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Exposure Draft of Draft Guidance Note on Some Important Issues Arising from Schedule II to the Companies Act, 2013
November, 10th 2015
                                                            
 




                Exposure Draft


         Draft Guidance Note on
    Some Important Issues Arising from
     Schedule II to the Companies Act,
                    2013
      (Last Date for Comments: November 25, 2015)




                        Issued by
                    Research Committee

         The Institute of Chartered Accountants of India

                 (Set up by an Act of Parliament)

                           New Delhi
     
 
                                                                                             
 
Contents 

                                                                             Paragraphs
Background                                                                            1-3
Objective                                                                               4
Scope                                                                                   5
Useful Life of an Asset                                                              6-14
Residual Value of an Asset                                                             15
Continuous Process Plant (CPP)                                                     16-21
Multiple Shift Depreciation                                                        22-29
Unit of Production (UOP) Method of Depreciation                                    30-37
Transition to Schedule II                                                          38-41
Regulatory Rates                                                                   42-43

Purchase of Used Assets                                                                44
Intangible Assets                                                                  45-46
Revaluation of Assets                                                              47-51
Component Approach                                                                 52-55
Depreciation on Low Value Items                                                    56-58
Pro-Rate Depreciation                                                                  59
Adoption of Different Methods for Similar Assets at Different Geographical         60-62
Locations
Disclosures                                                                            63
Effective Date                                                                         64

Appendices:                                                                   Page No.
Appendix A: Schedule II to the Companies Act, 2013 (as amended)                        26
Appendix B: MCA Notification No. G.S.R. 237 (E) dated March 31, 2014                   34
Appendix C: MCA Notification No. G.S.R. 627 (E) dated August 29, 2014                  37




                                                                             Page 1 of 42 
 
                 
 
 




    Page 1 of 42 
 
                                                                                                                 
                                                                                                                 
 
                                         Exposure Draft

    Draft Guidance Note on Some Important Issues Arising from
              Schedule II to the Companies Act, 2013
Research Committee of the Institute of Chartered Accountants of India invites
comments on any aspect of this Exposure Draft of the `Guidance Note on Some
Important Issues Arising from Schedule II to the Companies Act, 2013'. Comments are
most helpful if they indicate the specific paragraph or group of paragraphs to which they
relate, contain a clear rationale and, where applicable, provide a suggestion for
alternative wording.
Comments should be submitted in writing to the Secretary, Research Committee, The
Institute of Chartered Accountants of India, ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi ­ 110 002, so as to be received not later than November
25, 2015. Comments can also be sent by e-mail at research@icai.in .

                                                        
Background 
 
1.     Schedule  II  to  the  Companies  Act,  2013,  specifies  useful  lives  for  the  purpose  of 
       computation  of  depreciation.  The  said  Schedule  II  was  further  amended  by  the  Ministry 
       of  Corporate  Affairs  (MCA)  through  its  notifications  G.S.R.  237(E)  dated  March  31,  2014 
       and  G.S.R.  627(E)  dated  August  29,  2014,  respectively.  As  compared  to  Schedule  XIV  to 
       the  Companies  Act,  1956,  Schedule  II,  instead  of  specifying  rates  of  depreciation  for 
       various  assets,  specifies  that  depreciation  should  be  provided  on  the  basis  of  useful  life 
       of  an  asset.  While  Schedule  XIV  was  prescriptive  in  nature  as  it  specified  the  minimum 
       rate  of  depreciation,  Schedule  II  provides  indicative  useful  lives  for  various  assets.  As  a 
       consequence,  the  companies  are  in  a  position  to  charge  depreciation  based  on  the 
       useful  life  of  an  asset  supported  by  technical  advice,  even  though  such  lives  are  higher 
       or lower than those specified in the said schedule.  In view of this, depreciation charged 
       as  per  the  useful  life  is  true  commercial  depreciation  bringing  the  financial  statements 
       prepared  accordingly  closer  to  those  prepared  in  accordance  with  International 
       standards.  
2.     In  this  Guidance  Note  wherever  the  term  `Schedule  II'  is  used  it  refers  to  Schedule  II  to 
       the Companies Act, 2013, and wherever term `Schedule XIV' is used it refers to Schedule 
       XIV to the Companies Act, 1956, unless specified otherwise.    
        
3.     Overview of some of the key changes in Schedule II  as compared to Schedule XIV  are as 
       follows:  




                                                                                                  Page 2 of 42 
 
                                                                                                                   
                                                                                                                   
 
         

              Useful  life  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. Schedule XIV did not include such requirement.  
              Schedule  II  prescribes  indicative  useful  lives  of  various  assets  instead  of  Straight 
              Line Method (SLM)/ Written Down Value (WDV) rates for calculating depreciation  
              Useful lives prescribed for tangible assets only  
              No  life  prescribed  for  intangible  assets.  Notified  Accounting  Standards  to  govern 
              the same  
              Depreciation  is  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  
              Companies  are  allowed  to  follow  different  useful  lives/residual  value  if  an 
              appropriate justification is given supported by technical advice.  
              Useful life of significant parts of an asset to be determined separately   
              No separate rate for double/ triple shift; depreciation to be increased based on the 
              double shift/triple shift use of the assets  
              Useful  lives  of  fixed  assets  prescribed  under  schedule  II  are  Act  different  from 
              those envisaged under Schedule XIV.  
              No reference to depreciation on low value assets.  

         
Objective 
         
4.      This  Guidance  Note  is  issued  with  the  objective  to  provide  guidance  on  certain 
        significant issues that may arise from the practical application of  Schedule II with a  view 
        to establish consistent practice with regard to the accounting for depreciation.     
 
Scope 
     5. This Guidance Note includes relevant provisions of Schedule II and provides guidance on 
        implementing the requirements of Schedule II. 
         
Shift from Ratebased requirements to Useful Life  
 
6.     Paragraph 1 of Part A of Schedule II defines `useful life' of an asset as: 
 
              "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." 




                                                                                                    Page 3 of 42 
 
                                                                                                                        
                                                                                                                        
 
 
7.        Paragraph 3(i) of Part A of Schedule II, as amended, states as follows: 
           
          "3.  Without prejudice to the foregoing provisions of paragraph 1 (of Schedule II),-- 
           
               i.  The  useful  life  of  an  asset  shall  not  ordinarily  be  different  from  the  useful  life 
                   specified  in  Part  C  and  the  residual  value  of  an  asset  shall  not  be  more  than 
                   five percent of the original cost of the asset. 
           
                   Provided  that  where  a  company  adopts  a  useful  life  different  from  what  is 
                   specified  in  Part  C  or  uses  a  residual  value  different  from  the  limit  specified 
                   above,  the  financial  statements  shall  disclose  such  difference  and  provide 
                   justification in this behalf duly supported by technical advice." 
       
8.        In  view  of  the  above,  paragraph  3  of  Part  A  of  Schedule  II  should  be  read  along  with 
          paragraph 1 of Part A of Schedule II which defines useful life.  
           
9.        It  may  be  noted  that  paragraph  3  of  Schedule  II    initially  provided  that  the  useful  life  of 
          an  asset  shall  not  be  longer  than  the  useful  life  than  that  prescribed  in  Part  C.   With  a 
          view  to  clarify  that  the  useful  lives  as  prescribed  in  Part  C  to   Schedule  II  are  indicative, 
          Schedule II was amended by the MCA vide its notification G.S.R. 627(E) dated August 29, 
          2014,  where  the  expression  `shall  not  be  longer  than'  was  changed  to  `shall  not 
          ordinarily be different'. 
           
10.       Under  Schedule  XIV  which  specified  rates  of  depreciation  rather  than  useful  lives,  the 
          Ministry  of  Industry,  Department  of  Company  Affairs,  vide  its  circular  No.  1/17/87CL.V 
          dated  March  7,  1989,  clarified  that  the  rates  as  contained  in  Schedule  XIV  should  be 
          viewed  as  the  minimum  rates,  and,  depreciation  at  rates  lower  than  those  specified  in 
          Schedule  XIV  should  not  be  adopted  by  the  companies.  However,  on  bonafide  technical 
          evaluation, higher rate may be applied by a company.  
           
11.       Paragraph  13  of  AS  6  also  contains  clarification  similar  to  the  aforesaid  circular,  inter 
          alia,  providing  that  "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."  As  Schedule  II  permits 
          useful  lives  different  from  that  specified  in  Part  C  of  Schedule  II,    the  useful  lives 




                                                                                                         Page 4 of 42 
 
                                                                                                                     
                                                                                                                     
 
          specified  therein  are  indicative  only  and  therefore  paragraph  13  of  AS  6  now  permits 
          useful life longer than that specified in statute.   
           
12.       Paragraphs  8  and  22  of  Accounting  Standard  (AS)  6,  Depreciation  Accounting,  notified 
          under the Companies (Accounting Standards) Rules, 2006, state as follows: 
       
                  "8.     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." 
           
                  "22.   The  useful  life  of  a  depreciable  asset  should  be  estimated  after 
                  considering the following factors: 
                         (i)     expected physical wear and tear; 
                         (ii)    obsolescence; 
                         (iii)  legal or other limits on the use of the asset." 
           
13.       In  view  of  the  above,  the  useful  lives  as  given  under  Part  `C'  of  Schedule  II  for  various 
          types  of  assets  are  indicative  only  and  are  not  minimum  or  maximum.  Accordingly,  a 
          company  should  first  estimate  the  useful  life  of  an  asset  for  the  purpose  of  providing 
          depreciation  on  the  basis  of  the  number  of  shifts  for  which  the  company  is  going  to  use 
          the  asset  and  the  other  factors  as  given  in  AS  6  supported  by  the  technical  advice, 
          external  or  internal.  Where  the  useful  lives  of  various  specific  assets  are  the  same  as 
          those  under  Schedule  II,  the  company  should  use  these  useful  lives.  In  case  the  useful 
          life  of  an  asset  as  estimated  by  the  company  differs,  i.e.,  higher  or  lower  from  the 
          indicative  useful  life  given  under  Schedule  II,  the  former  should  be  applied  by  the 
          company  for  providing  depreciation.  The  disclosures  in  this  regard  should  be  made  as 
          described  later  in  this  Guidance  Note.  The  process  of  determination  of  useful  life  is 
          explained  in  the  chart  below.  A  company  has  to  determine  the  useful  life  at  the 
          beginning  of  the  year  for  all  fixed  assets,  existing  as  at  the  end  of  the  immediately 
          preceding  period  and  newly  acquired.  All  fixed  assets  existing  at  the  beginning  of  the 
          year  should  be  classified  into  assets  for  which  no  extra  shift  depreciation  is  applicable 
          which  would  include  continuous  process  plant  (CPP)  and  assets  for  which  extra  shift 
          depreciation  applies.  Of  the  assets  for  which  extra  shift  depreciation  applies,  assets 
          which  are  going  to  be  used  on  single  shift,  double  shift  or  triple  shift  are  segregated. 
          This  segregation  is  required  as  the  extra  shift  depreciation  is  applicable  only  to  those 
          assets  whose  useful  life  is  determined  on  single  shift  basis.  After  segregation,  the 
          remaining  useful  life  of  the  asset  is  estimated.  A  company  recognises  depreciation 




                                                                                                      Page 5 of 42 
 
                                                                                                                    
                                                                                                                    
    
            expense  based  on  the  useful  life  estimated  by  the  management.  Where  the  useful  life 
            estimated  by  the  management  is  different  from  that  specified  by  Schedule  II,  the  same 
            is disclosed in notes. 
    
    
    
    
    
    
    
    
                   Determination of Useful Life at the beginning of the year
             
                                  Asset (Newly acquired or Existing)
    

       NESD/CPP as per Schedule                                                   NonNESD 
    

                             Single Shift                 Double Shift                    Triple Shift 

    

                   Estimate Useful Life                                Estimate Useful Life 


    

    
Lower than Schedule II            Equal to Schedule II              Higher than Schedule II 
    

                                                                          Make Disclosures 
   Make Disclosures                    No Disclosure 
    
        14. As  per  Paragraph  23  of  AS  6,  the  useful  lives  of  major  depreciable  assets  or  classes  of 
            depreciable  assets  may  be  reviewed  periodically.  Where  there  is  a  revision  of  the 
            estimated  useful  life  of  an  asset,  the  unamortized  depreciable  amount  should  be 
            charged over the revised remaining useful life. Further, Paragraph 21 of AS 5 states that, 
            an  estimate  may  have  to  be  revised  if  changes  occur  regarding  the  circumstances  on 
            which  the  estimate  was  based,  or  as  a  result  of  new  information,  more  experience  or 




                                                                                                      Page 6 of 42 
    
                                                                                                                  
                                                                                                                  
 
    subsequent  developments.  The  revision  of  the  estimate,  by  its  nature,  does  not  bring 
    the  adjustment  within  the  definitions  of  an  extraordinary  item  or  a  prior  period  item. 
    Therefore, a company is required to assess whether there have been any changes in the 
    expected  pattern  of  consumption  of  the  asset  during  the  year  and  in  future.  Where 
    there  have been  such  changes,  the company  is  required  to  reestimate the  useful  life  of 
    the asset. 
 
    Illustration 1 
     
    Facts:  A  Limited  is  a  company  incorporated  under  the  Companies  Act,  1956,  engaged  in 
    the  business  of  manufacturing  of  toys.  A  Limited  purchased  a  unit  of  machinery  costing 
    Rs. 60 lakhs as on April 01, 2014. As per Schedule II the general useful life of the assets is 
    15  years.  However,  as  per  A  Ltd.'s  estimation,  the  useful  life  of  the  asset  is  20  years 
    supported by the technical advice.  
     
    Issue:   Should the company use the useful life as 15 years or 20 years? 
    Response:  In  this  case,  keeping  in  view  the  requirements  under  Schedule  II,  A  Ltd. 
    should  depreciate  the  machinery  over  its  useful  life  of  20  years  as  determined  by  the 
    company and not over 15 years as indicated in Schedule II. A limited should also provide 
    disclosures  in  this  regard  as  recommended  later  in  this  Guidance  Note  in  the  notes  to 
    accounts  to  justify  the  reason  for  difference  between  the  indicative  use  life  and  A's 
    estimated useful life.  
     
    Illustration 2 
     
    Facts:  B  Limited  had  considered  the  minimum  rates  of  depreciation  mentioned  in 
    Schedule  XIV  for  depreciating  all  its  fixed  assets  till  March  31,  2014.  Based  on  the  rates 
    mentioned  for  SLM  and  WDV  in  Schedule  XIV,  B  Limited  had  derived  the  useful  lives for 
    the  assets.  Schedule  II  of  the  Companies  Act,  2013  is  now  applicable  to  B  Limited w.e.f. 
    April 1, 2014.  
     
    Issue:  Whether  B  Limited  needs  to  follow  the  useful  lives  mentioned  in  the  Schedule  II 
    or derived useful lives considered till March 31, 2013 can be considered?  
     
    Response:  W.e.f.  April  1,  2014,  B  limited  should  estimate  the  remaining  useful  lives  of 
    its  assets  based  on  the  definition  of  useful  life  in  Schedule  II  and  the  factors  specified  in 
    AS  6  for  recognising  depreciation  in  the  statement  of  profit  and  loss.  There  is  no 
    relevance  of  the  derived  useful  life  as  per  Schedule  XIV.  However,  if  B  Ltd  estimates 
    useful  lives  different  from  those  specified  in  Schedule  II,  it  should  disclose  such 




                                                                                                   Page 7 of 42 
 
                                                                                                                      
                                                                                                                      
 
            differences  in  the  financial  statements  and  provide  justification  in  this  behalf  duly 
            supported by technical advice. 
 
Residual Value of an Asset 
       
15.         As  mentioned  above,  paragraph  3(i)  of  Part  A  of  Schedule  II,  inter  alia,  states  that  the 
            residual  value  of an asset  shall  not  be  more  than  five  percent  of  the original  cost of  the 
            asset;  provided  that  where  a  company  uses  a  residual  value  different  from  the  limit 
            specified  above,  the  financial  statements  shall  disclose  such  difference  and  provide 
            justification  in  this  behalf  duly  supported  by  technical  advice.  The  aforesaid  proviso  can 
            be taken to mean that the residual value of the asset is indicative in nature. Thus, where 
            the  estimate  of  the  residual  value  of  the  asset  is  more  than  five  percent  of  the  original 
            cost  of  the  asset,  the  company  should  use  that  estimate  of  residual  value  provided  it  is 
            supported  by  technical  advice,  external  or  internal,  and  disclosures  in  this  regard  are 
            made  as  recommended  later  in  this  Guidance  Note.  In  case  the  residual  value  is 
            estimated  to  be  less  than  five  percent  of  the  original  cost  of  the  asset,  the  same  should 
            be  used  and  it  would  not  be  necessary  to  make  a  disclosure  in  such  a  case.  The  chart 
            given below summarises the position as stated above. 


                                    Determination of Residual Value


                                          Estimate Residual Value  




          Lower than 5% of               Equal to 5% of Original              Higher than 5% of Original 
            Original Cost                         Cost                                  Cost  




            No Disclosures                      No Disclosure                       Make Disclosures 



Continuous Process Plant (CPP) 
 
16.         Note 8 to Schedule II defines the expression 'Continues Process Plant' as: 




                                                                                                       Page 8 of 42 
 
                                                                                                                
                                                                                                                
 
       
           ``Continuous  process  plant''  means  a  plant  which  is  required  and  designed  to 
           operate for twentyfour hours a day. 
        
17.   The  words  "required  and  designed  to  operate  24  hours  a  day"  are  very  significant  and 
      should  be  interpreted  with  reference  to  the  inherent  technical  nature  of  the  plant,  i.e., 
      the  technical  design  of  a  CPP  is  such  that  there  is  a  requirement  to  run  it  continuously 
      for  24  hours  a  day.  If  it  is  not  so  run,  there  are  significant  shutdown  and/or  startup 
      costs.  If  such  a  plant  is  shutdown,  there  may  be  significant  spoilage  of  materialsin 
      process /some damage to the plant itself/significant energy loss. It is, however, possible 
      that due to various reasons, e.g., lack of demand, maintenance etc., such a plant may be 
      shut down for some time. The shut down does not change the inherent technical nature 
      of  the  plant.  For  instance,  a  blast  furnace  which  is  required  and  designed  to  operate  24 
      hours a day, may be shut down due for various reasons; it would still be considered as a 
      CPP and useful life as estimated would be applicable for providing Depreciation. 
       
18.   There  can  be  certain  plants  which  though  may  work  24  hours  a  day,  yet  their  technical 
      design  is  not  such  that  they  have  to  be  operated  24  hours  a  day,  e.g.,  a  textile  weaving 
      mill.  In  such cases,  depreciation  to be  charged would  be on  the  basis  of  estimated  useful 
      life.  
       
19.   A  CPP  is  distinct  from  the  repetitive  process  plant  or  assemblyline  type  plants.  These 
      plants  are  not  CPP  since  such  plants  do  not  involve  significant  shutdown  and/or  start
      up  costs  and  are  not  technically  required  and  designed  to  operate  24  hours  a  day,  e.g., 
      an automobile manufacturing plant. 
       
20.   It  is  noted  that  Schedule  XIV,  inter  alia,  specified  the  general  rates  of  15.28%  under 
      Written  Down  Value  method  (WDV)  and  5.33%  under  Straight  Line  Method  (SLM)  of 
      depreciation  for  CPP,  other  than  those  for  which  special  rates  had  been  prescribed.  In 
      other words, as per the depreciation rates provided under Schedule XIV for the CPP, the 
      useful  life  was  20  years  (approx).   However,  Schedule  II  indicates  useful  life  of  25  years 
      for  CPP,  other  than  those  for  which  special  rates  have  been  prescribed  in  Schedule  II. 
      The  principle  of  estimation  of  useful  life  as  explained  in  paragraph  10  of  this  Guidance 
      Note will also apply to CPP. 
       
21.   It  may  be  noted  that  what  should  be  considered  as  CPP  under  Schedule  II  is  same  as  it 
      was  under  Schedule  XIV.  Accordingly,  in  case  a  plant  was  not  considered  as  CPP  under 
      Schedule XIV, the same cannot be considered as CPP under Schedule II.   
       




                                                                                                 Page 9 of 42 
 
                                                                                                                 
                                                                                                                 
 
Multiple Shift Depreciation 
 
22.   Note  6 to Schedule II to the companies Act, 2013, states that: 
        
           "6.  The  useful  lives  of  assets  working  on  shift  basis  have  been  specified  in  the 
           Schedule  based  on  their  single  shift working.  Except  for  assets  in  respect  of  which  no 
           extra shift depreciation is permitted (indicated by NESD in Part C above), if an 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 calculated 
           on the basis of 100% for that period." 
 
23.   On  the  other  hand,  Schedule  XIV  specified  the  depreciation  rates  for  double  shift  and 
      triple  shift  separately.  Therefore,  an  issue  may  arise  whether  the  rates  for  extra  shift  as 
      given  under  Schedule  II  should  be  applied  without  estimating  the  useful  lives  of  the 
      assets under multiple shifts.  
 
24.    It is noted that extra shift depreciation does not apply to CPP and the assets which have 
      been  marked  as  No  Extra  Shift  Depreciation  (NESD)  under  Schedule  II.  The  concept  of 
      extra  shift  depreciation  applies  only  to  those  assets  for  which  the  useful  life  has  been 
      estimated on single shift basis at the beginning of the year.  
       
25.   Where  the  useful  life  of  an  asset  has  been  estimated  on  single  shift  basis  at  the 
      beginning  of  the  year  and  the  company  uses  the  asset  on  double  or  triple  shifts,  the 
      depreciation expense should be increased by 50% or 100% for the period that asset was 
      used for double or triple shift respectively. 
       
26.   Where  an  asset  is  expected  to  be  used  on  single  shift  basis  and  the  use  of  the  asset  for 
      extra  shift  is  to  continue  on  sporadic  basis  in  future,  the  company  should  consider 
      whether  there  are  any  changes  in  circumstances  or  new  developments  which  may  have 
      impact  on  the  remaining  useful  life  of  the  asset.  Where  there  have  been  changes  in 
      circumstances  or  new  developments  have  taken  place  during  the  year,  a  company 
      should  reassess  the  remaining  useful  life  of  the  asset.    In  case  there  is  no  change  in 
      circumstances  or  no  new  developments  have  taken  place,  company  should  continue  to 
      depreciate the asset on the basis of previous estimates.  
       



27.   Where  the  asset  was  initially  expected  to  be  used  on  single  shift  but  in  future,  it  is 
      expected  to  be  used  on  double  /  triple  shift  basis,  the  company  should  reassess  the 
      remaining  useful  life  on  double/  triple  shift  basis  at  the  end  of  the  year  and  depreciate 
      the asset over the revised remaining useful life on prospective basis. 




                                                                                                 Page 10 of 42 
 
                                                                                                           
                                                                                                           
 
       
28.   For assets which are not marked as NESD under Schedule II and for which the useful life 
      has been estimated on double/triple shift basis at the beginning of the year, the concept 
      of  extra  shift  deprecation  will  not  apply.  For  such  assets,  a  company  should  consider 
      whether  there  is  any  change  in  circumstances  on  which  the  useful  life  of  asset  was 
      based  or  any  new  developments  have  taken  place  which  may  have  impact  on  the 
      estimated  useful  life  of  the  asset.  If  there  is  no  such  indication,  the  company  should 
      continue  to  depreciate  such  assets  on  the  basis  of  previous  estimates.  If  there  is  any 
      such  indication,  the  company  should  reassess  the  remaining  useful  life  of  the  assets  on 
      the  basis  of  changed  circumstances  or  new  developments,  e.g.,  use  of  the  asset  on 
      single shift basis in future.   
       

                                

                          This portion has been left blank intentionally.




                                                                                            Page 11 of 42 
 
                                                                                                                           
                                                                                                                           
          
                     
         29.        The  charge  of  extra  shift  depreciation  as  explained  above  is  depicted  in  the  form  of  a 
                    chart as follows:  


                                                     Extra Shift Depreciation 
                                                          Life estimated (NonNESD) 
                                                    Useful




                        Useful life estimated on Single Shift                Useful life estimated on Double/Triple 
                                                                                              Shift  


                                                                             Extra Shift Depreciation not applicable
              Used for Double Shift                Used for Triple Shift 

                                                                                        Change in circumstances/ 
                                                                                        subsequent developments? 
                Add 50% on                                Add 100% on 
                Prorata Basis                             Prorata Basis                        No
                                                                                                                    Yes


                                                                                       Continue with 
                                                                                       previous estimates 


             Sporadic Use for                   NonSporadic Use for 
             extra shifts                       extra shifts                              Reassess the number of shifts 
                                                                                         for which the asset will be used 
                                                                                                 at the year end 


  Change in circumstances/                   Reassess remaining 
  subsequent developments?                   useful life on 
                                             Double/Triple Shift basis         Single Shift         Double/Triple 
   No                                        and extra shift                   Useful Life          Shift Useful life 
                                 Yes
                                             depreciation will not 
Continue with                                apply for future period 
previous estimates 
                                                                                   Reassess             Review remaining 
                                                                              remaining useful          useful life on 
                                                                                life on Single          Double/Triple 
    Reassess remaining useful                                                  Shift and extra          Shift basis and 
      life on Single Shift and                                                       shift              extra shift 
     extra shift depreciation                                                   depreciation            depreciation will 
       would apply in future                                                   would apply in           not apply for 
                                                                                    future              future period 


                                                                                                           Page 12 of 42 
          
                                                                                                              
                                                                                                              
 
Unit of Production (UOP) Method of Depreciation 
 
30.   Schedule II to the Companies Act, 2013 defines `Useful Life' as: 
               
              "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." 
       
31.   The  depreciation  on  an  asset  can  be  provided,  where  appropriate,  on  the  basis  of  the 
      units  expected  to  be  obtained  from  the  use  of  the  asset.  This  method  of  providing 
      depreciation is generally known as `Unit of Production' method (UOP).  
       
       
32.    Paragraph 12 of Accounting Standard (AS) 6, Depreciation Accounting, state as follows: 
       
          "12.        There  are  several  methods  of  allocating  depreciation  over  the  useful  life 
          of  the  assets.  Those  most  commonly  employed  in  industrial  and  commercial 
          enterprises  are  the  straight  line  method  and  the  reducing  balance    method.  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.  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." 
       
33.   In  view  of  the  above,  as  a  result  of  application  of  Schedule  II,  a  company  may  use  UOP 
      method, where appropriate keeping in view the various factors mentioned in paragraph 
      12  of  AS  6.  UOP  method  is  generally  considered appropriate  where  the  number  of  units 
      that  can  be  produced  or  serviced  from  the  use  of  the  asset  is  the  major  limiting  factor 
      for  the  use  of  the  asset  rather  than  the  time.  Following  are  some  examples  where  UOP 
      method can be identified appropriate: 
        (i)    Useful life of Aircraft engine is restricted by number of flying hours 
        (ii)   Useful life of Boiler is limited to number of hours  
        (iii)  Useful life of Mould is limited by the number of imprints  
       
       
34.   A  company  will  have  to  review  the  number  of  units  that  can  be  produced  or  serviced 
      from  the  asset  in  the  future  periodically.  The  carrying  amount  of  such  an  asset  will  be 
      depreciated  over  the  revised  remaining  number  of  units  expected  to  be  obtained  or 




                                                                                              Page 13 of 42 
 
                                                                                                               
                                                                                                               
 
      serviced  on  a  prospective  basis.  Where,  such  an  asset  is  idle  for  a  long  period  of  time, 
      the company should assess whether the use of UOP method is still appropriate.  
       
35.   Under  Schedule  XIV  primarily  two  methods  of  depreciation,  i.e.,  Written  Down  Value 
      (WDV)  and  Straight  Line  Method  (SLM)  were  prescribed.   Therefore,  an  issue  may  arise 
      that  whether  the  change  in  method  of  depreciation  from  SLM  to  UOP  or  WDV  to  UOP 
      would  be  a  change  in  accounting  policy  and  need  to  be  applied  retrospectively  or 
      required to be applied prospectively.  
       
36.   In  this  regards,  it  may  be  noted  that  paragraph  15  of  AS  6,  Depreciation  Accounting, 
      states as follows: 
       
               "15.   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  the  adoption  of  the  new  method  is  required  by  statute  or  for  compliance 
              with  an  accounting  standard  or  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 deficiency or surplus arising from retrospective re
              computation  of  depreciation  in  accordance  with  the  new  method  is  adjusted  in 
              the  accounts  in  the  year  in  which  the  method  of  depreciation  is  changed.  In  case 
              the  change  in  the  method  results  in  deficiency  in  depreciation  in  respect  of  past 
              years,  the  deficiency  is  charged  in  the  statement  of  profit  and  loss.  In  case  the 
              change  in  the  method  results  in  surplus,  the  surplus  is  credited  to  the  statement 
              of  profit  and  loss.  Such  a  change  is  treated  as  a  change  in  accounting  policy  and 
              its effect is quantified and disclosed." 
               
37.   In  view  of  the  above,  with  the  introduction  of  UOP  method  in  Schedule  II,  a  company 
      may  change  from  SLM  or  WDV  method  to  UOP  method.  In  such  cases,  in  accordance 
      with  AS  6,  depreciation  on  the  underlying  asset  should  be  calculated  retrospectively 
      using  the  UOP  method  from  the  date  the  asset  came  into  use  to  the  company  with 
      adjustment of any surplus or deficiency arising from change in method to the statement 
      of  profit  and  loss  as  such  change  is  required  by  the  statute.  However,  as  a  first  time 
      application  of  Schedule  II,  if  a  company  changes  its  method  of  depreciation  from  WDV 
      to  SLM  or  vice  versa,  the  same  cannot  be  justified  as  required  by  law  as  both  the 
      methods  were  allowed  under  Schedule  XIV  and  AS  6.   In  accordance  with  AS  6,  a  shift 
      from  WDV  to  SLM  or  vice  versa  can  only  be  applied  by  the  company  if  it  is  considered 




                                                                                               Page 14 of 42 
 
                                                                                                             
                                                                                                             
 
      that  the  change  would  result  in  a  more  appropriate  preparation  or  presentation  of  the 
      financial  statements  of  the  company.  In  such  a  case  also,  any  surplus  or  deficiency 
      arising from change in method should be adjusted to the statement of  profit and loss in 
      accordance  with  AS  6.  It  may  also  be  noted  that  in  case  of  change  in  method  of 
      depreciation, transitional provisions given under Note 7 (b) of Schedule II will not apply.  
       
      Illustration:  
      Facts:   A  Limited  is  a  company  incorporated  under  the  Companies  Act  and  engaged  in 
      the  business  of  oil  exploration.  Keeping  in  view  the  requirement  in  Schedule  XIV  it  was 
      depreciating  its  oil  and  gas  assets  on  SLM  basis.  In  the  financial  year  201415,  when  A 
      applies Schedule II it decides to depreciate the said assets by following the UOP method.  
       
      Issue:  How should change in method be accounted for? 
       
      Response:   In  this case, in  accordance  with  AS  6,  A  Ltd. should  calculate depreciation 
      on  all  such  assets  following  the  UOP  method  since  the  assets  came  into  existence  and 
      recognise  any  deficiency/gain  in  the  statement  of  profit  and  loss  for  the  period  ending 
      on March 31, 2015.  
 
Transition to Schedule II 
 
38.   Note 7 to Schedule II to the Companies Act, 2013, states that  
       
      "7.   From  the  date  this  Schedule  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  this 
                 Schedule; 
            (b)  after retaining the residual value, may be recognised in the opening balance of 
                 retained earnings where the remaining useful life of an asset is nil." 
 
39.   An  issue  may  arise  that  in  what  circumstances  due  to  transition  to  Schedule  II,  the 
      carrying amount of an asset may be transferred to retained earnings . 
 
40.   Note 7 (b) uses the phrase `remaining useful life of an asset'. This means on transition to 
      Schedule  II,  a  company  should  estimate  the  remaining  useful  life  of  an  asset  over  which 
      the  company  expects  to  use  the  asset,  which  may  or  may  not  be  equal  to  remaining 
      useful life as per the rate of depreciation specified in Schedule XIV. In other words, there 
      may  be  a  situation  that  when  a  company  initially  applies  Schedule  II  that  the  remaining 
      useful life of some assets may be estimated at nil, whereas for other assets some useful 




                                                                                              Page 15 of 42 
 
                                                                                                                  
                                                                                                                  
 
        life  remains  as  per  the  said  Schedule.  In  respect  of  an  asset  whose  remaining  useful  life 
        is  nil,  as  per  the  option  provided  under  Note  7  to  Schedule  II,  the  carrying  amount  of 
        such  assets  may  be  transferred  directly  either  to  the  opening  balance  of  retained 
        earnings  or  recognised  in  the  statement  of  profit  and  loss  as  depreciation  expense  as 
        required  by  AS  5,  Net  Profit  or  Loss  for  Period,  Prior  Period  Items  and  Changes  in 
        Accounting  Policies,  and  AS  6,  Depreciation  Accounting.  If  the  company  opts  to  adjust 
        the  carrying  amount  of  the  assets  to  the  retained  earnings  in  accordance  with  the 
        transitional  provisions  of  Schedule  II,  the  tax  effect  of  the  same  has  also  to  be  adjusted 
        directly  against  the  retained  earnings  in  accordance  with  the  Announcement  issued  by 
        the Institute of Chartered Accountants of India, "Tax effect of expenses/income adjusted 
        directly against the reserves and / or Securities Premium Account". 
         
41.     If  a  company  uses  straight  line  method  (SLM)  of  depreciation,  the  asset  will  be 
        depreciated  equally  over  the  new  remaining  useful  life  of  the  asset.  However,  if  a 
        company  uses  Written  Down  Value  (WDV)  method  of  depreciation,  it  will  need  to 
        calculate  a  new  rate  for  depreciation  to  depreciate  the  asset  over  its  remaining  useful 
        life  using  the  formula  for  calculation  of  rate  for  depreciation  as  per  WDV  method  which 
        is reproduced below ­  
         
                   R=       {1 ­ (s/c)^1/n } x 100  
                    
                   Where R = Rate of Depreciation (in %)  
                            n = Remaining useful life of the asset (in years)  
                            s = Scrap value at the end of useful life of the asset  
                            c= Cost of the asset/Written down value of the asset  
 
Illustration: 
 
Facts:  B  Limited  has  followed  Schedule  XIV  rates  for  depreciation  of  a  plant  and  machinery 
        under  WDV  method  by  following  the  rate  of  13.91%  as  it  runs  under  single  shift.  The 
        WDV  of  the  asset  as  at  March  31,  2014  is  Rs.  23,63,919  and  remaining  useful  life  as 
        estimated  by  the  company  is  11  years.  B  Ltd.  estimates  that  the  residual  value  of  the 
        asset is 5% of the original cost of the asset, i.e., Rs. 2,50,000.  
 
Issue:  On transition to Schedule II, how plant and machinery should be depreciated?   
 
        Response:  As  per  the  transitional  provisions  given  under  Schedule  II  assets  are  required 
        to  be  depreciated  over  their  remaining  useful  lives.  In  the  above  case,  since  B  Ltd 
        follows  WDV  method  for  depreciation,  the  carrying  value  of  Rs.  23,63,919  of  plant  and 
        machinery  should  be  depreciated  by  following  the  WDV  method  over  its  remaining 
        useful  life  of  11  years.  B  Ltd.  should  determine  the  rate  of  depreciation  to  be  charged 
        under WDV method as follows:
         




                                                                                                  Page 16 of 42 
 
                                                                                                                  
                                                                                                                  
 
          Rate of Depreciation:  {1 (Residual Value/Cost of the Asset)^1/ useful life}*100 
          Rate of Depreciation in the above case= {1 (2,50,000/23,63,919)^1/11}*100 
             =18.74 %  
           
                Year       Carrying Value         Dep. For the year              WDV 

                     1          2,363,919.00               436,690.25            1,927,228.75  
                     2          1,927,228.75               356,019.82            1,571,208.93  
                     3          1,571,208.93               290,251.75            1,280,957.19  
                     4          1,280,957.19               236,633.11            1,044,324.07  
                     5          1,044,324.07               192,919.53              851,404.54  
                     6            851,404.54               157,281.22              694,123.32  
                     7            694,123.32               128,226.43              565,896.90  
                     8            565,896.90               104,538.97              461,357.93  
                     9            461,357.93                85,227.33              376,130.59  
                    10            376,130.59                69,483.16              306,647.43  
                    11            306,647.43                56,647.43              250,000.00  
           
          Illustrations: 
           
    1.  Facts::  B  Limited  purchased  a  unit  of  plant  and  machinery  on  April  1,  2005,  and 
          depreciated  the  same  at  the  rate  of  4.75%  on  straight  line  basis  as  per  the  depreciation 
          rate  given  in  Schedule  XIV  (equivalent  useful  life  approximately  21  years),  even  though 
          the  useful  life  as  estimated  by  the  management  at  the  time  of  initial  recognition  of  the 
          asset  was  higher  (30  years).  For  the  financial  year  beginning  on  April  1,  2014,  when  B 
          Ltd.  applies  Schedule  II    it  estimates  that  the  remaining  useful  life  of  the  plant  and 
          machinery  as  on  April  1,  2014,  is  18  years,  which  is  different  from  the  useful  life 
          remaining as per Schedule XIV  i.e., 12 years.  
           
          Issue: Which remaining useful life of plant and machinery should be considered by the B 
          Ltd. to provide depreciation? 
           
          Response:    B  Ltd.  should  depreciate  the  plant  and  machinery  over  its  estimated 
          remaining  useful  life  of  18  years  on  prospective  basis  and  not  on  the  basis  of  remaining 
          useful life as per Schedule XIV, i.e., 12 years (21 years ­ 9 years).         
           
       2. Facts:  B  Limited  purchased  machinery  as  on  April  1,  2005  and  depreciated  the  same  on 
          straight  line  method  as  per  the  depreciation  rates  given  in  Schedule  XIV.  For  the 
          financial  year  beginning  on  April  1,  2014,  when  B  Limited  applies  Schedule  II,  it 




                                                                                                  Page 17 of 42 
 
                                                                                                                    
                                                                                                                    
 
      estimates  that  the  remaining  useful  life  of  machinery  is  nil  and  requires  to  be  disposed 
      off.  
       
      Issue: What should be the treatment of carrying amount of machinery? 
       
      Response:      The  carrying  amount  of  machinery  (net  of  tax)  may  be  recognised  in  the 
      opening balance of the retained earnings as on April 01, 2014. 
 
Regulatory Rates 
 
42.   Part B of Schedule II to the Companies Act, 2013, states as follows: 
 
      "4.   The  useful  life  or  residual  value  of  any  specific  asset,  as  notified  for  accounting 
              purposes  by  a  Regulatory  Authority  constituted  under  an  Act  of  Parliament  or  by 
              the  Central  Government  shall  be  applied  in  calculating  the  depreciation  to  be 
              provided for such asset irrespective of the requirements of this Schedule." 
 
43.   In  view  of  the  above,  where  a  Regulatory  Authority  prescribes  useful  life,  rate  of 
      depreciation  or  residual  value  for  any  specific  asset  for  accounting  purposes,  the 
      company  should  use  that  useful  life,  rate  of  depreciation  or  residual  value  even  though 
      it  is  different  from  that  as  estimated  by  the  management.  For  example,  Govt.  Of  India, 
      Ministry  of  Power  vide  resolution  dated  6th  January,  2006  has  notified  Tariff  Policy  in 
      terms  of  section  3  of  the  Electricity  Act,  2003.  The  said  policy  interalia  provides  that 
      rates  of  depreciation  as  notified  by  Central  Electricity  Regulatory  Commission  (CERC) 
      would  be  applicable  for  the  purpose  of  tariffs  as  well  as  accounting.  Therefore,  in 
      accordance  with  Part  B  of  Schedule  II,  companies  which  are  regulated  by  the 
      abovementioned  tariff  policy  should  apply  the  rate  of  depreciation  as  specified  in  the 
      abovementioned tariff policy.   
       
Purchase of Used Assets 
 
44.   The expression `available for use by an entity' in the definition of `useful life' of assets as 
      given  in  paragraph  1  of  Part  A  of  Schedule  II  clarifies  that  the  useful  life  of  an  asset  is 
      estimated  on  the  basis  of  the  expectations  of  the  company  that  purchases  the  asset 
      irrespective of whether the asset is a new asset or a used asset. 
       
      Illustration: 
      Facts:  B| Limited, a company incorporated under the Companies Act, acquired a second 
      hand machinery for Rs. 5,00,000 from C Ltd. As per the estimate of the C Ltd., the useful 




                                                                                                   Page 18 of 42 
 
                                                                                                              
                                                                                                              
 
      life  of  the  asset  when  it  was  newly  purchased  by  it  was  15  years  out  of  which  8  years 
      have already elapsed (duration for which machinery is used by the C Ltd.). B Limited, for 
      the  purpose  of  providing  depreciation  on  SLM  basis  under  Schedule  II,  estimates  that 
      the asset can be used for 10 years and the residual value is estimated to be nil.  
       
      Issue:  What  useful  life  of  such  second  hand  machinery  should  be  considered  by  the  B 
      Ltd. for providing depreciation? 
       
      Response:          In  this  case,  B  Limited  should  provide  for  depreciation  on  the  machinery 
      on  the  basis  of  useful  life  of  10  years  and  not  7  years  remaining  as  per  the  earlier 
      estimate of C Ltd. (15 years ­ 8 years). Therefore, depreciation expense to be recognised 
      in the statement of profit and loss for the year would be Rs. 50,000 (5,00,000/10 yrs.).  
 
Intangible Assets 
 
45.   The  Ministry  of  Corporate  Affairs  (MCA),  vide  its  notification  G.S.R.  237  (E)  dated March 
      31, 2014, made amendments to clause (ii) of paragraph (i) of Schedule II   with regard to 
      amortisation  of  intangible  assets.  Through  the  amendments,  the  MCA  provides  that 
      revenuebased  methodology  `may  be'  used  for  amortisation  of  intangible  assets  (Toll 
      Roads)  created  under  `Build,  Operate  and  Transfer'(BOT),  `Build,  Own,  Operate  and 
      Transfer(BOOT)' or any other form of public private partnership (PPP)route.  
       
46.   The words `may be' used in clause (ii) of paragraph (i) Schedule II indicates that revenue
      based amortisation as provided in Schedule II is optional and not mandatory. Moreover, 
      the  option  is  available  only  for  intangible  assets  arising  from  toll  road  projects. 
      Therefore,  a  company  can  follow  a  basis  other  than  revenuebased  amortisation  for 
      intangible  assets  arising  from  toll  road  projects.  Intangible  assets  other  than  those 
      arising from tollroads should be amortised in accordance with AS 26.    
       
      Illustration: 
      Facts:  B  Limited  is  a  company  engaged  in  various  projects  of  infrastructure 
      development.  B's  basic  business  model  is  to  enter  into  various  infrastructure 
      development  projects  with  the  Central  and  State  Governments  controlled  enterprises 
      under  Public  Private  Partnership  Model  (PPP).  During  the  year  201112,  B  Limited 
      entered  into  a  contract  with  the  State  Government  of  Haryana  for  developing  a  coal
      fired thermal power plant serving the states of Haryana, Delhi, Rajasthan and Punjab.  
       
      Issue:  At  the  yearend,  i.e.,  31st  March,  2015,  for  providing  amortisation  on  the 
      intangible  assets    arising  from  the  abovementioned  projects  for  developing  thermal 




                                                                                              Page 19 of 42 
 
                                                                                                                    
                                                                                                                    
 
      power  plant,  B  Limited  was  of  the  view  that  the  revenuebased  amortisation 
      methodology  as  permitted  by  the  Schedule  II  may  be  applied.  Whether  the  view  taken 
      by B Ltd. Is appropriate?  
       
      Response:  In  this  case,  use  of  revenuebased  amortisation  is  inappropriate  as  Schedule 
      II  permits  revenue  based  amortisation  only  for  intangible  assets  arising  from  toll  road 
      projects  and  not  from  any  other  infrastructure  projects  even  though  they  are  entered 
      into through PPP model, BOT or BOOT. 
 
Revaluation of Assets 
 
47.   Paragraph 1 of Part A of Schedule II  defines `depreciable amount' as: 
               
              "The  depreciable  amount  of  an  asset  is  the  cost  of  an  asset  or  other  amount 
              substituted for cost, less its residual value." 
       
48.   AS 6, also defines the term `depreciable amount' in the same way. The expression `other 
      amount  substituted  for  cost'  used  in  the  said  definitions  means  that  in  case  of  a 
      revalued  asset,  the  depreciable  amount  should  be  the  carrying  value  of  the  asset  after 
      revaluation (revalued amount).  
       
       
49.    Thus the definition of `depreciable amount' under Schedule II has been aligned with the 
      definition  of  `depreciable  amount'  under  AS  6.  Therefore,  Schedule  II  requires 
      depreciation  to  be  provided  on  historical  cost  or  the  amount  substituted  for  the 
      historical  cost.  Accordingly,  in  case  of  revaluation  of  an  asset,  a  company  should 
      recognise depreciation based on the revalued amount (substituted cost) of the asset.  In 
      accordance  with  paragraph  32  of  AS  10,  on  disposal  of  an  item  of  fixed  asset,  the 
      difference  between  net  disposal  proceeds  and  the  net  book  value  (carrying  amount) 
      should  be  charged  or  credited  to  the  statement  of  profit  and  loss.  However,  in  case  of 
      loss  on  sale of  fixed  asset,  if  such  loss  is  related  to  a  previously  recorded  increase  in  the 
      carrying  amount  of  the  asset  (revaluation  gain)  as  credit  to  revaluation  reserve  and 
      which  has  not  been  subsequently  reversed  or  utilised,  such  loss  should  be  first  charged 
      directly  to  that  revaluation  reserve,  and  any  remaining  balance  to  the  statement  of 
      profit and loss. However, some of the surplus may be transferred as the asset is used by 
      a  company.  In  such  a  case,  the  amount  of  the  surplus  transferred  would  be  the 
      difference  between  depreciation  based  on  the  revalued  carrying  amount  of  the  asset 
      and  depreciation  based  on  its  original  cost.  Transfers  from  revaluation  surplus  to  the 
      revenue reserves are not made through the statement of profit and loss. 




                                                                                                   Page 20 of 42 
 
                                                                                                                     
                                                                                                                     
 
       
50.   A  company  that  followed  the  policy  of  recouping  additional  depreciation  as  a  credit  to 
      the  statement  of  profit  and  loss,  with  Schedule  II  becoming  applicable  starts  recouping 
      additional  depreciation  on  account  of  revaluation  as  a  credit  to   revenue  reserves,  such 
      a  company  should  disclose  the  change  as  a  change  in  accounting  policy  in  accordance 
      with AS 5.  
 
Component Approach 
 
51.   As  per  note  4  of  Schedule  II "Useful  life  specified  in  Part  C  of  the  Schedule  is  for  whole 
      of the asset. 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."  As  per  the  amendment  dated 
      August 29, 2014 notified by the MCA, the said requirement shall be voluntary in respect 
      for  the  financial  year  commencing  on  or  after  the  April  1,  2014  and  mandatory  for 
      financial statements in respect of financial years commencing on or after April 1, 2015.  
      The above requirement is commonly known as `component  accounting'. Companies will 
      need  to  identify  and  depreciate  significant  components  with  different  useful  lives 
      separately.  The  component  approach  is  already  allowed  in  paragraph  8.3  of  the  current 
      AS  10.  Under  AS  10,  there  seems  to  be  a  choice  in  this  matter;  however,  Schedule  II 
      requires  application  of  component  accounting  mandatorily.  The  determination  as  to 
      whether  a  part  of  an  asset  is  significant  requires  a  careful  assessment  of  the  facts  and 
      circumstances. This assessment would include at a minimum:  
       
       Determine  the  threshold  value  to  determine  which  asset  requires 
             componentisation.   
       Threshold value in percentage of cost of component to the total cost of the asset 
       Proportion of useful life of that part as compared to the useful life of the asset 
       Potential impact on the total depreciation expenditure   
 
      Component  accounting  requires  a  company  to  identify  and  depreciate  significant 
      components  with  different  useful  lives  separately.  The  application  of  component 
      accounting  is  likely  to  cause  significant  change  in  the  measurement  of  depreciation  and 
      accounting  for  replacement  costs.  Currently,  companies  need  to  expense  replacement 
      costs  in  the  year  of  incurrence.  Under  component  accounting,  companies  will  capitalise 
      these  costs  as  a  separate  component  of  the  asset  and  decapitalise  the  carrying  amount 
      of  previously  recognised  component.  When  it  is  not  practicable  to  determine  the 
      carrying  amount  of  the  replaced  part,  the  cost  of  the  replacement  may  be  used  as  an 
      indication  of  what  the  cost  of  the  replaced  part  was  at  the  time  it  was  acquired  or 
      constructed.  
 
52.   As  component  accounting  was  hitherto  not  mandatory  in  India,  it  is  possible  that  the 
      separate  cost  of  each  significant  component  of  an  asset  is  not  available  in  the  books  of 




                                                                                                    Page 21 of 42 
 
                                                                                                           
                                                                                                           
 
      account. In order to determine the cost of such component the following criteria can be 
      used:  
      a)     Breakup cost provided by the vendor; 
      b)     Cost breakup given by internal/external technical expert;  
      c)     Fair Values of various components; or 
      d)     Current  replacement  cost  of  component  of  the  related  asset  and  applying  the 
             same basis on the historical cost of asset  
 
53.   A  company  is  required  to  apply  component  accounting  (if  appropriate)  for  all 
      depreciable fixed assets (existing or newly acquired) as at 1 April 2014 if a company opts 
      to  follow  it  voluntarily  and  as  at  1  April,  2015  mandatorily.  However,  if  the  carrying 
      amount  of  any  asset  is  lower  than  or  equal  to    the  estimated  residual  value  of  the 
      asset(s), company is not required to apply component accounting for such asset(s). 
          
       
54.   Schedule  II  requires  separate  depreciation  only  for  parts  of  an  item  of  tangible  fixed 
      asset having: 
        (i) Significant cost, and  
      (ii) Different useful lives from remaining parts of the asset.  
 
 

 
                           This portion has been left blank intentionally.
 

 

 

 

 

 

 

 

 

 

 

 

 




                                                                                            Page 22 of 42 
 
                                                                                                          
                                                                                                          
 
    Following  diagram  depicts  a  method  for  bifurcating  Tangible  Fixed  Assets  into  major 
    components  

                                     Apportionment in Parts 
 
 
 
    Part 1            Part 2       Part 3           Part 4        Part 5              Other 
                                                                                Insignificant parts
 
 
      Comparison of useful life and pattern of consumption 
               between identified components
 
 
 
      Aggregation of parts with the same useful life and the 
 
                 same pattern of consumption
 
 
 
      Component 1               Component              Component 3                    Remainder 
 
      (Part 1 and 3)             2 (Part 2)            (Part 4 and 5)              
 
 
    The  company  must  split  the  fixed  asset  into  various  identifiable  parts  to  the  extent 
    possible.  The  identified  parts  should  be  grouped  together  if  they  have  the  same  or 
    similar  useful  life  for  the  purpose  of  separate  depreciation.  Insignificant  parts  may  be 
    combined together in the remainder of the asset or with the principal asset.  
 
    For instance:  
 
    A Ship may be bifurcated into the following components ­  
         (i) Hull  
         (ii) Keel  
         (iii) Engine  
         (iv) Navigation system  
         (v) Major overhaul/ inspections  
         (vi) Other fit out assets  
          
    Identification  of  significant  parts  is  a  matter  of  judgment  and  decided  on  casetocase 
    basis. Identification of separate parts of an asset and determination of their useful life is 
    not  merely  an  accounting  exercise;  rather,  it  involves  technical  expertise.  Hence,  it  may 
    be  necessary  to  involve  technical  experts  to  determine  the  parts  of  an  asset,  wherever 
    appropriate.  
     




                                                                                           Page 23 of 42 
 
                                                                                                                 
                                                                                                                 
 
 Depreciation on Low Value Items 
 
55.   Note 8 to Schedule XIV to the Companies Act, 1956, stated as follows: 
       
                "8.     Notwithstanding  anything  mentioned  in  this  Schedule  depreciation  on 
                assets, whose actual cost does not exceed five thousand rupees, shall be provided 
                depreciation at the rate of hundred per cent 
       
                Provided  that  where  the  aggregate  actual  cost  of  individual  items  of  plant  & 
                machinery costing Rs. 5,000 or less constitutes more than 10 per cent of the total 
                actual  cost  of  plant  &  machinery,  rates  of  depreciation  applicable  to  such  items 
                shall be the rates as specified in Item II of the Schedule." 
        
56.   It  may  be  noted  that  Schedule  II  does  not  prescribe  any  such  requirement  to  provide 
      depreciation  at  the  rate  of  hundred  percent.  Therefore,  an  issue  may  arise  whether  the 
      earlier requirement of providing hundred percent depreciation on assets with value less 
      than rupees five thousand can still be followed or not.  
       
57.   In  this  regard,  it  may  be  noted  that  the  provisions  of  Schedule  XIV  permitting  100% 
      depreciation  of  the  cost  of  an  asset  having  individual  value  of  Rs.  5000/  or  less  was 
      based  on  practices  followed  by  the  companies  based  on  the  materiality  of  the  financial 
      impact  of  such  charge.  As  the  life  of  the  asset  is  a  matter  of  estimation,  the  materiality 
      of  impact  of  such  charge  should  be  considered  with  reference  to  the  cost  of  asset.  The 
      size of the company  will also be a factor to be considered for such policy. Accordingly, a 
      company  may  have  a  policy  to  fully  depreciate  assets  upto  certain  threshold  limits 
      considering materiality aspect in the year of acquisition 
       

Prorata Depreciation 
       
58.   Note  no.2  in  Schedule  II  prescribes  that  "where,  during  any  financial  year,  any  addition 
      has been made to any asset, or where any asset has been sold, discarded, demolished or 
      destroyed,  the  depreciation  on  such  assets  shall  be  calculated  on  a  pro  rata  basis  from 
      the date of such addition or, as the case may be, up to the date on which such asset has 
      been sold, discarded,  demolished  or  destroyed.".  The company  may  group  additions and 
      disposals  in  appropriate  time  period(s),  e.g.,  15  days,  a  month,  a  quarter  etc.,  for  the 
      purpose  of  charging  pro  rata  depreciation  in  respect  of  additions  and  disposals  of  its 
      assets keeping in view the materiality of the amounts involved. 
       




                                                                                                 Page 24 of 42 
 
                                                                                                                 
                                                                                                                 
 
Adoption of different methods for similar assets at different geographical 
locations  
 
59.      An  issue  may  arise,  whether  a  company  can  use  different  methods  for  depreciation  for 
         similar assets located at different locations. 
          
60.      As per the requirements of Schedule II and AS 6, it may be noted that the basic purpose 
         of charging depreciation is to allocate depreciable amount of an asset over its useful life. 
         As stated  in paragraph  6  of  this Guidance  Note,  for  the  purpose  of  estimating  useful life 
         of  an  asset,  a  company  should  consider  various  factors  given  in  AS  6  such  as  expected 
         physical  wear  and  tear,  obsolescence,  etc.  Therefore,  selection  of  a  method  of 
         depreciation  is  a  matter  of  judgement  by  the  management  considering  various  factors, 
         such  as,  type  of  asset,  the  nature  of  the  use  of  such  asset  and  circumstances  prevailing 
         in the business, to allocate the depreciable amount of an asset over its useful life so that 
         the  depreciation  method  best  reflects  the  way  the  asset  is  consumed,  i.e.,  depreciation 
         should  be  allocated  so  as  to  charge  a  fair  proportion  of  the  depreciable  amount  in  each 
         accounting period during the expected useful life of the asset . As per AS 6, the selection 
         of  a  method  depends  upon  the  facts  and  circumstances  of  the  case  and  thus,  the 
         company  should  select  the  most  appropriate  method  based  on  various  factors,  as 
         discussed above. 
          
61.      Different methods for similar assets at different geographical locations can only be used 
         if  the  said  methods  are  selected  based  on  the  factors  discussed  in  paragraph  52  above.  
         Otherwise,  the  use  of  different  methods  for  similar  assets  at  different  geographical 
         locations is not justified. 
          
      Disclosures  
       
62.      Apart  from  the  disclosures  required  under  the  accounting  standards,  Schedule  II 
         requires  disclosure  of  useful  life  and/or  residual  value,  if  they  are  different  from  those 
         specified under that Schedule. In this regard, following disclosures should be made: 
         (i)    Disclosure  of  assets  alongwith  their  useful  lives  where  different  from  those 
                specified  under  Schedule  II  including  where  the  useful  life  estimated  as  per 
                double/triple  shift  is  different  from  that  as  would  be  estimated  on  the  basis  of 
                increase  in  depreciation  by  50%  or  100%  in  case  of  double  shift  and  triple  shift 
                respectively of single shift based depreciation.   
         (ii)   The  fact  that  the  said  useful  lives/residual  values  are  supported  by  technical 
                advice.  




                                                                                                 Page 25 of 42 
 
                                                                                                      
                                                                                                      
 


       Transitional provisions & Effective Date
    63. This  Guidance  Note  will  be  applicable  for  accounting  periods  ..............*.  Any 
        cumulative  impact  (net  of  taxes)  due  to  its  applicability  should  be  recognised  in 
        revenue reserves and disclosed separately. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
               *Effective date of this Guidance Note will be decided in accordance with the 
               decision of the Council                              




                                                                                        Page 26 of 42 
 
                                                                                                     
                                                                                                     
 
 

                                                                                    Appendix A
                             SCHEDULE II (As Amended)
                     USEFUL LIVES TO COMPUTE DEPRECIATION

                                            PART `A'

1.      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.

2.     For the purpose of this Schedule, the term depreciation includes amortisation.

3.     Without prejudice to the foregoing provisions of paragraph 1,--

       (i)      The useful life of an asset shall not ordinarily be different from the useful life
       specified in part C and the residual value of an asset shall not be more than five per cent.
       of the original cost of the asset:


       Provided that where a company adopts a useful life different from what is specified in
       part C or uses a residual value different from the limit specified above, the financial
       statements shall disclose such difference and provide justification in this behalf duly
       supported by technical advice".


       (ii)   For intangible assets, the provisions of the accounting standards applicable for the
       time being in force shall apply, except in case of intangible assets (Toll Roads) created
       under Build, Operate and Transfer', `Build, Own, Operate and Transfer' or any other
       form of public private partnership route in case of road projects. Amortisation in such
       cases may be done as follows: -

       (a) Mode of amortization

               Amortisation Rate =           Amortisation Amount
                                                                         × 100
                                         Cost of Intangible Assets (A)

               Amortisation Amount

       = Cost of Intangible Assets (A)            Actual Revenue for the year (B)
                                            ×
                                                  Projected Revenue from Intangible Asset
                                                (till the end of the concession period) (C)




                                                                                       Page 27 of 42 
 
                                                                                                     
                                                                                                     
 

    (b) Meaning of particulars are as follows:-

           Cost of Intangible Assets (A)       = Cost incurred by the company in accordance with
                                               the accounting standards.

       Actual Revenue for the year (B)     =        Actual revenue (Toll Charges) received during
                                                    the accounting year.

       Projected Revenue from Intangible        =   Total projected revenue from the Intangible
       Asset (C)                                     Assets as provided to the project lender at the
                                                    time of financial closure/agreement.

     The amortization amount or rate should ensure that the whole of the coast of the intangible
     asset is amortised over the concession period.

     Revenue Shall be reviewed at the end of each financial year and projected revenue shall he
     adjusted to reflect such changes, if any, in the estimates as will lead to the actual collection
     at the end of the concession period.

    (c ) Example:-


    Cost of creation of Intangible Assets             :                      Rs. 500 Crores
    Total period of Agreement                         :                      20 Years
    Time used for creation of intangible Assets       :                      2 Years
    Intangible Assets to be amortised in              :                      18 Years

    Assuming that the Total revenue to be generated out of Intangible Assets over the period
    would be Rs. 600 Crores, in the following manner:-
                                                             Remarks
                Year No.                 Revenue (In Rs.
                                         Crores)
                Year 1                                 5     Actual
                Year 2                               7.5     Estimate*
                Year 3                                10     Estimate*
                Year 4                              12.5     Estimate*
                Year 5                              17.5     Estimate*
                Year 6                                20     Estimate*
                Year 7                                23     Estimate*
                Year 8                                27     Estimate*
                Year 9                                31     Estimate*
                Year 10                               34     Estimate*
                Year 11                               38     Estimate*
                Year 12                               41     Estimate*
                Year 13                               46     Estimate*




                                                                                       Page 28 of 42 
 
                                                                                                     
                                                                                                     
 
                   Year 14                            50    Estimate*
                   Year 15                            53    Estimate*
                   Year 16                            57    Estimate*
                   Year 17                            60    Estimate*
                   Year 18                           67.5   Estimate*
                                                                                             `*'
                   Total                             600
         will                                                                        be actual at
         the end of financial year

         Based on this the charge for first year would be Rs. 4.16 Crore (approximately) (i.e Rs.
         5/Rs. 600 × Rs. 500 Crores) which would be charged to profit and loss and 0.83% (i.e.
         Rs. 4.16 Crore/Rs. 500 Crore×100) is the amortisation rate for the first year.

         Where a company arrives at the amortisation amount in respect of the said Intangible
         Assets in accordance with any method as per the applicable Accounting Standards, it
         shall disclose the same."


                                            PART `B'

4.      The useful life or residual value of any specific asset, as notified for accounting
purposes by a Regulatory Authority constituted under an Act of Parliament or by the Central
Government shall be applied in calculating the depreciation to be provided for such asset
irrespective of the requirements of this Schedule.

                                            PART `C'

5.      Subject to Parts A and B above, the following are the useful lives of various tangible
assets:

Nature of assets Useful Life

I.     Buildings [NESD]
     (a) Buildings (other than factory buildings) RCC Frame Structure                       60 Years
     (b) Buildings (other than factory buildings) other than RCC Frame Structure            30 Years
     (c) Factory buildings                                                                  -do-
     (d) Fences, wells, tube wells                                                          5 Years
     (e) Others (including temporary structure, etc.)                                       3 Years

II. Bridges, culverts, bunders, etc. [NESD]                                                 30 Years

III. Roads [NESD]
   (a) Carpeted roads
        (i) Carpeted Roads-RCC                                                              10 Years
        (ii) Carpeted Roads-other than RCC                                                  5 Years
    (b) Non-carpeted roads                                                                  3 Years




                                                                                      Page 29 of 42 
 
                                                                                                    
                                                                                                    
 

IV. Plant and Machinery
 (i) General rate applicable to plant and machinery not covered
     Under special plant and machinery
     (a) Plant and Machinery other than continuous process plant not
         covered under specific industries                                                 15 Years
     (b) continuous process plant for which no special rate has been
         prescribed under (ii) below [NESD]                                                25 Years

    (ii) Special Plant and Machinery
         (a) Plant and Machinery related to production and exhibition of
             Motion Picture Films

           1. Cinematograph films--Machinery used in the production and
              exhibition of cinematograph films, recording and reproducing
              equipments, developing machines, printing machines, editing
              machines, synchronizers and studio lights except bulbs                       13 Years

           2. Projecting equipment for exhibition of films                                 -do-

       (b) Plant and Machinery used in glass manufacturing
           1. Plant and Machinery except direct fire glass melting furnaces --
               Recuperative and regenerative glass melting furnaces                        13 Years
           2. Plant and Machinery except direct fire glass melting furnaces --
               Moulds [NESD]                                                               8 Years
           3. Float Glass Melting Furnaces [NESD]                                          10 Years
       (c) Plant and Machinery used in mines and quarries--Portable
           underground machinery and earth moving machinery used in
           open cast mining [NESD]                                                         8 Years
       (d) Plant and Machinery used in Telecommunications [NESD]
           1. Towers                                                                        18 Years
           2. Telecom transceivers, switching centres, transmission and
               other network equipment                                                     13 Years
           3. Telecom--Ducts, Cables and optical fibre                                     18 Years
           4. Satellites                                                                   -do-
       (e) Plant and Machinery used in exploration, production and
           refining oil and gas [NESD]
           1. Refineries                                                                   25 Years
           2. Oil and gas assets (including wells), processing plant and facilities         -do-
           3. Petrochemical Plant                                                          -do-
           4. Storage tanks and related equipment                                          -do-
           5. Pipelines                                                                    30 Years




                                                                                      Page 30 of 42 
 
                                                                                              
                                                                                              
 
         6. Drilling Rig                                                             -do-
         7. Field operations (above ground) Portable boilers, drilling tools,
             well-head tanks, etc.                                                   8 Years
         8. Loggers                                                                  -do-
    (f) Plant and Machinery used in generation, transmission and distribution
         of power [NESD]
         1. Thermal/ Gas/ Combined Cycle Power Generation Plant                      40 Years
         2. Hydro Power Generation Plant                                             -do-
         3. Nuclear Power Generation Plant                                           -do-
         4. Transmission lines, cables and other network assets                      -do-
         5. Wind Power Generation Plant                                              22 Years
         6. Electric Distribution Plant                                              35 Years
         7. Gas Storage and Distribution Plant                                       30 Years
         8. Water Distribution Plant including pipelines                             -do-
    (g) Plant and Machinery used in manufacture of steel
         1. Sinter Plant                                                              20 Years
         2. Blast Furnace                                                            -do-
         3. Coke ovens                                                                -do-
         4. Rolling mill in steel plant                                              -do-
         5. Basic oxygen Furnace Converter                                           25 Years
    (h) Plant and Machinery used in manufacture of non-ferrous metals
         1. Metal pot line [NESD]                                                    40 Years
         2. Bauxite crushing and grinding section [NESD]                              -do-
         3. Digester Section [NESD]                                                  -do-
         4. Turbine [NESD]                                                           -do-
         5. Equipments for Calcination [NESD]                                        -do-
         6. Copper Smelter [NESD]                                                     -do-
         7. Roll Grinder                                                             40 Years
         8. Soaking Pit                                                              30 Years
         9. Annealing Furnace                                                         -do-
         10. Rolling Mills                                                           -do-
         11. Equipments for Scalping, Slitting , etc. [NESD]                         -do-
         12. Surface Miner, Ripper Dozer, etc., used in mines                        25 Years
         13. Copper refining plant [NESD]                                            -do-
    (i) Plant and Machinery 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 Years
         2. Other Equipments.                                                        15 Years
    (j) Plant and Machinery used in manufacture of pharmaceuticals and
      chemicals [NESD]
         1. Reactors                                                                 20 Years




                                                                                Page 31 of 42 
 
                                                                                                      
                                                                                                      
 
          2. Distillation Columns                                                             -do-
          3. Drying equipments/Centrifuges and Decanters                                      -do-
          4. Vessel/storage tanks                                                             -do-
     (k) Plant and Machinery used in civil construction
          1. Concreting, Crushing, Piling Equipments and Road Making Equipments              12 Years
          2. Heavy Lift Equipments--
          Cranes with capacity of more than 100 tons                                         20 Years
          Cranes with capacity of less than 100 tons                                         15 Years
          3. Transmission line, Tunneling Equipments [NESD]                                  10 Years
          4. Earth-moving equipments                                                         9 Years
          5. Others including Material Handling /Pipeline/Welding
          Equipments [NESD]                                                                  12 Years
     (l) Plant and Machinery used in salt works [NESD]                                       15 Years

V. Furniture and fittings [NESD]
     (i) General furniture and fittings                                                      10 Years
     (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.                                                             8 Years

VI. Motor Vehicles [NESD]
     1. Motor cycles, scooters and other mopeds                                              10 Years
     2. Motor buses, motor lorries, motor cars and motor taxies used in
        a business of running them on hire                                                   6 Years
     3. Motor buses, motor lorries and motor cars other than those used
        in a business of running them on hire                                                8 Years
     4. Motor tractors, harvesting combines and heavy vehicles                                -do-
     5. Electrically operated vehicles including battery powered or fuel
        cell powered vehicles                                                                8 Years

VII. Ships [NESD]
     1. Ocean-going ships
         (i) Bulk Carriers and liner vessels                                                 25 Years
         (ii) Crude tankers, product carriers and easy chemical carriers with or
               without conventional tank coatings.                                           20 Years
         (iii) Chemicals and Acid Carriers:
                (a) With Stainless steel tanks                                               25 Years
                (b) With other tanks                                                         20 Years
         (iv) Liquified gas carriers                                                         30 Years
         (v) Conventional large passenger vessels which are used for cruise




                                                                                        Page 32 of 42 
 
                                                                                                    
                                                                                                    
 
               purpose also                                                                -do-
        (vi) Coastal service ships of all categories                                        -do-
        (vii) Offshore supply and support vessels                                          20 Years
        (viii) Catamarans and other high speed passenger for ships or boats                 -do-
         (ix) Drill ships                                                                   25 Years
        (x) Hovercrafts                                                                    15 Years
        (xi) Fishing vessels with wooden hull                                              10 Years
        (xii) Dredgers, tugs, barges, survey launches and other similar ships
        used mainly for dredging purposes                                                  14 Years
     2. Vessels ordinarily operating on inland waters--
        (i) Speed boats                                                                    13 Years
        (ii) Other vessels                                                                 28 Years
VIII. Aircrafts or Helicopters [NESD]                                                      20 Years

IX.       Railways sidings, locomotives, rolling stocks, tramways and
           railways used by concerns, excluding railway concerns [NESD]                    15 Years
           X. Ropeway structures [NESD]                                                    15 Years
           XI. Office equipment [NESD]                                                      5 Years

XII. Computers and data processing units [NESD]
        (i) Servers and networks                                                           6 Years
        (ii) End user devices, such as, desktops, laptops, etc.                            3 Years

XIII. Laboratory equipment [NESD]
        (i) General laboratory equipment                                                   10 Years
        (ii) Laboratory equipments used in educational institutions                        5 Years

XIV. Electrical Installations and Equipment [NESD]                                         10 years

XV. Hydraulic works, pipelines and sluices [NESD]                                          15 Years


Notes.-

1.        "Factory buildings" does not include offices, godowns, staff quarters.

2.      Where, during any financial year, any addition has been made to any asset, or where any
asset has been sold, discarded, demolished or destroyed, the depreciation on such assets shall be
calculated on a pro rata basis from the date of such addition or, as the case may be, up to the
date on which such asset has been sold, discarded, demolished or destroyed.

3.     The following information shall also be disclosed in the accounts, namely:--
       (i)    depreciation methods used; and




                                                                                      Page 33 of 42 
 
                                                                                                       
                                                                                                       
 
       (ii)    the useful lives of the assets for computing depreciation, if they are different from
               the life specified in the Schedule.
4.     (a) Useful life specified in Part C of the Schedule is for whole of the asset and 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

       (b) The requirement under sub-paragraph (a) shall be voluntary in respect of the financial
       year commencing on or after the 1 st April, 2014 and mandatory for financial statements
       in respect of financial years commencing on or after the 1 st April, 2015."





5.     Omitted

6.      The useful lives of assets working on shift basis have been specified in the Schedule
based on their single shift working. Except for assets in respect of which no extra shift
depreciation is permitted (indicated by NESD in Part C above), if an 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 calculated on the basis of 100% for that period.

7.      From the date this Schedule 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 this
                   Schedule;
        (b)    after retaining the residual value, may be recognized in the opening balance of
               retained earnings where the remaining useful life of an asset is nil.

8.     ``Continuous process plant'' means a plant which is required and designed to operate for
twenty-four hours a day.


 

 

                                




                                                                                         Page 34 of 42 
 
                                                                                                          
                                                                                                          
 
                                                                                     Appendix B
                           MINISTRY OF CORPORATE AFFAIRS

                                        NOTIFICATION

                                  New Delhi, the 31st March, 2014

G.S.R.237 (E).__ In exercise of the powers conferred by sub-section (2) of Section 123 read
with sub-section (1) of Section 467 of the Companies Act, 2013 (18 of 2013), the Central
Government hereby makes the following alterations to schedule II to the said Act, namely:-

1.   In Schedule II,....

      (1.) in Part `A', in para 3, for sub-paragraphs (i) to (iii), the following sub-paragraphs
     shall be substituted, namely:-

           "(i) The useful life of an asset shall not be longer than the useful life specified in Part
           `C' and the residual value of an asset shall not be more than five per cent of the
           original cost of the asset:

           Provided that where a company uses a useful life or residual value of the asset which
           is different from the above limits, justification for the difference shall be disclosed in
           its financial statement.

           "(ii) For intangible assets, the provisions of the accounting standards applicable for
           the time being in force shall apply, except in case of intangible assets (Toll Roads)
           created under Build, Operate and Transfer', `Build, Own, Operate and Transfer' or
           any other form of public private partnership route in case of road projects.
           Amortisation in such cases may be done as follows: -

               (b)     Mode of amortization

           Amortisation Rate =                 Amortisation Amount
                                                                         × 100
                                         Cost of Intangible Assets (A)

        Amortisation Amount

= Cost of Intangible Assets (A)          Actual Revenue for the year (B)

                                    ×          Projected Revenue from Intangible Asset
                                               (till the end of the concession period) (C)


           (b) Meaning of particulars are as follows:-

           Cost of Intangible Assets (A)      = Cost incurred by the company in accordance with
                                              the accounting standards.




                                                                                         Page 35 of 42 
 
                                                                                                     
                                                                                                     
 

       Actual Revenue for the year (B)     =        Actual revenue (Toll Charges) received during
                                                    the accounting year.

        Projected Revenue from Intangible      =    Total projected revenue from the Intangible
        Asset (C)                                    Assets as provided to the project lender at the
                                                    time of financial closure/agreement.

     The amortization amount or rate should ensure that the whole of the coast of the intangible
     asset is amortised over the concession period.

     Revenue Shall be reviewed at the end of each financial year and projected revenue shall he
     adjusted to reflect such changes, if any, in the estimates as will lead to the actual collection
     at the end of the concession period.

(c ) Example:-

    Cost of creation of Intangible Assets            :                       Rs. 500 Crores
    Total period of Agreement                        :                       20 Years
    Time used for creation of intangible Assets      :                       2 Years
    Intangible Assets to be amortised in             :                       18 Years

    Assuming that the Total revenue to be generated out of Intangible Assets over the period
    would be Rs. 600 Crores, in the following manner:-

                                                                    Remarks
Year No.                            Revenue (In Rs. Crores)
Year 1                              5                               Actual
Year 2                              7.5                             Estimate*
Year 3                              10                              Estimate* 
Year 4                              12.5                            Estimate* 
Year 5                              17.5                            Estimate* 
Year 6                              20                              Estimate* 
Year 7                              23                              Estimate* 
Year 8                              27                              Estimate* 
Year 9                              31                              Estimate* 
Year 10                             34                              Estimate* 
Year 11                             38                              Estimate* 
Year 12                             41                              Estimate* 
Year 13                             46                              Estimate* 
Year 14                             50                              Estimate* 
Year 15                             53                              Estimate* 
Year 16                             57                              Estimate* 
Year 17                             60                              Estimate* 
Year 18                             67.5                            Estimate* 
Total                               600
`*' will be actual at the end of financial year.




                                                                                       Page 36 of 42 
 
                                                                                                       
                                                                                                       
 
Based on this the charge for first year would be Rs. 4.16 Crore (approximately) (i.e Rs. 5/Rs. 600
× Rs. 500 Crores) which would be charged to profit and loss and 0.83% (i.e. Rs. 4.16 Crore/Rs.
500 Crore×100) is the amortisation rate for the first year.

Where a company arrives at the amortisation amount in respect of the said Intangible Assets in
accordance with any method as per the applicable Accounting Standards, it shall disclose the
same."

     (2)       In Part `C', in para 5, in item IV, in sub-item (i), for clause (b), the following
     clause shall be substituted, namely:-

       "(b) continuous process plant for which no special rate has been prescribe         25 Years"
            under (ii) below [NESD]

     (3)       under the heading `Notes', appearing after Part `C', paragraph 5 shall be omitted.

2.   this notification shall come into force with effect from 01 April, 2014




                                                                         [F.No.A-17/60/2012-CL-V]

                                                                       RENUKA KUMAR, Jt. Secy.
                                




                                                                                         Page 37 of 42 
 
                                                                                                                
                                                                                                                
 
                                                                                         Appendix C
                          THE GAZETTE OF INDIA EXTRA ORDINARY
                             MINISTRY OF CORPORATE AFFAIRS
                                          NOTIFICATION
                                   New Delhi, the 29th August, 2014
G.S.R.627 (E).__ In exercise of the powers conferred by sub section (1) of Section 467 of the
Companies Act, 20132 (18 of 2013), the Central Government hereby makes the following
amendments further to amend schedule II of the said Act with effect from the date of publication
of this notification in the official Gazette, namely:-

1.    In Schedule II of the Companies Act, 2013,-

(a) in part `A', in paragraph 3, for sub-paragraph (i), the following sub-paragraph shall be
substituted, namely:-

     "(i)           The useful life of an asset shall not ordinarily be different from the useful life
            specified in part C and the residual value of an asset shall not be more than five per cent.
            of the original cost of the asset:

      Provided that where a company adopts a useful life different from what is specified in part C
      or uses a residual value different from the limit specified above, the financial statements
      shall disclose such difference and provide justification in this behalf duly supported by
      technical advice".

(b) after Part `C', under the heading Notes,-

       (i) for paragraph 4 the following paragraph shall be substituted namely:-

              "4 (a) Useful life specified in Part C of the Schedule is for whole of the asset and
              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

              (b) The requirement under sub-paragraph (a) shall be voluntary in respect of the
              financial year commencing on or after the 1 st April, 2014 and mandatory for financial
              statements in respect of financial years commencing on or after the 1 st April, 2015."

              (c) in paragraph 7, in sub-paragraph (b) for the words "shall be recognized", the
              words "may be recognized" shall be substituted.

                                                                             [F.No.A-17/60/2012-CL-V]

                                                                     AMARDEEP S. BHATIA, Jt. Secy.




                                                                                              Page 38 of 42 
 
                                                                                                  
                                                                                                  
 
Note: Schedule II of the Companies Act, 2013 came into force with effect from the 1st April,
2014 and was amended (with effect from 1st April, 2014) vide notification number S.O. 237 (E),
dated the 31st March, 2014. 




                                                                                 Page 39 of 42 
 

 
 
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