Hello everyone and Welcome.
Our today's topic of discussion is about the Depreciation as per Companies Act 2013.
There is lot of confusion related to what exactly does the new Companies Act 2013 say about the Depreciation related to Fixed Assets. Let us get started.
What is Depreciation?
Depreciation is reduction in the value of the Asset due to usage over a period of time.
Why is Depreciation Important?
The Depreciation is important for 2 main reasons:Deceleration of Dividend.Calculation of Net Profit.
What method to follow SLM, WDV and any rates are mentioned?
One can follow any method SLM (Straight Line Method), WDV (Written down Value) and Unit of Production. In Companies Act 2013, no rates of Depreciation are mentioned. It says we need to calculate depreciation over Useful Life provided in the Annexure Schedule II Part C.
What does the term Useful Life means?
As stated in Annexure Schedule II Part A (Section 123), Depreciation is systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount of an asset is Cost of Asset less its Residual Value. The Useful life is the period in which the asset can be used. Useful life of an Asset shall not be more than as specified in Part C of Schedule II.
How to define Residual Value of an asset?
The Companies Act 2013 clearly states Residual Value of an asset shall not be more than 5% of the Original Cost of an Asset.
Is usage of Different Useful Life and Residual Value allowed?
Yes. One can use different Useful Life other than mentioned in the Part C of Schedule II and also can defined different Residual Value, for doing so they need to disclose this change in Useful life and Residual Value in their Financial Statement supported with valid reason and technical advice.
What about Assets used in Shifts (Double or Triple Shifts) does Companies Act 2013 allow additional depreciation?
Companies Act 2013 states that asset used in Double Shift, depreciation will increase by 50% and by 100% for Triple Shift working.
Companies Act 1956, required 100% Depreciation on Assets costing less than Rs.5000/- does same exist?
Under the New Companies Act 2013, there is no such requirement regarding charging of 100% Depreciation on Assets cost less than Rs.5000/-.
If a Useful life of Part of Asset is different than Actual Asset how to do the Depreciation, does Component Approach exist?
Useful life Specified in the Schedule II of Companies Act 2013 is for the whole of the Asset. In case of useful life of Part of Asset is different or more than Actual Asset than the depreciation calculation for the Whole Asset and Part of Asset is to be done separately.
As on Current Date, If Asset useful life is NIL, how to treat the Asset for Depreciation?
In case Useful life of an Asset is NIL, the Organization needs to Write Off the Asset against the Retained Earnings. Write off amount would be Carrying Value of Asset less its Residual Value.
How to Calculate Depreciation in case of Intangible Assets?
New Companies Act 2013 is silent on the useful life relating to Intangible Assets. But it says that Assets are to be used and depreciated over its useful life. It states that Intangible Assets are to be amortized.
What about Revaluation Reserve?
Before Companies Act 2013, the companies were required to charge off depreciation on revalued amount with Revaluation Reverse. However in Companies Act 2013 this is not case.