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
cagsgrewal@gmail.com
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
depreciation every year?
to
provide
The answer is “Yes”.
CA. (Dr.) G.S. Grewal
2
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)
CA. (Dr.) G.S. Grewal
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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.
CA. (Dr.) G.S. Grewal
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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.
CA. (Dr.) G.S. Grewal
5
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.
CA. (Dr.) G.S. Grewal
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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.
CA. (Dr.) G.S. Grewal
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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.
CA. (Dr.) G.S. Grewal
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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…
CA. (Dr.) G.S. Grewal
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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.
CA. (Dr.) G.S. Grewal
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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.
CA. (Dr.) G.S. Grewal
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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;
CA. (Dr.) G.S. Grewal
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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)
CA. (Dr.) G.S. Grewal
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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.
CA. (Dr.) G.S. Grewal
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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.
CA. (Dr.) G.S. Grewal
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Schedule II – Useful Lives to Compute
Depreciation
Part BUseful 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.
CA. (Dr.) G.S. Grewal
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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
CA. (Dr.) G.S. Grewal
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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.
CA. (Dr.) G.S. Grewal
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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.
CA. (Dr.) G.S. Grewal
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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
31st 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.
CA. (Dr.) G.S. Grewal
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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
31st March, 2014.
• Determine the Rate of Depreciation to write off the
balance amount over the remaining Useful Life.
CA. (Dr.) G.S. Grewal
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Comparative Rates – Factory Building
Schedule II
Schedule XIV
• Useful life - 30 Years • WDV Rate 10%
• SLM Rate –
3.17% • SLM Rate - 3.34%
• WDV Rate 9.5 % • Useful life - 23 years
CA. (Dr.) G.S. Grewal
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Comparative Rates - Other than Factory
Building
Schedule II
Schedule XIV
• Useful Life - 60 Years • WDV Rate 5%
• SLM Rate 1.58% • SLM Rate - 1.63%
• WDV Rate - 4.87% • Useful Life - 58 Years
CA. (Dr.) G.S. Grewal
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Comparative Rates – Temporary Structure
Schedule II
• Useful life • SLM rate • WDV rate -
CA. (Dr.) G.S. Grewal
Schedule XIV
3 Years • SLM rate 31.67% • WDV rate 63 % • Useful life -
100%
100%
0 year
24
Comparative Rates – P & M (General Rate)
Schedule II
Schedule XIV
• Useful Life - 15 Years • SLM Rate - 4.75%
• SLM Rate 6.33% • WDV Rate - 13.91%
• WDV Rate - 18.10% • Useful Life - 20 years
CA. (Dr.) G.S. Grewal
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Comparative Rates –
P & M (Continuous Process)
Schedule II
Schedule XIV
• Useful Life - 25 Years • SLM Rate - 5.28%
• SLM Rate 3.80% • WDV Rate - 15.33%
• WDV Rate - 11.29% • Useful Life - 18 years
CA. (Dr.) G.S. Grewal
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Comparative Rates – Furniture & Fixtures
Schedule II
Schedule XIV
• Useful Life - 10 Years • SLM Rate 6.33%
• SLM Rate 9.5% • WDV Rate - 18.10%
• WDV Rate - 25.89% • Useful Life - 15 years
CA. (Dr.) G.S. Grewal
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Comparative Rates – Motor Vehicle
Schedule II
Schedule XIV
• Useful Life - 10 Years • SLM Rate 9.5%
• SLM Rate 9.5% • WDV Rate - 25.89%
• WDV Rate - 25.89% • Useful Life - 10 years
CA. (Dr.) G.S. Grewal
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Revision of Depreciation Rates
Useful
of Machinery
(under
Sch.XIV)
XIV)
Usefullife
Life
of Machinery
(Sch.
20 Yrs.
Useful Life of Machinery (Under Sch. II)
15 Yrs.
Cost of Machinery (installed on 1.4.2009)
Depreciation Rate Under Sch. XIV- SLM
Rs. 5,00,000
4.75%
Depreciation Per year
Rs. 23,750
WDV as on 1.4.2014
Rs.3,81,250
-
Remaining Useful Life Sch. II on 1.4.2014
10 Yrs.
Dep. Rate for remaining Useful Life –SLM
7.125%
Depreciation Per year
CA. (Dr.) G.S. Grewal
Rs. 35,625
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Revision of Depreciation Rates
Useful
Machinery
(under
Sch.
XIV)
Usefullife
lifeofof
Machinery
(Sch.
XIV)
20 Yrs.
Useful life of Machinery (under Sch. II)
15 Yrs.
Cost of Machinery (installed on 1.4.2000)
Depreciation Rate under Sch. XIV- SLM
Rs. 5,00,000
4.75%
Depreciation Per Year
Rs. 23,750
WDV as on 1.4.2014
Rs.1,67,500
-
Remaining Useful Life Sch. II on 1.4.2014
Dep. rate for remaining useful life –SLM
Residual Value (5% of Rs. 5,00,000)
Depreciation
CA. (Dr.) G.S. Grewal(Rs. 1,67,500 – Rs. 25,000)
1 Yr.
100%
Rs. 25,000
Rs. 1,42,500
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Effect of Change in Useful Life
Useful
Machinery
(under
Sch.
XIV)
Usefullife
lifeofof
Machinery
(Sch.
XIV)
20 Yrs.
Useful life of Machinery (under Sch. II)
15 Yrs.
Cost of Machinery (installed on 1.4.1996)
Depreciation Rate under Sch. XIV- SLM
Depreciation Per Year
WDV as on 1.4.2014
Rs. 5,00,000
4.75%
Rs. 23,750
-
Rs. 72,500
Remaining Useful Life Sch. II on 1.4.2014
Nil
Amount to be debited to Opening Balance
of Surplus Account
Rs. 47,500
CA. (Dr.) G.S. Grewal
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Revision of Depreciation Rate
Date of Addition of Plant &
Machinery
Rate of Depreciation
(SLM)
1st April, 2009
7.125%
15th July, 2009
7.06%
3rd September, 2009
7.03%
30th December, 2009
6.96%
CA. (Dr.) G.S. Grewal
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Revision of Depreciation Rates
Useful
of Machinery
(under
Sch.XIV)
XIV)
Usefullife
Life
of Machinery
(Sch.
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- WDV
13.91%
Depreciation (Total up to 31.03. 2014)
Rs.2,63,554
WDV as on 1.4.2014
Rs. 2,36,446
-
Remaining Useful Life Sch. II on 1.4.2014
10 Yrs.
Dep. Rate for remaining Useful Life –WDV
18.10%
Depreciation for the year (2014 – 15)
CA. (Dr.) G.S. Grewal
Rs. 42,797
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Depreciation Calculation
Year
Book Value Depreciation Depreciation
(Rs.)
Rate
(Rs.)
2009 - 10
5,00,000
13.91%
69,550
2010 - 11
4,30,450
13.91%
59,876
2011 - 12
3,70,574
13.91%
51,547
2012 - 13
3,19,027
13.91%
44,377
2013 - 14
2,74,650
13.91%
38,204
2014 - 15
2,36,446
18.10%
42,797
CA. (Dr.) G.S. Grewal
(Rs.)
2,63,554
34
Revision of Depreciation Rates
Useful
of Machinery
(under
Sch.XIV)
XIV)
Usefullife
Life
of Machinery
(Sch.
20 Yrs.
Useful Life of Machinery (under Sch. II)
15 Yrs.
Cost of Machinery (installed on 1.4.2000)
Depreciation Rate under Sch. XIV- WDV
Depreciation (Total)
WDV as on 1.4.2014
Rs. 5,00,000
13.91%
Rs. 4,23,107
Rs. 76,493
- on 1.4.2014
Remaining Useful Life Sch. II
1 Yr.
Dep. rate for remaining Useful Life –WDV
100%
Realisable Value
Rs. 25,000
Depreciation for the Year
Rs. 51,493
CA. (Dr.) G.S. Grewal
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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.
CA. (Dr.) G.S. Grewal
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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.
CA. (Dr.) G.S. Grewal
37
CA. (Dr.) Gurmeet S. Grewal
grewal@cagrewalsingh.com , cagsgrewal@gmail.com
Phone: 011-29842641, 29833394
Mobile: +91-9811242856 & 09266942856
CA. (Dr.) G.S. Grewal
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