Skip to main content

Depreciation under Companies Act 2013

Method of Depreciation - Straight Line or Written Down Value (WDV) / Double Declining Balance Method

The new Companies Act 2013 prescribes the Useful life of assets (Schedule II) as opposed the rate of depreciation in the Companies Act 1956.

The plain reading of the act implies that the Ministry of Corporate Affairs (MCA) expects the companies to follow the Straight Line Method of Depreciation as opposed to the Written Down Value of Depreciation. Although it is not prescribed which method of depreciation is required to be used.

If this implication is drawn, this may impact the financial statements significantly as this would result in change of depreciation method for all companies. Moreover, the change in depreciation method would imply retrospective application which can change the financial statements significantly.

There is a breather though. Companies can still opt to continue the Written Down Value Method of Depreciation under the New Companies Act 2013.

Using a simple (huh!) formula, companies can calculate the rate of Depreciation to be charged under Written Down Value Method using the useful life prescribed under the new Companies Act 2013.

Rate of Depreciation = 1 - (Scrap Value / Cost of Asset)^(1/N)
where N is the useful life of the asset.

This method can be applied and accordingly, companies will be able to maintain WDV method of depreciation. Also, even if the rate changes accordingly, since this is a change in estimate, only prospective application would be required.

Residual value
As a general prescription, the Companies Act prescribes that the residual value of the assets should not be more than 5% of the cost of the asset.

Transition Provisions
From the date Schedule III comes into effect, the carrying amount of the asset as on that date -
(a) shall be depreciated over the remaining useful life of the asset as per Schedule III;
(b) 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.
Useful Life for specific class of companies
The New Companies Act also mentions that the useful life and residual value of assets should not be different than those mentioned in the Schedule III for specific class of companies (who are complying with Accounting Standards). In case they are different, it should be justified in the financial statements. For other companies, it retains that the useful life is the minimum useful life prescribed for such assets.
  

Comments

  1. This formula( 1 - (Scrap Value / Cost of Asset)^(1/N)) proven wrong when asset already depreciated in any of previous years.
    Example if asset purchased on 30.9.2013, Rs 100 old rate of Depre-5% and useful life is 5 years.
    WDV on 31.3.2014=97.5
    This should be depreciated in next 4.5 years.
    Now, after applying this formula we don't get Rs.4.875 after 4.5 years.

    Kindly Suggest the solution for this problem.
    Mail ID: thaker.yash786@gmail.com

    ReplyDelete
  2. What will happen for partial year depreciation for new assets?. This formula doesn't cover the partial year depreciation. So if I buy a machinery on 1.6.2014 how will I calculate the depreciation?

    ReplyDelete

Post a Comment

Popular posts from this blog

Vikash Goel - Introduction

Hello People, Welcome to my Blog Please pardon me if u find this blog a bit unconventional, unusual and out of place. To be honest, m not a blogger and this is my Debut as far as Blogging is concerned. I am a simple, average guy from Kolkata, India. I am a CA, MS Finance, CFA (ICFAI, India), Diploma in Business Management, Bachelor of Commerce. Meanwhile for a quick look about me, visit the link below, (its become a little outdated as of now but still enough to give an idea about me) http://www.freewebs.com/vikash_goel/ www.vikashgoel.com Catch ya soon

Angel Tax on start-ups may be amended soon

The Angel Tax imposed on start-ups has been the talk of the town lately. Various start-up founders have received demand notices from the tax authorities which plans to tax the capital receipts in the form of Income when the tax authorities believe that the amount is in excess of the value of the company. What is Angel Tax? In 2012, the then Finance Minister Pranab Mukherjee introduced a tax on unlisted companies which aimed at raising funds from investors (the 'angel investors") who invested in these companies with the objective of gaining significant returns. Since many companies used this route to launder money and raise funds at excessive valuations, the tax was imposed to arrest such money laundering. Angel Tax is a tax payable by the unlisted companies who raise funds via issue of shares where the share price is believed to be in excess of the fair market value of the shares sold. What is a Startup? An entity shall be considered as a Startup: (i). Upto a period o...

Economic Survey 2013 Highlights

Chief Economic Advisor Raghuram Rajan tabled his first ever Economic Survey. Key features of the Survey are: GDP growth for 2012-13 is expected at 5% GDP growth for 2013-14 is expected at 6.1% to 6.7% The Average WPI Inflation has come down from 8.9% in 2011-12 to 7.6% in 2012-13 The Average CPI Inflation has increased from 8.4% in 2011-12 to 10.0% in 2012-13 Gross Fiscal Deficit has come down from 5.7% of GDP to 5.1% of GDP Revenue Deficit has come down from 4.3% of GDP to 3.5% of GDP The trade deficit increased to US$ 189.8 billion (10.2 per cent of GDP) in 2011-12 as compared to US$ 127.3 billion (7.4 per cent of GDP) during 2010-11. Current account deficit seen at 4.6% for 2013-14 Overall global economic environment remains fragile Gold imports is key contributor to inflation, imports need to be curbed LPG and Diesel prices need to be increased in line with global rates, oil subsidy is a key risk