Hi Venugopal,
As we all know companies bill is passed by both houses of
parliaments and some of is section are applicable from 1-4-2014. i.e. out of
470, 283 sections are applicable and section 123 and schedule II is one of them
Before discussing the this, first of all let’s have a look
on major changes in schedule II
Companies act 1956 does not deal with the amortization of
intangible Assets but New Schedule by companies’ act 2014 provide the method to
amortize them.
Instead of method and rates of Depreciation (whether WDV
method or Straight line Method and Single shift or double shift or triple
shift) new Act prescribed only assets’ useful life.
if a Company, being a class of company specifically
prescribed by MCA, can adopt a different useful life longer than what is
prescribed in Schedule II, however the same shall be disclosed, as Note on
Accounts together with justification. For other companies, useful life cannot
be longer than what is prescribed in Schedule II.
New act prescribed the residual value to be 5% of cost of
asset, in older schedule there is no such prescription as but rates given by
schedule are worked out by considering the 5% residual value.
New method for double shift and triple shift is
prescribed under which addition depreciation of 50% or 100% will be allowed for
double and triple shift respectively.
The concept of 100% depreciation of assets whose cost is
less than Rs. 5000/- is deleted hence under new act it will be depreciated as
per other normal provisions of schedule II.
Under act if any component of Asset have significant cost
and has useful life other than the assets then is should be considered as
separate asset for depreciation.
List of assets cover is more specific in new schedule.
The Practical Implication:
To apply the schedule II on the running companies schedule II has Note
No. 7 which have 2 clauses we’ll discuss them sequentially
Note no. 7(a) from the date this Schedule comes into effect, 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 II.
Let’s understand with the help if an example:
We taking a general purpose plant and machinery on WDV basis:-
Sr. No. | Particulars | Amount/Rate/ Remarks |
1 | Original cost | Rs. 1,00,000/- |
2 | Useful life and rate of depreciation as per old provisions | 20 year and 13.91% |
3 | Useful life and rate of depreciation as per New provisions | 15 years and 18.10% |
4 | Expired life | 5 years |
5 | Accumulated depreciation for the expired life | Rs. 52,711/- |
Now i am just pausing here to ask you some questions:-
- What should be the carrying amount?
- What should be the remaining useful life of Plant and machinery?
- What should be the rate of depreciation?
4. What should be the amount for Depreciation?
Ans.
Schedule II does not elaborate the meaning of carrying amount so we have to
refer AS 28 which defines it as “Carrying amount means the amount at which an
asset is recognised in the Balance Sheet after
deducting any accumulated Depreciation/amortization and accumulated impairment
losses thereon”. This AS does not talk about residual value so we do not deduct
any residual value i.e. 5% of original cost of asset to arrive at the carrying
amount
Therefore carrying amount is: original cost less depreciation for the expired life
In given example Column 1 – column 5 i.e. 1,00,000-52,711= 47,289/-
What should be the remaining useful life of Plant and machinery?
The remaining useful life of the asset is: Revised life of assets
as per schedule II less expired life of asset till 1.4.2014.
In given example: Revised life of Plant and machinery as per schedule II is 15
years and expired life is 5 years therefore remaining useful life is : 15-5=10years
What should be the rate of depreciation?
Is it on the basis of revised useful life i.e. 15 years as mentioned
in schedule II, which comes out 18.10% or,
On the basis of remaining useful life which is calculated in
above i.e. 10 years and the rate comes out is 25.89%
In first instant rate 18.10% seems to be the correct answer,
because we are takings about plant and machinery and its rate of depreciation
on basis of its revised useful life as mentioned in schedule II is comes out
18.10%.
But as per note 7(a) the asset as on that date shall be depreciated
over the remaining useful life of the asset as per this Schedule II.
So we take the rate on the basis of remaining
useful life which is 10 years in given example and corresponding rate is 25.89%
What should be the amount for depreciation?
Answer: The carrying amount @ rate corresponding to the remaining
useful life of asset as at 1st April, 2014
Let's understand it:
If we reduce the residual value from carrying amount then that means we have taken residual value twice for calculating the
depreciation because rates that we have derived are already worked out by setting apart 5% residual value. So we do not reduce residual value from carrying amount
Remaining useful life as at 1st April, 2014 as per new provisions 10 years
Carrying amount (1-5) 47,289/-
Rate ofdepreciation on the basis of remaining useful life 25.89%
The result of above is as under:-
Carrying Amount | 47,289 | Rate of Depreciation | 25.89% |
Year | Asset's value at year Opening | Depreciation | Assets Value at year end |
1 | 47,289 | 12,243 | 35,046 |
2 | 35,046 | 9,073 | 25,973 |
3 | 25,973 | 6,724 | 19,249 |
4 | 19,248 | 4,983 | 14,265 |
5 | 14,265 | 3,693 | 10,572 |
6 | 10,572 | 2,737 | 7,835 |
7 | 7,835 | 2,028 | 5,807 |
8 | 5,806 | 1,503 | 4,303 |
9 | 4,303 | 1,114 | 3,189 |
10 | 3,189 | 826 | 2,363 |
Note 7 (b) From the date this Schedule comes into effect, the carrying amount of the
asset as on that date After retaining the residual value, shall be recognised
in the opening balance of retained earnings where the remaining useful life of
an asset is nil
Let's understand it with Example: |
Sr. No. | Particulars | Amount/Rate/ Remarks |
1 | Original cost | Rs. 1,00,000/- |
2 | Useful life and rate of depreciation as per old provisions | 20 year and 13.91% |
3 | Useful life and rate of depreciation as per New provisions | 15 years and 18.10% |
4 | Expired life | 16 years |
5 | Accumulated depreciation for the expired life | Rs. 90,896/- |
6 | Carrying amount | Rs. 9,104/- |
Here clarification is needed for residual value that have to be retained, is on the basis of “carrying amount” which comes out as 9104*5%=455 or on the basis of “cost of asset” which is 100000*5%= 5000
Retained earnings a/c Dr: 4104
To Asset a/c: 4104
This is the short-fall of Depreciation consequent upon change in the useful Life of
Asset provided for after retaining Residual value of 5% and charged against the
Opening balance Retained Earnings
Thanks
Vivekananda