|QUERY:||M/s. ABC Ltd. is engaged in the business of cement manufacturing and power generation.
Existing depreciation policy of M/s. ABC Ltd. is as follows:
“Depreciation is provided on written down value method at the rates specified in schedule XIV of the Companies Act, 1956 or the rates prescribed in the Income-tax Act, 1961 whichever is higher. However in case of those assets whose WDV as per Income-tax Act,1961 is lower than the WDV as per books, additional depreciation is provided to align the book WDV as per Income-tax Act, 1961.”
The Companies Act, 2013 provides that depreciation is required to be charged as per useful life prescribed in Schedule-II as per provision of section 123 of the Act.
Provision of Schedule-II of Companies Act, 2013
3. Without prejudice to the foregoing provisions of paragraph 1,
(i) In case of such class of companies, as may be prescribed and whose financial statements comply with the accounting standards prescribed for such class of companies under section 133, the useful life of an asset shall not normally be different from the useful life and the residual value shall not be different from that as indicated in Part C, provided that if such a company uses a useful life or residual value which is different from the useful life or residual value indicated therein, it shall disclose the justification for the same.
(ii) In respect of other companies the useful life of an asset shall not be longer than the useful life and the residual value shall not be higher than that prescribed in Part C.”
(a) Whether company can continue its existing depreciation policy i.e., charging depreciation at higher rate from Companies Act (by deriving rates as per useful life as specified under Schedule-II and Income -tax Act, with WDV alignment, even after applicability of Companies Act, 2013. If yes, please specify justification/disclosure (if any) required to be given.
(b) Whether company can consider different useful life (higher or lower) from the useful life specified in Schedule-II. If yes, please specify justification/disclosure (if any) required to be given.
(c) Is there any retrospective impact if –
• Company shift from existing policy (WDV method with alignment) to SLM method under new Companies Act, 2013 and charge depreciation as per useful life prescribed under Schedule-II.
• Company shift from existing policy (WDV method with alignment) to WDV method (without alignment) under new Companies Act, 2013 and charge depreciation as per useful life prescribed under Schedule-II.
(d) How the rates of depreciation would be arrived for each asset under WDV method as per Schedule-II, where each asset is capitalised at different dates in a year
|ANSWER:||(i) As per schedule II of Companies Act, 2013, in case of prescribed class of companies, whose financial statements comply with Accounting Standards prescribed for such class of companies under section 133 of the Act, can have different useful life and residual value other than indicated in Part C of Schedule II of the Act, on disclosure of justification for the same i.e. on the basis of a bona fide technological evaluation. For other companies the useful life of an asset normally cannot be longer than the useful life and the residual value cannot be higher than that prescribed in Part C of the schedule-II of the Act.
(ii) As per para 21 of AS 6 “Depreciation Accounting”, the depreciation method selected should be applied consistently from period-to-period. A change from one method of providing depreciation to another should be made only if the adoption of new method is required by the statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise. When such change in the method of depreciation is made, depreciation should be recalculated in accordance with the new method from the date of assets coming into use. The deficiency or surplus arising from retrospective re-computation of depreciation in accordance with the new method should be adjusted in the accounts in the year in which the method of depreciation is changed. In case the change in the method results in deficiency in depreciation in respect of past years, the deficiency should be charged in the statement of profit and loss. In case the change in the method results in surplus, the surplus shall be credited to the statement of profit and loss. Such a change should be treated as a change in accounting policy and its effect should be quantified and disclosed.
(iii) As per note 2 of the Schedule-II of the Companies Act, 2013 where, during any financial year, any addition has been made to any asset or where any asset has been made to any asset or where any asset has been sold, discarded, demolished, the depreciation on such assets shall be calculated on a pro-rata basis from the date of such addition or, as the case may be, up to the date on which such asset has been sold, discarded, demolished or destroyed. As per note 4 of the Schedule II, useful life specified in Part C of the schedule is for whole of the asset.
|EXPERT:||CA. H. N. Motiwalla|
|SECTION(S):||123 of Companies Act|
|CATCH WORDS:||Companies Act, depreciation|
Opinion Of Eminent Legal Luminaries On Controversial Issues
Explain Depreciation Provisions Of S. 123 Of The Companies Act 2013?
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