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
(WDVM)
Value
Method
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
standards
of
accounting
• 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
remaining useful life of the assets
the
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.
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
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
Issues
• Depreciation on investment property
• Useful life of asset acquired under
amalgamation
THANK
YOU
D.S. Rawat, FCA
Partner, Basal & Co.