed Assets register will give this information. Determine the cost of asset debited. Fixed Assets register will give this information. Determine total amount of depreciation charged up to 31 st March, 2014 of the asset. Fixed Assets register will give this information. Determine Useful Life of the asset or take Useful Life as given in Schedule II of the Act. If Useful Life is different from that given in Schedule II of the Act, give reason. 20 CA. (Dr.) G.S. Grewal

21. Action Points to implement Schedule II Determine residual value of the asset. It should not to be more than 5% of Cost. Determine the amount to be written off over the remaining Useful Life. It is Cost less depreciation charged on the asset up to 31 st March, 2014. Determine the Rate of Depreciation to write off the balance amount over the remaining Useful Life. 21 CA. (Dr.) G.S. Grewal

22. Comparative Rates – Factory Building 22 CA. (Dr.) G.S. Grewal Schedule IISchedule XIV Useful life - 30 Years SLM Rate – 3.17% WDV Rate - 9.5 % WDV Rate - 10% SLM Rate - 3.34% Useful life - 23 years

23. Comparative Rates - Other than Factory Building 23 CA. (Dr.) G.S. Grewal Schedule IISchedule XIV Useful Life - 60 Years SLM Rate - 1.58% WDV Rate - 4.87% WDV Rate - 5% SLM Rate - 1.63% Useful Life - 58 Years

24. Comparative Rates – Temporary Structure 24 CA. (Dr.) G.S. Grewal Schedule IISchedule XIV Useful life - 3 Years SLM rate - 31.67% WDV rate - 63 % SLM rate - 100% WDV rate - 100% Useful life - 0 year

25. Comparative Rates – P & M (General Rate) 25 CA. (Dr.) G.S. Grewal Schedule IISchedule XIV Useful Life - 15 Years SLM Rate - 6.33% WDV Rate - 18.10% SLM Rate - 4.75% WDV Rate - 13.91% Useful Life - 20 years

26. Comparative Rates – P & M (Continuous Process) 26 CA. (Dr.) G.S. Grewal Schedule IISchedule XIV Useful Life - 25 Years SLM Rate - 3.80% WDV Rate - 11.29% SLM Rate - 5.28% WDV Rate - 15.33% Useful Life - 18 years

27. Comparative Rates – Furniture & Fixtures 27 CA. (Dr.) G.S. Grewal Schedule IISchedule XIV Useful Life - 10 Years SLM Rate - 9.5% WDV Rate - 25.89% SLM Rate - 6.33% WDV Rate - 18.10% Useful Life - 15 years

28. Comparative Rates – Motor Vehicle 28 CA. (Dr.) G.S. Grewal Schedule IISchedule XIV Useful Life - 10 Years SLM Rate - 9.5% WDV Rate - 25.89% SLM Rate - 9.5% WDV Rate - 25.89% Useful Life - 10 years

29. Revision of Depreciation Rates Useful life of Machinery (under Sch. XIV) - 29 CA. (Dr.) G.S. Grewal Useful Life of Machinery (Sch. XIV)20 Yrs. Useful Life of Machinery (Under Sch. II)15 Yrs. Cost of Machinery (installed on 1.4.2009)Rs. 5,00,000 Depreciation Rate Under Sch. XIV- SLM4.75% Depreciation Per yearRs. 23,750 WDV as on 1.4.2014Rs.3,81,250 Remaining Useful Life Sch. II on 1.4.201410 Yrs. Dep. Rate for remaining Useful Life –SLM7.125% Depreciation Per yearRs. 35,625

30. Revision of Depreciation Rates Useful life of Machinery (under Sch. XIV) - 30 CA. (Dr.) G.S. Grewal Useful life of Machinery (Sch. XIV)20 Yrs. Useful life of Machinery (under Sch. II)15 Yrs. Cost of Machinery (installed on 1.4.2000)Rs. 5,00,000 Depreciation Rate under Sch. XIV- SLM4.75% Depreciation Per YearRs. 23,750 WDV as on 1.4.2014Rs.1,67,500 Remaining Useful Life Sch. II on 1.4.20141 Yr. Dep. rate for remaining useful life –SLM100% Residual Value (5% of Rs. 5,00,000)Rs. 25,000 Depreciation (Rs. 1,67,500 – Rs. 25,000)Rs. 1,42,500

31. Effect of Change in Useful Life Useful life of Machinery (under Sch. XIV) - 31 CA. (Dr.) G.S. Grewal Useful life of Machinery (Sch. XIV)20 Yrs. Useful life of Machinery (under Sch. II)15 Yrs. Cost of Machinery (installed on 1.4.1996)Rs. 5,00,000 Depreciation Rate under Sch. XIV- SLM4.75% Depreciation Per YearRs. 23,750 WDV as on 1.4.2014Rs. 72,500 Remaining Useful Life Sch. II on 1.4.2014Nil Amount to be debited to Opening Balance of Surplus Account Rs. 47,500

32. Revision of Depreciation Rate 32 CA. (Dr.) G.S. Grewal Date of Addition of Plant & Machinery Rate of Depreciation (SLM) 1 st April, 20097.125% 15 th July, 20097.06% 3 rd September, 20097.03% 30 th December, 20096.96%

33. Revision of Depreciation Rates Useful life of Machinery (under Sch. XIV) - 33 CA. (Dr.) G.S. Grewal Useful Life of Machinery (Sch. XIV)20 Yrs. Useful Life of Machinery (Under Sch. II)15 Yrs. Cost of Machinery (installed on 1.4.2009)Rs. 5,00,000 Depreciation Rate Under Sch. XIV- WDV13.91% Depreciation (Total up to 31.03. 2014)Rs.2,63,554 WDV as on 1.4.2014Rs. 2,36,446 Remaining Useful Life Sch. II on 1.4.201410 Yrs. Dep. Rate for remaining Useful Life –WDV18.10% Depreciation for the year (2014 – 15)Rs. 42,797

34. Depreciation Calculation 34 CA. (Dr.) G.S. Grewal YearBook ValueDepreciation (Rs.)Rate(Rs.) 2009 - 10 5,00,00013.91% 69,550 2010 - 11 4,30,45013.91% 59,876 2011 - 12 3,70,57413.91% 51,547 2012 - 13 3,19,02713.91% 44,377 2013 - 14 2,74,65013.91% 38,204 2,63,554 2014 - 15 2,36,44618.10% 42,797

35. Revision of Depreciation Rates Useful life of Machinery (under Sch. XIV) - 35 CA. (Dr.) G.S. Grewal Useful Life of Machinery (Sch. XIV)20 Yrs. Useful Life of Machinery (under Sch. II)15 Yrs. Cost of Machinery (installed on 1.4.2000)Rs. 5,00,000 Depreciation Rate under Sch. XIV- WDV13.91% Depreciation (Total)Rs. 4,23,107 WDV as on 1.4.2014Rs. 76,493 Remaining Useful Life Sch. II on 1.4.20141 Yr. Dep. rate for remaining Useful Life –WDV100% Realisable ValueRs. 25,000 Depreciation for the YearRs. 51,493

36. AS – 26, Intangible Assets Para 63. The depreciable amount of an intangible asset should be allocated on a systematic basis over the best estimate of its useful life. There is a rebuttable presumption that the useful life of an intangible asset will not exceed ten years from the date when the asset is available for use. Amortisation should commence when the asset is available for use. 36 CA. (Dr.) G.S. Grewal

37. AS – 26, Intangible assets Para 72. The amortisation method used should reflect the pattern in which the asset's economic benefits are consumed by the enterprise. If that pattern cannot be determined reliably, the straight-line method should be used. The amortisation charge for each period should be recognised as an expense unless another Accounting Standard permits or requires it to be included in the carrying amount of another asset. 37 CA. (Dr.) G.S. Grewal

38. CA. (Dr.) Gurmeet S. Grewal grewal@cagrewalsingh.comgrewal@cagrewalsingh.com, cagsgrewal@gmail.com Phone: 011-29842641, 29833394 Mobile: +91-9811242856 & 09266942856 CA. (Dr.) G.S. Grewal 38