This Accounting Standard applies to Level I, Level II and Level III Entities.
This revised standard comes into effect in respect of accounting periods commencing on or after 1.4.1996 and is mandatory in nature.
This Statement deals with depreciation accounting and applies to all depreciable assets, except the following items to which special considerations apply: -
i. Forests, plantations and similar regenerative natural resources;
ii. Wasting assets including expenditure on the exploration for and extraction of minerals, oils, natural gas and similar non-regenerative resources;
iii. Expenditure on research and development;
v. Livestock:- Cattle, Animal Husbandry
This statement also does not apply to land unless it has useful life for the enterprise.
[Para 4 - 16]
Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. 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. Depreciation includes amortization of assets whose useful life is predetermined.
Depreciable assets are assets which:
i. are expected to be used during more than one accounting period; and
ii. have a limited useful life; and
iii. are held by an enterprise for use in the production or supply of goods and services, for rental to others, or for administrative purposes and not for the purpose of sale in the ordinary course of business.
Depreciable amount of a depreciable asset is its historical cost, or other amount substituted for historical cost in the financial statements, less the estimated residual value.[This Standard does not deal with the treatment of the revaluation difference which may arise when historical costs are substituted by revaluations.]
Depreciation = [Cost - (Residual Value at the end of the useful life of the asset)] / estimated useful life in number of years
Assessment of depreciation and the amount to be charged in respect thereof in an accounting period are usually based on the following three factors:
i. Historical cost or other amount substituted for the historical cost of the depreciable asset when the asset has been revalued;
ii. Expected useful life of the depreciable asset; and
iii. Estimated residual value of the depreciable asset.
Historical cost of a depreciable asset represents its money outlay
Example of Disclosures under AS - 6:
Asian Paints Limited:
For Phthalic Anhydride and Pentaerythritol plants, depreciation is provided on all eligible plants and machinery at rates applicable for continuous process plants and for other plant and machinery depreciation is provided on triple-shift basis. Depreciation on tinting systems except computers, leased to dealers is provided under Straight Line Method over the estimated useful life of nine years as per technical evaluation. Depreciation on computers given on lease is provided under Straight Line Method and at rates specified under Schedule XIV to the Companies Act, 1956. Assets costing less than Rs 5000 are fully charged to the profit and loss account in the year of acquisition. Leasehold land and leasehold improvements are amortised over the primary period of lease. Purchase cost, user licence fees and consultancy fees for major software are amortised over a period of four years. Acquired trade mark is amortised over a period of five years.
or its equivalent in connection with:
i. its acquisition,
ii. installation and
iv. as well as for additions to or improvement thereof.
The historical cost of a depreciable asset may undergo subsequent changes arising as a result of increase or decrease in long term liability on account of:
i. exchange fluctuations,
ii. price adjustments,
iii. changes in duties or similar factors.
Definition of Useful Life: [Para 3.3]
Useful life is either:
i. the period over which a depreciable asset is expected to be used by the enterprise; or
ii. the number of production or similar units expected to be obtained from the use of the asset by the enterprise
Estimation of Useful Life:
Determination of the useful life of a depreciable asset is a matter of estimation and is normally based on various factors including experience with similar types of assets. Such estimation is more difficult for an asset using new technology or used in the production of a new product or in the provision of a new service but is nevertheless required on some reasonable basis.
The useful life of a depreciable asset is shorter than its physical life and is:
i. pre-determined by legal or contractual limits, such as the expiry dates of related leases;
ii. directly governed by extraction or consumption;
iii. dependent on the extent of use and physical deterioration on account of wear and tear which again depends on operational factors, such as, the number of shifts for which the asset is to be used, repair and maintenance policy of the enterprise etc.; and
iv. reduced by obsolescence arising from such factors as:
a. technological changes;
b. improvement in production methods;
c. change in market demand for the product or service output of the asset; or
d. legal or other restrictions.
Effect of Addition to the Fixed Asset on the useful life of the asset:
Any addition or extension to an existing asset which is of a capital nature and which becomes an integral part of the existing asset is depreciated over the remaining useful life of that asset. As a practical measure, however, depreciation is sometimes provided on such addition or extension at the rate which is applied to an existing asset. Any addition or extension which retains a separate identity and is capable of being used after the existing asset is disposed of, is depreciated independently on the basis of an estimate of its own useful life.
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 realizable 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.
Charge of Depreciation to the Profit & Loss Account: Depreciation is charged in each accounting period by
Example of Disclosures under AS - 6:
Kalpataru Power Transmission Limited:
Depreciation is provided on the basis of Straight Line Method on all depreciable fixed assets at the rates prescribed in Schedule XIV of the Companies Act, 1956, on pro rata basis except:
a) Depreciation pertaining to assets of Research and Development Centre and on the Export Oriented Units is provided on the basis of Written Down Value Method.
b) Depreciation on plant and machinery of bio-mass energy plants is provided at a higher rate at 7.5% instead of the prescribed rate for continuous process plant considering the useful life of plant supported by technical evaluation and report.
c) In case of revalued assets, the difference between the depreciation based on revalued cost and the depreciation charged on historical cost is recouped out of revaluation reserve.
d) Depreciation on assets of overseas projects is provided at the rates as per the requirement of laws of respective foreign countries. Such rates of depreciation in each overseas project are higher than the depreciation rates prescribed in Schedule XIV of the Companies Act, 1956.
e) Depreciation on all the vehicles in the Company is provided at a higher rate at 15% instead of the prescribed rate, considering the useful life of vehicles based on technical evaluation by the management.
reference to the extent of the depreciable amount, irrespective of an increase in the market value of the assets.
The quantum of depreciation to be provided in an accounting period involves:
(i) The exercise of judgment by management
(ii) In the light of technical, commercial, accounting and legal requirements and
(iii) Need periodical review.
If it is considered that the original estimate of useful life of an asset requires any revision, the unamortized depreciable amount of the asset is charged to revenue over the revised remaining useful life.
In respect of depreciable assets which do not have material value, depreciation is often allocated fully in the accounting period in which they are acquired.
There are several methods of allocating depreciation over the useful life of the assets. Those most commonly employed in industrial and commercial enterprises are:
i. The straight-line method and
The management of a business selects the most appropriate method(s)based on various important factors e.g.,
i. Type of asset,
ii. The nature of the use of such asset and
iii. Circumstances prevailing in the business.
A combination of more than one method is sometimes used.
The statute governing an enterprise may provide the basis for computation of the depreciation. For example, the Companies Act, 1956 lays down the rates of depreciation in respect of various assets.
Where the management's estimate of the useful life of an asset of the enterprise is shorter than that envisaged under the provisions of the relevant statute, the depreciation provision is appropriately computed by applying a higher rate. If the management's estimate of the useful life of the asset is longer than that envisaged under the statute, depreciation rate lower than that envisaged by the statute can be applied only in accordance with requirements of the statute.
The method of depreciation is applied consistently to provide comparability of the results of the operations of the enterprise from period to period.
A change from one method of providing depreciation to another is made only if:
i. The adoption of the new method is required by statute or
ii. For compliance with an accounting standard or
iii. If it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise.
When such a change in the method of depreciation is made, depreciation is recalculated in accordance with the new method from the date of the asset coming into use. The recalculation is done in the following manner:
i. Depreciation shall be recomputed by applying the new method from the date of its acquisition/installation till the change of method
ii. Difference between the total depreciation under the new method and accumulated depreciation under the old method till the date of change may be surplus/deficiency
iii. Deficiency charged to profit and loss account
iv. Surplus credited to profit and loss account under Depreciation written back
Such a change is treated as a change in accounting policy and its effect is quantified and disclosed.
Where the historical cost of an asset has undergone a change due to circumstances specified above, the depreciation on the revised unamortized depreciable amount is provided prospectively over the residual useful life of the asset.
[Para 17 -19]
The following information should be disclosed in the financial statements:
i. the historical cost or other amount substituted for historical cost of each class of depreciable assets;
ii. total depreciation for the period for each class of assets; and
iii. the related accumulated depreciation.
The following information should also be disclosed in the financial statements along with the disclosure of other accounting policies:
i. Depreciation methods used; and
ii. Depreciation rates or the useful lives of the assets, if they are different from the principal rates specified in the statute governing the
Other Disclosures include:
1. In case the revaluation has a material effect on the amount of depreciation, the same is disclosed separately in the year in which revaluation is carried out
2. A change in the method of depreciation is treated as a change in an accounting policy and is disclosed accordingly. (Refer to AS 5)
3. Where depreciable assets are disposed of, discarded, demolished or destroyed, the net surplus or deficiency, if material, is disclosed separately. [Para 14]