The Companies Act 2013 introduces significant changes in the various provisions relating to compliance and management, disclosure norms, governance, auditors, mergers & acquisition etc.
One of the major changes announced under 2013 act was relating to the calculation of Depreciation which is now going to be allowed on the basis of useful life instead of rate of depreciation as prescribed under Companies Act 1956.
Schedule II – ‘Useful lives to Compute Depreciation’ read with section 123 of the Companies Act 2013 defines the following provisions for calculating depreciation:
- The PART-C of new schedule describes the useful life of assets and rates of depreciation applicable for the assets purchased on or after 01st April 2014. For the assets purchased before 01st April 2014, the depreciation is calculated for the remaining useful life given under PART C and after retaining the salvage value which shall not be more than @5% of the purchase value.
- PART-A of the Schedule II specified the amortization of Intangible Assets to be done in accordance with the provisions of applicable accounting standard i.e. AS-26.
- The new companies act has deleted the concept of methods of depreciation i.e. WDV or SLM. There will be only one method for calculation for all assets.
- The concept of fully depreciating the asset costing Rs.5000/- or less under Companies act 1956 has been deleted. It means that all the assets will be depreciated as per the normal provisions of Schedule II irrespective of the amount of purchase.
- If during the financial year, any addition has been made to any asset or any asset has been sold, discarded or destroyed, then the depreciation amount will be calculated on pro-rata basis from the date of its addition or upto the date on which the asset was sold, discarded or demolished, as the case may be.
- The PART-C of Schedule II provides the useful life of different assets. If the cost of any part of asset is significant to the total cost of the asset and the useful life of that part is different from the useful life of the remaining asset, then the depreciation on that significant part shall be calculated separately.
- In case of any asset existing as on 01st April 2014 and whose remaining useful life is NIL, then the carrying amount of such asset shall be transferred to the opening balance of Retained Earnings.
Our institute ICAI has also issued a Guidance Note to provide guidance on certain practical issues in the implementation of Schedule II to the Companies Act 2013 (2013 Act) relating to the depreciation of assets.
The depreciation charged on the basis of useful life is the factual commercial depreciation which will represent the financial statements prepared closer to those prepared in accordance with International Standards.
Contributed by CA Garima Goyal
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