Section 123 of the Companies Act, 2013 requires every company to provide depreciation in accordance with the provisions of Schedule II. This section has come into force with effect from 1st April 2014 implying that the Companies will be required to compute depreciation in their financial statements for the year closing on 31st March 2015 in accordance with Schedule II.
In Companies Act, 1956, Section 205, required every company to provide for depreciation in accordance with Schedule XIV.
Major Changes:
- In old Act, SLM and WDV rates were prescribed, while in new Act, useful life of assets have been prescribed.
- In old Act, assets were grouped according to the rates prescribed, in new Act, the assets have been grouped according to its nature and industry.
- In old Act, there was no mention in case a company wishes to apply higher or lower rates than given in the Schedule. However, the Accounting Standard has stated that company may choose to apply higher rate but it cannot be lower than the rates given in the Act. In new Act, it is given that 'ordinarily' the useful life of an asset shall not be different from the useful life given in the schedule. Originally, the word used was 'longer' which has been replaced with the word 'different'. It implies that the useful life may be longer or shorter than given in the Act. In case, the useful life adopted is different from the useful life given in the Act, a justification is to be given which shall also be duly supported by technical advice. Originally, only justification was to be disclosed, but it has been amended that it ought to be supported by technical advice.
- As regards residual value, there was no mention in schedule of the old Act. But, if we compare the rates given for WDV and SLM we can derive that those rates have been worked out taking 5% as the residual value. Section 205(2)(b) of the old Act also give a clue that a company was required to write off 95% of the original cost on the expiry of the specified period. In the new Act also, it is provided that residual value shall not be more than 5% of the original cost. In case, a company takes lesser or more than 5% as residual value, it has to justify with technical support. It implies that a company may take residual value other than 5% if it can be justified.
- New Schedule II also defines depreciation, depreciable amount and useful life as under:
- 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.
It does not define the term 'residual value'. AS-6 on Depreciation in para 10 states as under:
"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 the time of 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."
Impact of Change With the change in concept, in the first of year of change i.e. the current year each company will have to work out the useful life of each of the asset, whether it is more or less as given in Schedule II, the remaining of the useful life, carrying amount as on the last day of the previous year. The rate of the depreciation to be applied to each of the assets depending upon its remaining useful life will be required to be worked out.
A Comparison
In the table below, useful life based on rates given in Schedule XIV of the 1956 Act and rates based on useful life given in Schedule II of the 2013 Act, has been given
in respect of only those items where there is variation.
| 1956 | 2013 |
| Useful Life | WDV | SLM | Useful Life | WDV | SLM |
| | | | YEARS | | |
| I BUILDINGS [NESD] | | | | | | |
| (a) Building (other than Factory Building) | | | | | | |
| Non-RCC Frame Structure | 58 | 5% | 1.63% | 30 | 9.50% | 3.17% |
| (b) Fence, Wells, Tube wells | 28 | 10% | 3.34% | 5 | 45.07% | 19.00% |
| (c) Others (including Temporary Structures) | 1 | 100% | 100% | 3 | 63.16% | 31.67% |
| II. Roads [NESD] | | | | | | |
| (a) Carpeted Roads | | | | | | |
| (i) Carpeted Roads- RCC | 28 | 10% | 3.34% | 10 | 25.89% | 9.50% |
| (i) Carpeted Roads- other than RCC | 28 | 10% | 3.34% | 5 | 45.07% | 19.00% |
| (b) Other than Carpeted Roads | 28 | 10% | 3.34% | 3 | 63.16% | 31.67% |
| III Plant and Machinery | | | | | | |
| (i) General Rate applicable | | | | | | |
| (a) Plant and Machinery other than continuous process plant | 20 | 13.91% | 4.75% | 15 | 18.10% | 6.33% |
| (b) Continuous process plant for which no special rate has been prescribed [NESD] | 18 | 15.33% | 5.28% | 25 | 11.29% | 3.80% |
| (ii) Special Plant and Machinery | | | | | | |
| (a) Used in Telecomunication | | | | | | |
| 1. Towers | 20 | 13.91% | 4.75% | 18 | 15.33% | 5.28% |
| 2. Telecom Transceivers, switching centres, transmission and other network equipments | 20 | 13.91% | 4.75% | 13 | 20.58% | 7.31% |
| 3. Telecom - Ducts, Cables and optical fibres | 20 | 13.91% | 4.75% | 18 | 15.33% | 5.28% |
| 4. Satellites | 20 | 13.91% | 4.75% | 18 | 15.33% | 5.28% |
| (b) Used in exploration, production and refining oil and gas [NESD] | | | | | | |
| 1. Refineries | 20 | 13.91% | 4.75% | 25 | 11.29% | 3.80% |
| 2. Oil and gas assets (including wells) , processing plant and facilities | 20 | 13.91% | 4.75% | 25 | 11.29% | 3.80% |
| 3. Petrochemical Plant | 20 | 13.91% | 4.75% | 25 | 11.29% | 3.80% |
| 4. Storage tanks and related equipment | 20 | 13.91% | 4.75% | 25 | 11.29% | 3.80% |
| 5.Pipeline | 20 | 13.91% | 4.75% | 30 | 9.50% | 3.17% |
| 6. Drilling Rig | 20 | 13.91% | 4.75% | 30 | 9.50% | 3.17% |
| 7. Field operations (above ground) Portable boilers, drilling tools, well-head tanks etc. | 20 | 13.91% | 4.75% | 8 | 31.23% | 11.88% |
| 8. Loggers | 20 | 13.91% | 4.75% | 8 | 31.23% | 11.88% |
| (c) Used in generation, transmission and distribution of power [NESD] | | | | | | |
| 1. Thermal/ Gas/ Combined Cycle Power Generation Plant | 20 | 13.91% | 4.75% | 40 | 7.22% | 2.38% |
| 2. Hydro Power Generation Plant | 20 | 13.91% | 4.75% | 40 | 7.22% | 2.38% |
| 3. Nuclear Power Generation Plant | 20 | 13.91% | 4.75% | 40 | 7.22% | 2.38% |
| 4. Transmission lines, cables and other network assets | 20 | 13.91% | 4.75% | 40 | 7.22% | 2.38% |
| 5. Wind Power Generation Plant | 20 | 13.91% | 4.75% | 22 | 12.73% | 4.32% |
| 6. Electric Distribution Plant | 20 | 13.91% | 4.75% | 35 | 8.20% | 2.71% |
| 7. Gas Storage and Distribution Plant | 20 | 13.91% | 4.75% | 30 | 9.50% | 3.17% |
| 8. Water Distribution Plant including pipelines | 20 | 13.91% | 4.75% | 30 | 9.50% | 3.17% |
| (d) Used in Manufacture of steel | | | | | | |
| 1. Basic oxygen Furnace Converter | 20 | 13.91% | 4.75% | 25 | 11.29% | 3.80% |
| (e) Used in manufacture of non-ferrous metals | | | | | | |
| 1. Metal pot line [NESD] | 20 | 13.91% | 4.75% | 40 | 7.22% | 2.38% |
| 2. Bauxite crushing and grinding section [NESD] | 20 | 13.91% | 4.75% | 40 | 7.22% | 2.38% |
| 3. Digester Section [NESD] | 20 | 13.91% | 4.75% | 40 | 7.22% | 2.38% |
| 4. Turbine [NESD] | 20 | 13.91% | 4.75% | 40 | 7.22% | 2.38% |
| 5. Equipments for Calcination [NESD] | 20 | 13.91% | 4.75% | 40 | 7.22% | 2.38% |
| 6. Copper Smelter [NESD] | 20 | 13.91% | 4.75% | 40 | 7.22% | 2.38% |
| 7. Roll Grinder | 20 | 13.91% | 4.75% | 40 | 7.22% | 2.38% |
| 8. Soaking Pit | 20 | 13.91% | 4.75% | 30 | 9.50% | 3.17% |
| 9. Annealing Furnace | 20 | 13.91% | 4.75% | 30 | 9.50% | 3.17% |
| 10. Rolling Mills | 20 | 13.91% | 4.75% | 30 | 9.50% | 3.17% |
| 11. Equipments for Scalping, Slitting , etc. [NESD] | 20 | 13.91% | 4.75% | 30 | 9.50% | 3.17% |
| 12. Surface Miner, Ripper Dozer, etc., used in mines | 20 | 13.91% | 4.75% | 25 | 11.29% | 3.80% |
| 13. Copper refining plant [NESD] | 20 | 13.91% | 4.75% | 25 | 11.29% | 3.80% |
| (f) 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 | 20% | 7.07% | 13 | 20.58% | 7.31% |
| 2. Other Equipments | 20 | 13.91% | 4.75% | 15 | 18.10% | 6.33% |
| (g) used in civil construction | | | | | | |
| 1. Concreting, Crushing, Piling Equipments and Road Making Equipments | 20 | 13.91% | 4.75% | 12 | 22.09% | 7.92% |
| 2. Heavy Lift Equipments— | | | | | | |
| Cranes with capacity of more than 100 tons | 20 | 13.91% | 4.75% | 20 | 13.91% | 4.75% |
| Cranes with capacity of less than 100 tons | 20 | 13.91% | 4.75% | 15 | 18.10% | 6.33% |
| 3. Transmission line, Tunneling Equipments [NESD] | 20 | 13.91% | 4.75% | 10 | 25.89% | 9.50% |
| 4. Earth-moving equipments | 8 | 30% | 11.31% | 9 | 28.31% | 10.56% |
| 5. Others including Material Handling /Pipeline/Welding Equipments [NESD] | 20 | 13.91% | 4.75% | 12 | 22.09% | 7.92% |
| (h) used in salt works [NESD] | 1 | 100% | 100% | 15 | 18.10% | 6.33% |
| IV. Furniture and Fixtures | | | | | | |
| (i) General Furniture and fittings | 15 | 18.10% | 6.33% | 10 | 25.89% | 9.50% |
| (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. | 10 | 25.88% | 9.50% | 8 | 31.23% | 11.88% |
| V. Motor Vehicles [NESD] | | | | | | |
| Electrically operated vehicles including battery powered or fuel cell powered vehicles | 13 | 20% | 7.07% | 8 | 31.23% | 11.88% |
| VI. Ships [NESD] | | | | | | |
| 1. Ocean going ships | | | | | | |
| (i) Bulk Carriers and liner vessels | 19 | 14.60% | 5% | 25 | 11.29% | 3.80% |
| (ii) Crude tankers, product carriers and easy chemical carriers with or without conventional tank coatings. | 19 | 14.60% | 5% | 20 | 13.91% | 4.75% |
| (iii) Chemicals and Acid Carriers: | | | | | | |
| (a) With Stainless steel tanks | 19 | 14.60% | 5% | 25 | 11.29% | 3.80% |
| (b) With other tanks | 19 | 14.60% | 5% | 20 | 13.91% | 4.75% |
| (iv) Liquified gas carriers | 19 | 14.60% | 5% | 30 | 9.50% | 3.17% |
| (v) Conventional large passenger vessels which are used for cruise purpose also | 19 | 14.60% | 5% | 30 | 9.50% | 3.17% |
| (vi) Coastal service ships of all categories | 19 | 14.60% | 5% | 30 | 9.50% | 3.17% |
| (vii) Offshore supply and support vessels | 19 | 14.60% | 5% | 20 | 13.91% | 4.75% |
| (viii) Catamarans and other high speed passenger for ships or boats | 19 | 14.60% | 5% | 20 | 13.91% | 4.75% |
| (ix) Drill ships | 19 | 14.60% | 5% | 25 | 11.29% | 3.80% |
| (x) Hovercrafts | 19 | 14.60% | 5% | 15 | 18.10% | 6.33% |
| (xi) Fishing vessels with wooden hull | 10 | 27.05% | 10% | 10 | 25.89% | 9.50% |
| | | | | | | |
| VII. Aircrafts or Helicopters [NESD] | 17 | 16.26% | 5.60% | 20 | 13.91% | 4.75% |
| VIII. Railways sidings, locomotives, rolling stocks, tramways and railways used by concerns, excluding railway concerns [NESD] | 20 | 13.91% | 4.75% | 15 | 18.10% | 6.33% |
| IX Ropeway structures [NESD] | 8 | 30% | 11.31% | 15 | 18.10% | 6.33% |
| X Office equipment [NESD] | 20 | 13.91% | 4.75% | 5 | 45.07% | 19.00% |
| XI. Computers and data processing units [NESD] | | | | | | |
| (i) Servers and networks | 6 | 40% | 16.21% | 6 | 39.30% | 15.83% |
| (ii) End user devices, such as, desktops, laptops, etc | 6 | 40% | 16.21% | 3 | 63.16% | 31.67% |
| XII. Laboratory equipment [NESD] | | | | | | |
| (i) General laboratory equipment | 20 | 13.91% | 4.75% | 10 | 25.89% | 9.50% |
| (ii) Laboratory equipments used in educational institutions | 20 | 13.91% | 4.75% | 5 | 45.07% | 19.00% |
| XIII. Electric Installation and equipment [NESD] | 20 | 13.91% | 4.75% | 10 | 25.89% | 9.50% |
| XIV. Hydraulic works, pipelines and sluices [NESD] | 20 | 13.91% | 4.75% | 15 | 18.10% | 6.33% |
It is apparent that in respect of some of the assets, depreciation need to be accelerated and in some cases, it has to be decelerated. For example, End user Devices like desktop and laptops which were being depreciated @ 40% and would have been written off in 6 years will now be required to be written off in 3 years. There was no distinction between RCC Structured building and non-RCC structured building. Only distinction was of Factory Building and Non-Factory Building. There were no separate rates for Roads, Tube Wells etc. In these cases, depreciation has to be accelerated as their useful life in new schedule has been halved.
Example: 1 All non-factory buildings were required to be depreciated @ 5% (WDV) or 1.63% (SLM). Accordingly, the useful life of building was being taken as 58.28 years. Now useful life of all non-RCC structure buildings will be 30 years unless company is able to justify different useful life.
Scenario – 1 A non-RCC structure building was constructed for ? 100 lacs in financial year 1994-1995 and has lived its 19 years of useful life upto 31st March 2014. The company has been following WDV at the rates given in Schedule XIV of 1956 Act. The carrying amount of the asset as on 31st March 2014 is ? 37.74 lacs. In year 2014-15, the company will have to work out the rate of depreciation so that 95% of the original cost gets provided in the remaining 11 years of its useful life. How will the new rate be derived? Formula for working out the WDV rate is
- nv RV/CA i.e 1- nth root of RV(residual value) divided by CA (carrying amount) where n is the remaining useful life. By using the following one may get the rate in excel
=1-((RV/CA)^(1/n))
Applying above we get
= 1- 11v5/37.74 = 16.79%. The company will be required to accelerate the depreciation by making provision @ 16.79 % every year on WDV method.
Scenario – 2 A non-RCC structure building was constructed for ? 100 lacs in financial year 1980-1981 and has lived its 34 years of life upto 31st March 2014. The company has been following WDV at the rates given in Schedule XIV of 1956 Act. The carrying amount of the asset as on 31st March 2014 is ? 17.48 lacs. In this case, company will be required to provide ? 12.48 (17.48-5 lacs) either by debit to profit and loss account or to the retained earnings. In Schedule II, initially it was provided that it is to be written off by debit to opening balance in retained earnings. But it has been amended by notification of 29th August 2014 to provide for the option.
Extra Shift The useful life given is based on single shift working. Except for assets in respect of which no extra shift depreciation is permitted (indicated by NESD in schedule), if any 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 increased by 100% for that period.
How will the increase for extra shift will be worked out. In 1956 Act, the provision was that it shall be the proportion which the number of days for which the concern worked double shift or triple shift to the
normal number of working days. In the absence of any such provision, how the depreciation 'for that period' should be worked out. The moot question is whether total number of actual days should be taken or normal number of working days should be taken as denominator. There is no prescription as to what should be the normal number of working days as it ought to be in Schedule XIV of the 1956 Act i.e. actual number of days or in case of seasonal industry 180 days and in case on non- seasonal industry 240 days, whichever is higher was prescribed.
In such a scenario, in my view, the proportion in which depreciation shall be increased should be the actual number of days for which concern worked double shift or triple shift to the total number of actual days of working. If for any reason like strike etc, the concern has not worked for its full working days, the actual days shall be the normal number of days for which it could have worked.
Component based Depreciation It is also being recognized for the first time to provide depreciation in respect of a 'component of an asset' separately. It provides that 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. For example, in an aircraft, Engine and seats and interior will have different useful life and accordingly, both need to be depreciated separately. As no yardstick has been given as to 'significant', it will be a matter judgment and fact.
Addition, Sale or discard etc The schedule requires providing depreciation in respect of any addition, sale, discard, demolition or destruction of any asset, on a pro-rata basis from the date of such addition, sale, discard, demolition or destruction.
AS-6 requires that any addition or extension which becomes an integral part of the existing asset should be depreciated over the remaining useful life of that asset. Where an addition or extension retains a separate identity and is capable of being used after the existing asset is disposed of, depreciation should be provided independently on the basis of an estimate of its own useful life.
Specified Entities If in case the Regulatory authority constituted under an act of parliament or the Central Government notifies useful life or residual value of any specified assets, the same shall override the rates given in Schedule II of the Companies Act, 2013.
Intangible Assets For Intangible Assets, it is given that the provisions of accounting standards shall apply except in case of Toll Roads. In case of toll roads, it is provided that it shall be amortised in proportion of Actual Revenue to the Projected Revenue from Intangible Assets (till the end of the concession period) i.e.
Amortisation Amount =
Actual Revenue for the year
Cost of intangible Assets (A) X
Projected Revenue from Intangible Assets (till the end of the concession period) (C)
Disclosure The following information need to be disclosed in the accounts:
- Depreciation method used
- Useful lives of the assets if they are different from the life specified in the Schedule.
Disclaimer: The views expressed in this article are solely the opinion of the author.