Depreciation procedure under Schedule 2

• The introduction of Companies Act, 2013 method for calculating depreciation has changed.
• Schedule XIV has been replaced with Schedule II.

• As per Schedule II , useful lives will be mentioned for all the assent in Part C of the act.

For a class of companies, specifically prescribed by MCA, can adopt useful life longer than prescribed in schedule II, but the same should be disclosed in Notes To Accounts with justification. For other companies, life cannot be longer than that prescribed in Schedule II.

• As per this schedule, the residual value of should not exceed 5% of the original cost of the asset.

• In case of Double shift – Additional Depreciation 50% ( If depreciation is 2000 for single shift it will be 4000 for double shift ) and triple shift – Additional depreciation 100%

Previously the asset whose cost was Rs.5000/- or less was made 100% depreciation , but now it shall be depreciated as per the provisions specified in Schedule II ( i.e as per is useful life )

What happened before :

• Say my Asset is Rs. 20000 , depreciation rate is 10% .
• Now if Asset is revalued to Rs.30000/- we do the following :
  

The total amount of depreciation = 30000 * 10 % i.e 3000

Revaluation Reserve          Dr. 1000     P/L                                  Dr.  2000   To Asset                                         3000

What will happen now

Depreciation will be 10 %

Balance in Revaluation Reserve = 10000

• Useful lives are specified in Part C , if useful life / Residual value not in accordance with Part C then necessary disclosures of such difference with justification by technical advice is required.
•  

Translation Provision

Remaining Useful life as on 1/4/2014 as per Co’s Act

Let’s take up some examples

Formula for depreciation –    S.L.M =   (Cost – Scrap) / useful life

Formula for depreciation –   W.D.V =  1 – (s/c)^1/n  ( ‘s’ stands for scrap, ‘c’ stands for original cost and its (1 – s/c)^1/n , n stands for useful life )

• Eg. (1) – Original Cost of Plant and Machinery – 100000

useful life as per old provision  –  20 yrs

useful life as per new provision –  15yrs

depreciation as per old prov (wdv) –  13.91%

depreciation rate as per new prov –  18.10 %

Expired Life –  5 yrs

Accumulated Dep for expired life – 52711

(Q) What shall be the carrying amount?

(A) 100000 – 52711 = 47289

(Q) What shall be the remaining useful life of the P.M?

(A) 10 yrs    (life as per new prov – expired life)

(Q) What should be the rate of Dep ?

(A) 1 – ( Scrap value/Original cost)^{1/useful life}   i.e 1- (5000/100000)^1/10      = 25.89%

• Eg (2) Original cost of P.M      –   100000

useful life (old prov)      –   20 yrs

dep old prov.                  –   13.91 %

useful life (new prov )   –   15 yrs

dep new prov.                –   18.10 %

expired life                      –   16 yrs

accumulated dep           –   90896

carrying amount            –    9104

Since there is no useful life as per schedule II i.e. the remaining useful life is NIL. the carrying amount (i.e. 9104) as reduced by the Scrap Value (i.e. 5% of 100000 ) should be charged to opening retained earnings

Entry as on 1/4/2014

• Opening retained Earnings A/c     Dr. 4104
•              To Asset A/c                                           4104

• Eg (3)

This requirement of calculating dep as per Sch II was voluntary wrt F.Y. commencing from 1/4/2014  but mandatory for F.Y 1/4/2015  onwards.