Compliances

Depreciation under Companies Act, 2013

calendar22 Mar, 2022
timeReading Time: 5 Minutes
Depreciation under Companies Act

The Companies Act 1956 provided for various minimum depreciation rates for depreciable assets. However, With introduction of the Companies Act,2013, Schedule II to the Act of 2013 provides for the depreciable value to be allocated to each item over its useful lifetime of the Asset. In this article, we will discuss Depreciation under Companies Act, 2013.

Depreciation under Companies Act, 2013

As per companies act 2013, Depreciation is applicable for assets purchased on or after 1st April 2014. It only specifies the useful life of different assets and does not provide any particular depreciation rates.

Any company or individual can use the depreciation formula & the useful life given in Schedule II of Companies Act, 2013 to calculate the Depreciation rate under the companies act, 2013. 

Critical Points for Depreciation under Companies Act, 2013

  • It applies to Assets purchased on or after 1st April 2014.
  • To calculate Depreciation, the formula considers the Asset’s cost, useful life, and Residual Value.
  • Depreciation is calculated annually until the end of the useful life of an asset.
  • The residual value is treated at a maximum of 5% of the asset cost.
  • For finding Depreciation under the Companies Act 2013, a company can use either the Straight Line Method (SLM) or WDV (Written Down Value) method.
  • Schedule II of this Act provides for the useful life of Assets tangible in Nature.
  • It is essential to consider the Chart for Depreciation rate under the Companies Act, 2013. Also, for Intangible Assets, provisions of AS 26 shall apply.

Details Required for calculating Depreciation under Companies Act, 2013-

  • Date of Purchase of Asset.
  • Cost of Asset
  • Residual Value or Salvage Value
  • Particulars of the useful life of an asset
  • Method of Depreciation used by the company

Depreciation Accounting under the Companies Act, 2013

To ensure the applicability to the requirements of the Companies Act, 2013 – Schedule II, the companies are categorized into three classes according to:

  • The prescribed class of companies with financial statements must follow the Accounting Standard defined under 2013. Act The useful lives must be under the Schedule as long as should there be a deviation from this, and the reasons behind the change should be explained.
  • Companies that are regulated under other laws, e.g., electricity companies, the useful life of the company or remaining value for any specific asset, as notified for accounting purposes by a Regulatory Authority constituted under –
  1. An Act of Parliament or 
  2. By Central Government shall be applied in calculating the Depreciation that must be paid for the Asset, regardless of the rules in this Schedule.
  • For other companies, the useful life of an asset should not exceed the useful lifespan stipulated, and the value of residuals must not exceed the value specified in Part C.

The new Act includes the notion that assets can be componentized. When the cost of a portion of the Asset is essential to the overall cost of the Asset, and its useful time of that portion is different from the life of the other Asset, the useful life of the significant portion must be determined on its own.

Points to be kept in mind while calculating Depreciation under the companies act, 2013 on tangible assets

1. Depreciation on a pro-rata basis-Depreciation is calculated from the date of such addition/sale /destruction in the below-mentioned scenarios

(i) Any change is made to any asset.

(ii) Any asset is sold

(iii) Any asset is disposed of, damaged, or destroyed.

2. Additional Depreciation-The calculations of the additional Depreciation for shift workings must be made separately in the ratio of number of days for which concern worked a double shift or triple shift bears to normal number of working days during the year.

For calculating the same, the particular number of working days during the year shall be deemed to be – 

(a) For a seasonal factory – The number of days on which the factory actually worked during year or 180 days, whichever is higher,

(b) Others- Number of days on which the factory or establishment or establishment worked during the year or 240 days, whichever is higher.

3. Double Shift depreciation- In case of Double shifts, the Depreciation increases 

4. Triple Shift depreciation- In the case of Triple Shift, the Depreciation increases by 100% for period in which Asset is in use for the triple shift.

5.No extra shift depreciation: Schedule II of the Companies Act,2013 has specific assets with NESD, and a company cannot charge additional shift depreciation in respect of such assets. Residual value of an asset must not be greater than 5% of the Asset’s original cost.

Method of Depreciation under Companies Act,2013

Below mentioned are the methods of Depreciation under Companies ct,2013

  • Straight Line Method-SLM is one of the simplest methods of calculating Depreciation per the companies act,2013. Under the SLM method, the total depreciable amount is apportioned evenly over the Asset’s useful life every year.
  • Written Down Value Method (WDV)-WDV is also known as the Declining balance method. Under this method, a company charge the depreciation rate on the reducing balance of the Asset.

Difference between Depreciation under Companies Act,2013 and Depreciation under the Income Tax Act

The company claims Depreciation for two purposes-

  1. Accounting Purpose
  2. Taxation Purpose

For Income Tax purposes, Depreciation refers to 2 aspects-A decrease in value of assets and allocation of the cost of assets to the useful life of the assets.

As per Companies Act,2013, Depreciation is calculated based on the useful life of assets and not based on the rate of Depreciation.

In Income tax, Depreciation is allowed as an expense to the company while arriving at income under the head PGBP (Profit and Gain from Business and Profession) from the year on which Asset is first used. It is calculated based on the block of assets at the rates specified in the income tax act.

The methods of calculating Depreciation differs for taxation and accounting; that is why the amount of Depreciation as Per the Income-tax act and Companies Act,2013 varies.

Rate of Depreciation Under Companies Act,2013

Depreciation refers to decrease in the value of an asset, which appears every year. Depreciation is calculated based on the rate of Depreciation mentioned in the Act. The depreciation rate varies from one class of assets to another class assets. The motive of Depreciation is to allocate the value of the Asset regularly. The allocation is performed over the period for which the Asset is used. The various depreciation rates which should be used for different categories of assets are mentioned in Schedule II of the Companies Act, 2013. You can visit the MCA portal to get more information about the rate.

Other factors for Depreciation under Companies Act, 2013

The method of Depreciation used by business must be included in the financial statements and the useful lives of assets used to calculate Depreciation when it is different from the period specified within the plan. Factory Buildings do not include godowns, offices, and employee quarters. In any fiscal year, when there is a modification to any asset, disposal demolition, sale or destruction of any property, the Depreciation for these assets will be determined on a pro-rata basis starting from the date of the acquisition or in the event of a sale, disposal, demolition or destruction, the date may be, until the date of the removal, sale destruction or demolition.

Additionally, when considering the use duration of the Asset, the useful life stated as Part C in the Schedule applies to all assets and in cases where the costs of a particular part of an asset are essential to the total cost of the Asset and its useful life is different from the practical life of the other assets. The effective lifespan of the part significant to the Asset must be determined separately and proportionately.

Conclusion

The Companies Act 2013[1] has been implemented in India beginning in the financial year 2014-15. The transitional phase for companies moving from the old Companies Act 1956 to the new Companies Act 2013 has posed numerous challenges. One of the problems is presented in Schedule II of the Companies Act, 2013, formulated for ‘useful life’ purposes of calculating Depreciation. For other companies, useful life of an asset should not exceed the useful lifespan stipulated, and the value of residuals must not exceed the value specified in Part C.

Read our Article:Audit under Companies Act, 2013: Explained

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