- 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 :
Asset a/c Dr. 10000
To Revaluation Reserve 10000
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 %
To Asset 3000
To Dep 3000
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.
Remaining Useful life as on 1/4/2014 as per Co’s Act
||Does not exit
|The carrying amount as on 1/4/2014 depreciated over the remaining useful life of the asset as per Schedule. II.
||Net Carrying amount after retaining Residual value, will be charged to opn Revenue Reserve.
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
|Year of acq
||No. of yrs used as on 31/3/2014
||Dep charged as on 31/3/2014 as per Sch XIV
(5% of orginal cost)
|Useful life as per sch II
||Remaing useful life
||Amount to be charged to Opn Rev. reserve
So net ca = 3037
So net ca = 3670
net ca 4936
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.