Background Material. Half Day Seminar on. Changes in Law Tighten your belt

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1 Background Material Half Day Seminar on Changes in Law Tighten your belt Topic: Nitty-Gritty of Depreciation provisions under CA Case Studies & Use of MS-EXCEL for computation Sessions by: CA. Kuntal P. Shah, Ahmedabad Date: 31 st January, 2015 Table of Contents Section 1 Section - 2 Section - 3 Section - 4 Handout of Presentation Depreciation Rates as per Useful Life under SLM & WDV Method Computation of Depreciation through Spreadsheet Software Use of Formula & Functions available Text of Schedule II of CA 2013 as amended by Notification Dt and

2 Section 1 Handout of Presentation

3 Nitty-Gritty of Depreciation provisions under CA Case Studies & Use of MS-EXCEL for computation Organized by Ahmedabad Branch of WIRC of ICAI on 31 st January, 2015 Presented by CA. Kuntal Shah, Ahmedabad Disclaimers These are my personal views and can not be construed to be the views of the ICAI, Regional Council of ICAI, Branch of ICAI or Pradip R. Shah & Co., Chartered Accountants These views do not and shall not be considered as professional advice. Example files will not be shared, due to Intellectual Property Rights [IPR]. All efforts has been made toensurethat the information i contained in this presentation is accurate, up-to-date and complete. However, on account of frequent changes in the provisions users are advised to refer updated provisions. By CA. Kuntal P. Shah 2 1

4 Part - I Discussion on regulatory provisions on Depreciation Session 1 Overview Overview of Depreciation and provisions under CA 1956 Impact on Financials across Industry Provisions relating to Depreciation in CA 2013 Schedule II of CA 2013 Case Studies Transition under different scenarios Component Accounting Schedule II of CA 2013 vis a vis Schedule XIV of CA 1956 Accounting Standard on Depreciation Accounting AS 6 vis a vis CA 2013 Whether change as per CA 2013 is Change in Method? Few Issues for Brainstorming By CA. Kuntal P. Shah 4 2

5 Overview of Depreciation and Provisions under CA 1956 Depreciation is a charge on account of Effect of normal wear & tear in Depreciable Asset Consumption and other impact due to use Efflux of time, Change in technology Change in Market etc. Under CA 1956 Schedule XIV Depreciation on Tangible Assets was prescribed Method of Dep. and Rate of Dep. were provided Dep. Rates were prescribed by factoring 95% of Cost of Asset considering 5% as Residual Value. By CA. Kuntal P. Shah 5 Major Change in CA 2013 Changes in CA 2013 Schedule II List of Asset with Useful life is exhaustive Instead of Dep. Rate and Method, useful life of Asset are provided d Component Accounting Continuous Process Plants Upper cap on Residual Value is prescribed Treatment of Dep. on Intangible Assets Transitional provisions for 1 st year of adoption prescribed. No provisions for 100% Dep. on Assets valued of Rs. 5,000 and lesser as available in CA By CA. Kuntal P. Shah 6 3

6 Session 1 Overview Overview of Depreciation and provisions under CA 1956 Impact on Financials across Industry Provisions relating to Depreciation in CA 2013 Schedule II of CA 2013 Case Studies Transition under different scenarios Component Accounting Schedule II of CA 2013 vis a vis Schedule XIV of CA 1956 Accounting Standard on Depreciation Accounting AS 6 vis a vis CA 2013 Whether change as per CA 2013 is Change in Method? Few Issues for Brainstorming By CA. Kuntal P. Shah 7 Impact on Financials across Industry Useful life brought down to a realistic level (shorter period) thereby making an increase in Dep. Rate However, flexibility is provided to depreciate asset with useful life different from as prescribed in CA 2013 with appropriate justifications. Overall, there is a slight negative impact on financial on account of higher charge of Dep. However, it is a mixed bag feeling for different companies across industries. By CA. Kuntal P. Shah 8 4

7 Impact on Financials across Industry Information Technology, Financial & Other Service Sectors Companies which followed useful life (Rates) as prescribed CA 1956 and not actual will have negative impact due to reduction of Useful Life of Office Equipments, Computers & Laptops. Chemical and Machinery intensive Industries Useful life of General Plant & Machinery is reduced from 20 years to 15 years. This may end up in a Negative / Extra Depreciation in Year By CA. Kuntal P. Shah 9 Impact on Financials across Industry Non-Ferrous Manufacturers Useful Life is increased from 20 Years to 40 years. Companies are now allowed to choose useful life of prescribed Assets upto 40 years. This may end up in a Positive Result Electricity Generation and Distribution Companies Useful Life is increased from 20 Years to 40 years. Companies are now allowed to choose useful life prescribed Assets upto 40 years. This may end up in a Positive Result for Industry which is already under stress By CA. Kuntal P. Shah 10 5

8 Snapshot of Change in Dep. Rates Useful Life as per CA 2013 (Prescribed) WDV Dep Rate - CA 2013 (Derived) Useful Life as WDV Dep Rate - per CA 1956 CA 1956 (Prescribed) Change [Increase / (Decrease)] in Dep. Rate Factory Building % 28 10% Decrease Office Building % 58 5% Decrease General Plant & Mach % % Increase Furniture & Fittings % % Increase Office Equipment % % * Increase [Note No. 6(13) of Sch. XIV of CA 1956] Desktop & Laptops % 6 40% Increase Electrical Installation % % * Increase [Note No. 6(5) of Sch. XIV of CA 1956] Electricity Generation Plant % % Decrease Machineries used by Non % % Decrease Ferrous Near years * As per Note No. 6 of Sch. XIV of CA 1956 By CA. Kuntal P. Shah 11 Impact on Financials across Industry However, it is difficult to project impact across industry. It depends on how the companies play around the new provisions There is a sea change in Dep. Provisions which will require in-depth study and numerous number crunching activities to ascertain its impact By CA. Kuntal P. Shah 12 6

9 Session 1 Overview Overview of Depreciation and provisions under CA 1956 Impact on Financials across Industry Provisions relating to Depreciation in CA 2013 Schedule II of CA 2013 Case Studies Transition under different scenarios Component Accounting Schedule II of CA 2013 vis a vis Schedule XIV of CA 1956 Accounting Standard on Depreciation Accounting AS 6 vis a vis CA 2013 Whether change as per CA 2013 is Change in Method? Few Issues for Brainstorming By CA. Kuntal P. Shah 13 Provisions relating to Depreciation in CA 2013 As in case of CA 1956, Depreciation provisions in CA 2013 are with reference to manner of computing Net Profit (S. 198) and Declaration of Dividend (S. 123) Narrative part for Depreciation is under Schedule II of CA 2013 Applicability to any year commencing on or after 1st April, (Cir. No. 8 dt. 4 th April, 2014) For companies following December ending the provisions will be applicable from By CA. Kuntal P. Shah 14 7

10 Session 1 Overview Overview of Depreciation and provisions under CA 1956 Impact on Financials across Industry Provisions relating to Depreciation in CA 2013 Schedule II of CA 2013 Case Studies Transition under different scenarios Component Accounting Schedule II of CA 2013 vis a vis Schedule XIV of CA 1956 Accounting Standard on Depreciation Accounting AS 6 vis a vis CA 2013 Whether change as per CA 2013 is Change in Method? Few Issues for Brainstorming By CA. Kuntal P. Shah 15 Schedule II of CA 2013 Schedule II of CA 2013 is in 3 parts. Part A of the Schedule prescribes the following 1. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount of an asset is the cost of an asset or other amount substituted for cost, less its residual value. The useful life of an asset is the period over which an asset is expected to be available for use by an entity, or the number of production or similar units expected to be obtained from the asset by theentity. tit 2. For the purpose of this Schedule, the term depreciation includes amortisation. By CA. Kuntal P. Shah 16 8

11 Schedule II of CA Without prejudice to the foregoing provisions of paragraph 1, i) The useful life of an asset shall not be ordinarily be different from the useful life specified in Part C and the residual value of an asset shall not be more than five per cent of the original cost of the asset: Provided that where a company adopts a useful life different from what is specified in Part C or uses a residual different from the limit specified above, the financial statements shall disclose such difference and provide justification in this behalf duly supported by technical advice. (As amended on and on ) ii) For intangible assets, the provisions of the accounting standards applicable for the time being in force shall apply, except in case of intangible assets (Toll Roads) created under Build, Operate and Transfer, Build, Own, Operate and Transfer or any other form of public private partnership route in case of road projects.. (As amended on ) By CA. Kuntal P. Shah 17 Schedule II of CA 2013 Part B The useful life or residual value of any specific asset, as notified for accounting purposes by a Regulatory Authority constituted under an Act of Parliament or by the Central Government shall be applied in calculating the depreciation to be provided for such asset irrespective of the requirements of this Schedule. Part C Subject to Part A and B above, the following are the useful lives of various tangible assets: By CA. Kuntal P. Shah 18 9

12 Schedule II of CA 2013 Useful Life as prescribed in Schedule II for few type of Assets Nature of Asset Useful Life I. Buildings [NESD] a) Buildings (other than factory buildings) RCC Frame Structure t 60 Years c) Factory buildings 30 Years IV. Plant and Machinery a. Plant and Machinery other than continuous process plant not 15 Years covered under specific industries k. Plant and Machinery used in civil construction (1. Concreting, 12 Years Crushing, Piling Equipments and Road Making Equipments) V. Furniture and fittings [NESD] 10 Years By CA. Kuntal P. Shah 19 Schedule II of CA 2013 Nature of Asset Useful Life VI. Motor Vehicles [NESD] 1. Motor Cycles, Scooters & Moped 10 Years 3. Motor Buses, Lorries, Motor Cars (Other than used in Hire Business) 8 Years XI. Office equipment [NESD] 5 Years XII. Computers and data processing units [NESD] i. Servers & Networks 6 Years ii. End user devices, such as, desktops, laptops, etc. 3 Years XIII. Laboratory equipment [NESD] 10 Years XIV. Electrical Installations and Equipment [NESD] 10 Years By CA. Kuntal P. Shah 20 10

13 Schedule II of CA 2013 Explanation of terms used in Part A of Schedule. Systematic Allocation Not defined in CA However, dictionary meaning of two words can be said to be Share set aside for a specific purpose in prescribed method Depreciable Amount Cost Less Residual Value (Para 1 of Part A of Schedule - II) By CA. Kuntal P. Shah 21 Schedule II of CA 2013 Useful Life The period over which and Asset is expected to be available for use by an entity (Para 1 of Part A of Schedule II) As per Para 3.i of Part A of Schedule II useful life of an asset shall not ordinarily different from what is prescribed under Part - C Useful Life for different type of Assets have been prescribed under Part C of Schedule - II Residual Value The estimated amount that will be realized at the time of disposal as reduced by cost of disposal. As per Para 3.i. of Part A of Schedule II it should not be more than 5% of Original Cost of Asset. (If different from the said limit justification supported by technical advice is required in Fin. Statement) By CA. Kuntal P. Shah 22 11

14 Schedule II of CA 2013 Important Notes of Schedule II of CA 2013: "Factory buildings" does not include offices, godowns, staff quarters. (Note 1) Prorata Depreciation working for Assets acquired / disposed based on Date of Addition / Deduction. (Note - 2) Information to be disclosed (Note 3) Depreciation Method used the useful lives of the assets for computing depreciation, if they are different from the life specified in the Schedule. By CA. Kuntal P. Shah 23 Schedule II of CA 2013 Component Accounting (Note 4) a) Useful life specified in Part C of the Schedule is for whole of the asset and where cost of a part of the asset is significant to 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. b) The requirement under sub-paragraph (a) shall be voluntary in respect of Financial Year commencing on or after 1st April, 2014 and mandatory for financial statements in respect of financial years commencing on or after the 1st April, 2015 (As amended on ) E.g. i) Tanker mounted Truck where life of Tanker may be different from the life of Truck. ii) Air Pollution Control Equipment where life of Air Filter Cartridge may be different from life of rest of the equipement. By CA. Kuntal P. Shah 24 12

15 Schedule II of CA 2013 Assets used in multiple Shifts (Note 6) The useful lives of assets working on shift basis have been specified in the Schedule based on their single shift working. Except for assets in respect of which no extra shift depreciation is permitted (indicated by NESD in Part C above), if an asset is used for any time during the year for Double Shift, the depreciation will increase by 50% for that period and in case of the Triple shift the depreciation shall be calculated on the basis of 100% for that period. By CA. Kuntal P. Shah 25 Schedule II of CA 2013 Transitional Provisions (Note 7) FromthedatethisSchedulecomesintoeffect,thecarrying amount of the asset as on that date a. shall be depreciated over the remaining useful life of the asset as per this Schedule; b. after retaining the residual value, may be recognised in the opening balance of retained earnings where the remaining useful life of an asset is nil. (As amended on ) Speaker s Note: Hence, effect of excess depreciation on account of change in useful life leaving remaining useful life is Negative / Zero can be (at the option of the company words used may and not shall ) routed through PL or through Retained Earnings. Continuous Process Plants (Note 8) "Continuous process plant" means a plant which is required and designed to operate for twenty-four hours a day. By CA. Kuntal P. Shah 26 13

16 Schedule II of CA 2013 Transitional Provisions Note No. 7 of Sch. II: FromthedatethisSchedulecomesintoeffect,the carrying amount of the asset as on that date shall be depreciated over the remaining useful life of the asset as per this Schedule Poser - 1: Can it be said that the CA 2013 for Transitional Provisions prescribes Straight Line Method of Depreciation for Existing Assets? By CA. Kuntal P. Shah 27 Session 1 Overview Overview of Depreciation and provisions under CA 1956 Impact on Financials across Industry Provisions relating to Depreciation in CA 2013 Schedule II of CA 2013 Case Studies Transition under different scenarios Component Accounting Schedule II of CA 2013 vis a vis Schedule XIV of CA 1956 Accounting Standard on Depreciation Accounting AS 6 vis a vis CA 2013 Whether change as per CA 2013 is Change in Method? Few Issues for Brainstorming By CA. Kuntal P. Shah 28 14

17 Case Study - 1 on Transitional Provisions Asset Type: Plant & Machinery Cost: Rs. 1 Crore Dep. Method: SLM & Dep. Rate: 4.75% Put to use on: 1 st April, 2004 Dep. Claimed for: 10 Years Salvage Value: 5% of Cost Pending useful life: 5 Years (15 Years 10 Years) Carrying Value as on : Rs. Rs. 52,50,000 Working: i. Accu. Dep.: Rs. 1 Crore x 4.75% x 10 Years = Rs. 47,50,000 ii. WDV: Rs. 1,00,00,000 Rs. 47,50,000 = Rs. 52,50,000 Dep. (p.a.) w.e.f. FY 14-15: 15: Rs. 9,50,000 p.a. Rs. 47,50,000 (Carrying Value Residual Value ) / 5 Years (Remaining Life) Impact: Rs. 9,50,000 will be charged on yearly basis upto 5 years from FY By CA. Kuntal P. Shah 29 Case Study 2 on Transitional Provisions Asset Type: Plant & Machinery Cost: Rs. 1 Crore Dep. Method: SLM & Dep. Rate: 4.75% Put to use on: 1 st April, 1995 Dep. Claimed for: 19 Years Salvage Value: 5% of Cost Pending useful life: Nil Years (15 Years 19 Years) Carrying Value as on : Rs. 9,75,000 Working: i. Accu. Dep.: Rs. 1 Crore x 4.75% x 19 Years = Rs. 90,25,000 ii. WDV: Rs. 1,00,00,000 Rs. 90,25,000 = Rs. 9,75,000 Dep. (p.a.) w.e.f. FY 14-15: 15: Rs. Nil Rs. 4,75,000 (Carrying Value Salvage Value) / Nil Years (Remaining Life) Impact: Rs. 4,75,000 can be routed through Opening Balance of Retained earnings of through PL in FY By CA. Kuntal P. Shah 30 15

18 Case Study - 3 on Transitional Provisions Asset Type: Plant & Machinery Cost: Rs. 1 Crore Dep. Method: WDV & Dep. Rate: 13.91% Put to use on: 1 st April, 2010 Dep. Claimed for: 4 Years Salvage Value: 5% Pending useful life: 11 Years (15 Years 4 Years) Carrying Value as on : Rs. 54,93,016 Working: i. Accu. Dep.: Rs % for 4 Years - Rs. 45,06,984 ii. WDV: Rs. 1,00,00,000 Rs. 45,06,984 = Rs. 54,93,016 Dep. Rate Formula: (1-((SalvageVal/CarryingVal)^(1/Remaining Life))) (1-((5,00,000/54,93,016)^(1 / 11 Years))) Apply Rate derived on Carrying Value as on Impact: Rs. 10,75,390 will be charged in FY By CA. Kuntal P. Shah 31 Case Study 4 on Component Accounting Type of Asset: Air Pollution Control Equipment Asset component: i) Housing equipment Cost: Rs. 50,000 ii) Air Filter Cost: Rs. 80,000 Total Cost : Rs. 1,30,000 Useful Life: Housing Equipment 15 Years Air Filter 5 Years Dep. Method: SLM Residual Value: Rs. 2,500 (Housing Equip) & Nil for Air Filter Depreciation Computation: Housing Equip. = Rs. 47,500/ 15 = Rs. 3,167 Air Filter = Rs. 80,000 / 5 = Rs. 16,000 Total Depreciation = Rs. 19,167 On replacement the amount cost incurred will be recapitalized as Component. By CA. Kuntal P. Shah 32 16

19 Session 1 Overview Overview of Depreciation and provisions under CA 1956 Impact on Financials across Industry Provisions relating to Depreciation in CA 2013 Schedule II of CA 2013 Case Studies Transition under different scenarios Component Accounting Schedule II of CA 2013 vis a vis Schedule XIV of CA 1956 Accounting Standard on Depreciation Accounting AS 6 vis a vis CA 2013 Whether change as per CA 2013 is Change in Method? Few Issues for Brainstorming By CA. Kuntal P. Shah 33 Schedule II of CA 2013 vis a vis Schedule XIV of CA 1956 Schedule II of CA 2013 Schedule XIV of CA 1956 Provisions for Amortization introduced. Concept of Useful Life instead of Dep. Rates No specific provisions for Assets less than Rs. 5,000 Simplification in Extra Shift Depreciation Normal + 50% for Double Shift Normal % for Triple Shift Dealt with only Depreciation on Tangible Assets Depreciation Rates were prescribed 100% Depreciation for Assets less than Rs. 5,000 As per Rates prescribed for the number of days for which company worked second shift By CA. Kuntal P. Shah 34 17

20 Session 1 Overview Overview of Depreciation and provisions under CA 1956 Impact on Financials across Industry Provisions relating to Depreciation in CA 2013 Schedule II of CA 2013 Case Studies Transition under different scenarios Component Accounting Schedule II of CA 2013 vis a vis Schedule XIV of CA 1956 Accounting Standard on Depreciation Accounting AS 6 vis a vis CA 2013 Whether change as per CA 2013 is Change in Method? Few Issues for Brainstorming By CA. Kuntal P. Shah 35 Accounting Standard on Depreciation Accounting Important Points as per AS - 6 The depreciable amount of a depreciable asset should be allocated on a systematic basis to each accounting period during the useful life of the asset. (Para 20) 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 the new method is required by 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 financiali statements of the enterprise. When such a change in the method of depreciation is made, depreciation should be recalculated in accordance with the new method from the date of the asset coming into use. By CA. Kuntal P. Shah 36 18

21 Accounting Standard on Depreciation Accounting The deficiency or surplus arising from retrospective recomputation 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 should be credited to the statement of profit and loss. Such a change should be treated as a change in accounting policyand its effect should be quantified and disclosed (Para 21) By CA. Kuntal P. Shah 37 Accounting Standard on Depreciation Accounting The useful life of a depreciable asset should be estimated after considering the following factors: (i) expected physical py wear and tear; (ii) obsolescence; (iii) legal or other limits on the use of the asset. (Para 22) The useful lives of major depreciable assets or classes of depreciable assets may be reviewed periodically. Where there is a revision of the estimated useful life of an asset, the unamortised depreciable amount should be charged over the revised remaining useful life. By CA. Kuntal P. Shah 38 19

22 Session 1 Overview Overview of Depreciation and provisions under CA 1956 Impact on Financials across Industry Provisions relating to Depreciation in CA 2013 Schedule II of CA 2013 Case Studies Transition under different scenarios Component Accounting Schedule II of CA 2013 vis a vis Schedule XIV of CA 1956 Accounting Standard on Depreciation Accounting AS 6 vis a vis CA 2013 Whether change as per CA 2013 is Change in Method? Few Issues for Brainstorming By CA. Kuntal P. Shah 39 AS 6 vis a vis CA 2013 Charge of Depreciation: CA 2013: Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life AS 6: 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. By CA. Kuntal P. Shah 40 20

23 AS 6 vis a vis CA 2013 Useful Life: CA 2013: i) The useful life of an asset shall not be ordinarily be different from the useful life specified in Part C and the residual value of an asset shall not be more than five per cent of the original cost of the asset: Provided that where a company adopts a useful life different from what is specified in Part C or uses a residual different from the limit specified above, the financial statements shall disclose such difference and provide justification in this behalf duly supported by technical advice. AS 6: The useful life of a depreciable asset should be estimated after considering the following factors: (i) expected physical wear and tear; (ii) obsolescence; (iii) legal or other limits on the use of the asset. By CA. Kuntal P. Shah 41 AS 6 vis a vis CA 2013 Residual Value: CA 2013: It should not be more than 5% of Original Cost of Asset. (Justification in Fin. Statements t t if it is different) AS 6: Determination of residual value of an asset is normally a difficult matter. If such value is considered as insignificant, it is normally regarded as nil. On the contrary, if the residual value is likely to be significant, it is estimated at the time of acquisition / installation, or at thetimeof subsequent revaluation of the asset. One of the bases for determining the residual value would be the realisable value of similar assets which have reached the end of their useful lives and have operated under conditions similar to those in which the asset will be used. By CA. Kuntal P. Shah 42 21

24 AS 6 vis a vis CA 2013 Depreciation Method: CA 2013: No method is prescribed in CA 2013 as against available in CA At Note No. 3(i) of Schedule II of CA 2013 it is prescribed that Depreciation Methods Used should be disclosed in Financial Statement. AS 6: Explanatory Paragraph of AS 6 (Para 12) prescribes the following. There are several methods of allocating depreciation over the useful life of the assets. Those most commonly employed in industrial and commercial enterprises are the Straight Line method and the Reducing Balance Method By CA. Kuntal P. Shah 43 AS 6 vis a vis CA 2013 Transitional Provisions due to change in CA: CA 2013: FromthedatethisSchedulecomesintoeffect,the carrying amount of the asset as on that date a. shall be depreciated over the remaining useful life of the asset as per this Schedule; b. after retaining the residual value, may be recognised in the opening balance of retained earnings where the remaining useful life of an asset is nil. AS 6: Whether change in CA 2013 a Change in Method? If yes Refer Para 21 of AS 6 (For Change in Method) If no refer Para 23 of AS 6 (For Change in Accounting Estimate) By CA. Kuntal P. Shah 44 22

25 Session 1 Overview Overview of Depreciation and provisions under CA 1956 Impact on Financials across Industry Provisions relating to Depreciation in CA 2013 Schedule II of CA 2013 Case Studies Transition under different scenarios Component Accounting Schedule II of CA 2013 vis a vis Schedule XIV of CA 1956 Accounting Standard on Depreciation Accounting AS 6 vis a vis CA 2013 Whether change as per CA 2013 is Change in Method? Few Issues for Brainstorming By CA. Kuntal P. Shah 45 Whether change as per CA 2013 is Change in Method? Changes in CA 2013 is w.r.t. Change in useful life. Due to which there is a change in the amount of Depreciation. Poser - 2: Whether it can be termed as Change in Method which requires retrospective working and disclosure as per AS 6? By CA. Kuntal P. Shah 46 23

26 Session 1 Overview Overview of Depreciation and provisions under CA 1956 Impact on Financials across Industry Provisions relating to Depreciation in CA 2013 Schedule II of CA 2013 Case Studies Transition under different scenarios Component Accounting Schedule II of CA 2013 vis a vis Schedule XIV of CA 1956 Accounting Standard on Depreciation Accounting AS 6 vis a vis CA 2013 Whether change as per CA 2013 is Change in Method? Few Issues for Brainstorming By CA. Kuntal P. Shah 47 Issues for Brainstorming Impact on MAT Will there be any impact on MAT due to change? What will be the impact on adjustment on carry forward loss and unabsorbed depreciation? Will there be any impact reversal of Excess Dep. in Opening Retained Earnings on Positive Adjustment in MAT Computation? Willtherebeanybenefitavailableforthecaseswherein depreciation for Assets wherein remaining useful life is negative / zero and routed through Retained Earnings? By CA. Kuntal P. Shah 48 24

27 Issues for Brainstorming Impact on Deferred Tax What will be the impact on Deferred Tax computation? Scenarios Deferred Tax computed with Depreciation Amount Deferred Tax computed based on WDV What will be the impact of depreciation on account of remaining useful life being Nil if made in Opening Balance of Retained Earning on Deferred Tax? By CA. Kuntal P. Shah 49 Issues for Brainstorming Impact of Impairment & Revaluation Will there be any impact of Impairment & Revaluation of Asset on Depreciation? Which value should be considered for Depreciation. Original Cost of Acquisition or Revalued or Value after Impairment? Part A.1 Sch. II of CA 2013 The depreciable amount of an asset is the cost of an asset or other amount substituted for cost, less its residual value By CA. Kuntal P. Shah 50 25

28 Part - II Practical aspects on Computation of Depreciation as per CA 2013 provisions Session 2 Overview Computation of Depreciation under CA 2013 Depreciation Methods Computation of Depreciation in Spreadsheet Software Issues for Brainstorming Conclusion By CA. Kuntal P. Shah 52 26

29 Computation of Depreciation under CA 2013 Computation of Depreciation as per CA 2013 provisions should be carried in following steps. Step 1:Compute p Carrying Value / WDV as on Step 2: Compute Depreciation Charge for CY and Dep. for assets wherein useful life is Nil / Negative as on Step 3: Compute Depreciation on Assets acquired during the year By CA. Kuntal P. Shah 53 Session 2 Overview Computation of Depreciation under CA 2013 Depreciation Methods Computation of Depreciation in Spreadsheet Software Issues for Brainstorming Conclusion By CA. Kuntal P. Shah 54 27

30 Depreciation Methods Though method is not expressly provided in CA 2013, Methods discussed in AS 6 can be used. Straight Line Method (SLM) Reducing Balance Method (WDV) By CA. Kuntal P. Shah 55 Session 2 Overview Computation of Depreciation under CA 2013 Depreciation Methods Computation of Depreciation in Spreadsheet Software Issues for Brainstorming Conclusion By CA. Kuntal P. Shah 56 28

31 Computation through Spreadsheet Software Step 1: Computation of Carrying Value / WDV as on Collate Assetwise information. WDV of each assets as on is required to be arrived at. Aggregate of Assetwise WDV as on must agree with figure reported in Balance Sheet. What if proper records / information for Fixed Assets Additions (Assetwise) information is not available? How to do it? Lets go through it through an Example - 1 By CA. Kuntal P. Shah 57 Computation through Spreadsheet Software Step 2: Determination of Depreciation Charge for CY and Dep. for assets wherein useful life is Nil / Negative as on Determine the Class of Asset as per Schedule II for each of the Asset Determine Usage of Asset (in Years) since Date of Put to Use. Compute Remaining Life (Useful life as per Sch. II less Usage of Asset) If Negative or Zero Option 1 Route it through PL Option 2 Route it through Retained Earnings If Positive Revise the Charge of Depreciation and charge to PL. How to do it? For SLM divide carrying value with Remaining useful life For WDV it is a complicated process. Lets go through it through an Example 2 By CA. Kuntal P. Shah 58 29

32 Computation through Spreadsheet Software Step 3: Depreciation for the Assets acquired after Two methods Use of Excel Functions viz. DB, SLN and other functions (viz. DDB, SYD, SLN, AMORLINC, AMORDEGRC) Arrive at the Rate of Depreciation through Mathematical equation as discussed in Case Study 3 earlier. Prepare one time Dep. Rate Template for each class of Asset based on useful life How to do it? Refer Background Material for Rate of Depreciation Based on useful life By CA. Kuntal P. Shah 59 Functions in MS Excel for Depreciation Computation DB Returns the depreciation of an asset for a specified period using the fixed-declining balance method. Syntax DB (cost, salvage, life, period, month) Cost is the initial cost of the asset. Salvage is the value at the end of the depreciation (sometimes called the salvage value of the asset). Life is the number of periods over which the asset is being depreciated (sometimes called the useful life of the asset). Period is the period for which you want to calculate the depreciation. Period must use the same units as life. Month is the number of months in the first year. If month is omitted, it is assumed to be 12. By CA. Kuntal P. Shah 60 30

33 Functions in MS Excel for Depreciation Computation SLN Returns the straight-line depreciation of an asset for one period. Syntax SLN (cost, salvage, life) Cost is the initial cost of the asset. Salvage is the value at the end of the depreciation (sometimes called the salvage value of the asset). Life is the number of periods over which h the asset is depreciated (sometimes called the useful life of the asset). By CA. Kuntal P. Shah 61 Functions in MS Excel for Depreciation Computation Mathematical Equation for WDV in Excel Mathematical Equation Equation as Formula in Excel: (1-((SalvageVal/CarryingVal)^(1/Remaining Life))) By CA. Kuntal P. Shah 62 31

34 Session 2 Overview Computation of Depreciation under CA 2013 Depreciation Methods Computation of Depreciation in Spreadsheet Software Issues for Brainstorming Conclusion By CA. Kuntal P. Shah 63 Issues for Brainstorming FAR with Proper details is not available Posers: What if the existing FAR maintained by the company does not contain proper details w.r.t. WDV and yearly Depreciation Charge? What if there is no FAR? Possible Solutions: Information from IT Depreciation working can be used. Fixed Asset Ledger entries will also provide insight on FA Addition during the year. By CA. Kuntal P. Shah 64 32

35 Issues for Brainstorming Preparation of Template for Data collection and Computation Two sets of Templates are required to be prepared. One for Data Collection Oh Other for Actual computation Important Points: The format of the 1 st Template should match exactly with the other. All possibilities should be tested on computation template Handling different Date Formats in Excel is the key to success. Use Relative References and Absolute References for all the formula in order to expand the working area without changing the formula each time. Check, Re-check and Cross-check for correctness of computation By CA. Kuntal P. Shah 65 Session 2 Overview Computation of Depreciation under CA 2013 Depreciation Methods Computation of Depreciation in Spreadsheet Software Issues for Brainstorming Conclusion By CA. Kuntal P. Shah 66 33

36 Conclusion SeachangeinDepreciationProvisions. Impact on Financials is not known until the computation is made. Date for 1 st Year financial closure under CA 2013 is fast approaching and with other reforms viz. GST, IFRS in offing, CA 2013 compliances should be completed at the earliest. By CA. Kuntal P. Shah 67 Questions? By CA. Kuntal P. Shah 68 34

37 Thank You CA. Kuntal P. Shah Pradip R. Shah & Co. 35

38 Section 2 Depreciation Rates as per Useful Life under SLM & WDV Method

39 Depreciation Rates derived based on Useful life of Asset as prescribed under Schedule II of CA 2013 (WDV Working) (WDV) (SLM) Rate 4.87% Yr OB Dep. WDV Yr. WDV Rate Yr. SLM Rates 1 1,00,000 4,870 95, % % 2 95,130 4,633 90, % % 3 90,497 4,407 86, % % 4 86,090 4,193 81, % % 5 81,897 3,988 77, % % 6 77,909 3,794 74, % % 7 74,115 3,609 70, % % 8 70,505 3,434 67, % % 9 67,072 3,266 63, % % 10 63,805 3,107 60, % % 11 60,698 2,956 57, % % 12 57,742 2,812 54, % % 13 54,930 2,675 52, % % 14 52,255 2,545 49, % % 15 49,710 2,421 47, % % 16 47,289 2,303 44, % % 17 44,986 2,191 42, % % 18 42,795 2,084 40, % % 19 40,711 1,983 38, % % 20 38,729 1,886 36, ,843 1,794 35,048 Note: 22 35,048 1,707 33,341 (Assuming 5% Residual Value) 23 33,341 1,624 31, ,718 1,545 30, ,173 1,469 28, ,704 1,398 27, ,306 1,330 25, ,976 1,265 24, ,711 1,203 23, ,508 1,145 22, ,363 1,089 21, ,274 1,036 20, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,001

40 Section 3 Computation of Depreciation through Spreadsheet Software Use of Formula & Functions available

41 A B C D Data 10,00,000 50,000 Example - DB Function Description Initial cost Salvage value 6 Lifetime in years Syntax DB (cost, salvage, life, period, month) Years Dep. Amount WDV Formula 1 3,93,000 6,07,000 =DB($A$4,$A$5,$A$6,$A9) 2 2,38,551 3,68,449 =DB($A$4,$A$5,$A$6,$A10) 3 1,44,800 2,23,649 =DB($A$4,$A$5,$A$6,$A11) 4 87,894 1,35,755 =DB($A$4,$A$5,$A$6,$A12) 5 53,352 82,403 =DB($A$4,$A$5,$A$6,$A13) 6 32,384 50,019 =DB($A$4,$A$5,$A$6,$A14) Total Dep 9,49,981

42 A B C D Data 10,00,000 50,000 Example - SLN Function Description Initial cost Salvage value 6 Lifetime in years Syntax SLN (cost, salvage, life) Years Dep. Amount WDV Formula 1 1,58,333 8,41,667 =SLN($A$4,$A$5,$A$6) 2 1,58,333 6,83,333 =SLN($A$4,$A$5,$A$6) 3 1,58,333 5,25,000 =SLN($A$4,$A$5,$A$6) 4 1,58,333 3,66,667 =SLN($A$4,$A$5,$A$6) 5 1,58,333 2,08,333 =SLN($A$4,$A$5,$A$6) 6 1,58,333 50,000 =SLN($A$4,$A$5,$A$6) Total Dep 9,50,000

43 A B C D Example - WDV Maths Equation in Excel Data 10,00,000 50,000 6 Description Initial cost Salvage value Lifetime in years Formula 39.30% Dep. % <---- =(1-((A5/A4)^(1/A6))) Years Dep WDV Formula 1 3,93,038 6,06,962 =A4*A7 2 2,38,559 3,68,403 =C9*$A$7 3 1,44,796 2,23,607 =C10*$A$7 4 87,886 1,35,721 =C11*$A$7 5 53,343 82,377 =C12*$A$7 6 32,377 50,000 =C13*$A$7 Total Dep 9,50,000

44 Section 4 Text of Schedule II of CA 2013 as amended by Notifications Dt and

45 (As amended vide Notification Dt and vide Notification Dt ) [Text with Double Strikethrough is original Text of Schedule II which has been replaced with amended text as per Notification Dt Text with Single Strikethrough is text which is replaced by Notification Dt ] SCHEDULE II (See section 123) USEFUL LIVES TO COMPUTE DEPRECIATION PART A 1. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount of an asset is the cost of an asset or other amount substituted for cost, less its residual value. The useful life of an asset is the period over which an asset is expected to be available for use by an entity, or the number of production or similar units expected to be obtained from the asset by the entity. 2. For the purpose of this Schedule, the term depreciation includes amortisation. 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. (i) The useful life of an asset shall not be longer than ordinarily be different from the useful life specified in Part C and the residual value of an asset shall not be more than five per cent of the original cost of the asset: (ii) (ii) Provided that where a company uses adopts a useful life different from what is specified in Part C or uses a residual value of the asset which is different from the above limit specified above, justification for the difference shall be disclosed in its financial statement the financial statements shall disclose such difference and provide justification in this behalf duly supported by technical advice. 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. For intangible assets, the provisions of the Accounting Standards mentioned under sub-para (i) or (ii), as applicable, shall apply.

46 (ii) For intangible assets, the provisions of the accounting standards applicable for the time being in force shall apply, except in case of intangible assets (Toll Roads)created under Build, Operate and Transfer, Build, Own, Operate and Transfer or any other form of public private partnership route in case of road projects. Amortisation in such cases may be done as follows:- (a) Mode of amortisation Amortisation Amount Amortisation Rate = x 100 Cost of Intangible Assets (A) Amortisation Amount = Actual Revenue for the year (B) Cost of Intangible Assets (A) x Projected Revenue from Intangible Asset (till the end of the concession period) (C) (b) Meaning of particulars are as follows :- Cost of Intangible Assets (A) = Cost incurred by the company in accordance with the accounting standards. Actual Revenue for the year (B) = Actual revenue (Toll Charges) received during the accounting year. Projected Revenue from Intangible Asset (C) = Total projected revenue from the Intangible Assets as provided to the project lender at the time of financial closure / agreement. The amortisation amount or rate should ensure that the whole of the cost of the intangible asset is amortised over the concession period. Revenue shall be reviewed at the end of each financial year and projected revenue shall be adjusted to reflect such changes, if any, in the estimates as will lead to the actual collection at the end of the concession period. (c) Example:- Cost of creation of Intangible Assets Total period of Agreement Time used for creation of Intangible Assets : Rs. 500 Crores : 20 Years : 2 Years

47 Intangible Assets to be amortised in : 18 Years Assuming that the Total revenue to be generated out of Intangible Assets over the period would be Rs. 600 Crores, in the following manner:- Year No. Revenue ( In Rs. Crores) Remarks Year 1 5 Actual Year Estimate * Year 3 10 Estimate * Year Estimate * Year Estimate * Year 6 20 Estimate * Year 7 23 Estimate * Year 8 27 Estimate * Year 9 31 Estimate * Year Estimate * Year Estimate * Year Estimate * Year Estimate * Year Estimate * Year Estimate * Year Estimate * Year Estimate * Year Estimate * Total 600 * will be actual at the end of financial year. Based on this the charge for first year would be Rs Crore (approximately) (i.e. Rs. 5/Rs. 600 x Rs. 500 Crores) which would be charged to profit and loss and 0.83% (i.e. Rs Crore/ Rs 500 Crore x 100) is the amortisation rate for the first year. Where a company arrives at the amortisation amount in respect of the

48 said Intangible Assets in accordance with any method as per the applicable Accounting Standards, it shall disclose the same. PART 'B' 4. The useful life or residual value of any specific asset, as notified for accounting purposes by a Regulatory Authority constituted under an Act of Parliament or by the Central Government shall be applied in calculating the depreciation to be provided for such asset irrespective of the requirements of this Schedule. PART 'C' 5. Subject to Parts A and B above, the following are the useful lives of various tangible assets: Nature of assets I. Buildings [NESD] Useful Life (a) Buildings (other than factory buildings) RCC Frame Structure 60 Years (b) Buildings (other than factory buildings) other than RCC Frame Structure (c) Factory buildings -do- 30 Years (d) Fences, wells, tube wells 5 Years (e) Others (including temporary structure, etc.) 3 Years II. Bridges, culverts, bunders, etc. [NESD] III. Roads [NESD] (a) Carpeted roads (i) Carpeted Roads RCC (ii) Carpeted Roads other than RCC 30 Years 10 Years 5 Years (b) Non-carpeted roads 3 Years IV. Plant and Machinery (i) (ii) General rate applicable to plant and machinery not covered under special plant and machinery (a) (b) Plant and Machinery other than continuous process plant not covered under specific industries continuous process plant for which no special rate has been prescribed under (ii) below [NESD] Special Plant and Machinery (a) Plant and Machinery related to production and exhibition of Motion Picture Films 15 Years 8 Years 25 Years

49 1. Cinematograph films Machinery used in the production and exhibition of cinematograph films, recording and reproducing equipments, developing machines, printing machines, editing machines, synchronizers and studio lights except bulbs 2. Projecting equipment for exhibition of films -do- (b) Plant and Machinery used in glass manufacturing 1. Plant and Machinery except direct fire glass melting furnaces Recuperative and regenerative glass melting furnaces 2. Plant and Machinery except direct fire glass melting furnaces Moulds [NESD] 13 Years 13 Years 8 Years 3. Float Glass Melting Furnaces [NESD] 10 Years (c) Plant and Machinery used in mines and quarries Portable under ground machinery and earth moving machinery used in open cast mining [NESD] (d) Plant and Machinery used in Telecommunications [NESD] 8 Years 1. Towers 18 Years 2. Telecom transceivers, switching centres, transmission and other network equipment 13 Years 3. Telecom Ducts, Cables and optical fibre 18 Years 4. Satellites -do- (e) Plant and Machinery used in exploration, production and refining oil and gas [NESD] 1. Refineries 25 Years 2. Oil and gas assets (including wells), processing plant and facilities -do- 3. Petrochemical Plant -do- 4. Storage tanks and related equipment -do- 5. Pipelines 30 Years 6. Drilling Rig -do- 7. Field operations (above ground) Portable boilers, drilling tools, well-head tanks, etc. 8 Years 8. Loggers -do- (f) Plant and Machinery used in generation, transmission and distribution of power [NESD] 1. Thermal/Gas/Combined Cycle Power Generation Plant 40 Years 2. Hydro Power Generation Plant -do-

50 3. Nuclear Power Generation Plant -do- 4. Transmission lines, cables and other network assets -do- 5. Wind Power Generation Plant 22 Years 6. Electric Distribution Plant 35 Years 7. Gas Storage and Distribution Plant 30 Years 8. Water Distribution Plant including pipelines -do- (g) Plant and Machinery used in manufacture of steel 1. Sinter Plant 20 Years 2. Blast Furnace -do- 3. Coke ovens -do- 4. Rolling mill in steel plant -do- 5. Basic oxygen Furnace Converter 25 Years (h) Plant and Machinery used in manufacture of non-ferrous metals 1. Metal pot line [NESD] 40 Years 2. Bauxite crushing and grinding section [NESD] -do- 3. Digester section [NESD] -do- 4. Turbine [NESD] -do- 5. Equipments for Calcination [NESD] -do- 6. Copper Smelter [NESD] -do- 7. Roll Grinder 40 Years 8. Soaking Pit 30 Years 9. Annealing Furnace -do- 10. Rolling Mills -do- 11. Equipments for Scalping, Slitting, etc. [NESD] -do- 12. Surface Miner, Ripper Dozer, etc., used in mines 25 Years 13. Copper refining plant [NESD] -do- (i) Plant and Machinery used in medical and surgical operations [NESD] 1. Electrical Machinery, X-ray and electrotherapeutic apparatus and accessories thereto, medical, diagnostic equipments, namely, Cat-Scan, Ultrasound Machines, ECG Monitors, etc. 13 Years 2. Other Equipments. 15 Years (j) Plant and Machinery used in manufacture of pharmaceuticals and chemicals [NESD]

51 1. Reactors 20 Years 2. Distillation Columns -do- 3. Drying equipments/centrifuges and Decanters -do- 4. Vessel/storage tanks -do- (k) Plant and Machinery used in civil construction 1. Concreting, Crushing, Piling Equipments and Road Making Equipments 2. Heavy Lift Equipments Cranes with capacity of more than 100 tons Cranes with capacity of less than 100 tons 12 Years 20 Years 15 Years 3. Transmission line, Tunneling Equipments [NESD] 10 Years 4. Earth-moving equipments 9 Years 5. Others including Material Handling /Pipeline/Welding Equipments [NESD] (l) Plant and Machinery used in salt works [NESD] V. Furniture and fittings [NESD] VI. (i) General furniture and fittings (ii) Furniture and fittings used in hotels, restaurants and boarding houses, schools, colleges and other educational institutions, libraries; welfare centres; meeting halls, cinema houses; theatres and circuses; and furniture and fittings let out on hire for use on the occasion of marriages and similar functions. Motor Vehicles [NESD] 12 Years 15 Years 10 Years 8 Years 1. Motor cycles, scooters and other mopeds 10 Years 2. Motor buses, motor lorries, motor cars and motor taxies used in a business of running them on hire 3. Motor buses, motor lorries and motor cars other than those used in a business of running them on hire 6 Years 8 Years 4. Motor tractors, harvesting combines and heavy vehicles -do- 5. Electrically operated vehicles including battery powered or fuel cell powered vehicles VII. Ships [NESD] 1. Ocean-going ships 8 Years (i) Bulk Carriers and liner vessels 25 Years (ii) Crude tankers, product carriers and easy chemical carriers with or without conventional tank coatings (iii) Chemicals and Acid Carriers : 20 Years

52 (a) With Stainless steel tanks 25 Years (b) With other tanks (iv) Liquified gas carriers (v) Conventional large passenger vessels which are used for cruise purpose also (vi) Coastal service ships of all categories (vii) Offshore supply and support vessels (viii) Catamarans and other high speed passenger for ships or boats 20 Years 30 Years -do- -do- 20 Years -do- (ix) Drill ships 25 Years (x) Hovercrafts 15 Years (xi) Fishing vessels with wooden hull 10 Years (xii) Dredgers, tugs, barges, survey launches and other similar ships used mainly for dredging purposes 2. Vessels ordinarily operating on inland waters (i) Speed boats (ii) Other vessels VIII. Aircrafts or Helicopters [NESD] IX. Railways sidings, locomotives, rolling stocks, tramways and railways used by concerns, excluding railway concerns [NESD] 14 Years 13 Years 28 Years 20 Years 15 Years X. Ropeway structures [NESD] 15 Years XI. Office equipment [NESD] 5 Years XII. Computers and data processing units [NESD] (i) Servers and networks (ii) End user devices, such as, desktops, laptops, etc. XIII. Laboratory equipment [NESD] (i) General laboratory equipment (ii) Laboratory equipments used in educational institutions XIV. Electrical Installations and Equipment [NESD] XV. Hydraulic works, pipelines and sluices [NESD] 6 Years 3 Years 10 Years 5 Years 10 years 15 Years Notes. 1. "Factory buildings" does not include offices, godowns, staff quarters. 2. Where, during any financial year, any addition has been made to any asset, or where any asset has been sold, discarded, demolished or destroyed, the depreciation on such assets shall be calculated on a pro rata basis from the