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First Edition : February 2015
Committee/Department : Corporate Laws & Corporate Governance Committee
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Keeping in view the changing economic environment as well as the growth of
our economy, the Companies Act, 2013 was enacted to improve corporate
governance and to further strengthen regulations for the companies. The Act
has introduced some new concepts in the Indian context which are not only
remarkable but also setting a tone for making our Law at par with the best
International Standards and Practices. Further, the Act requires companies
to compute the depreciation in accordance with the Schedule II which
provides useful lives to compute the depreciation.
The Corporate Laws & Corporate Governance Committee (CL&CGC) of the
Institute of Chartered Accountants of India (ICAI) has taken the initiative of
bringing out an Application Guide on the Provisions of Schedule II to the
Companies Act, 2013 to provide application guidance to the members of the
profession for implementation of the requirements of Schedule II as it would
be required for preparation of financial statements.
I appreciate the Corporate Laws & Corporate Governance Committee (CL &
CGC) in bringing this publication which is so important for our members. I
extend my sincere appreciation to CA S. Santhanakrishnan, Chairman,
CL&CGC, to bring out this timely and very useful publication and the Study
Group under the convenorship of CA. Dhinal Shah, Member of CL & CGC,
for their efforts, deliberations and in-depth study to bring out this Application
I am confident that this publication would be of great help to the members.
New Delhi CA. K. Raghu
February 5, 2015 President, ICAI
The Companies Act, 2013 ushers a change for corporate environment and
corporate democracy. The Act seeks to consolidate and amend the law
relating to the companies taking into consideration best global practices and
emerging Indian perspectives.
The provisions governing charge of depreciation in the erstwhile Schedule
XIV to the Companies Act, 1956 have been replaced with Schedule II to the
Companies Act 2013. To facilitate members of the profession understand the
requirements for implementation of Schedule II, the Corporate Laws &
Corporate Governance Committee has brought out Application Guide on
Provisions of Schedule II to the Companies Act, 2013.
I am thankful to CA. K. Raghu, President of ICAI and CA. Manoj Fadnis,
Vice-President of ICAI for their encouragement in bringing out this
publication. I also thank CA. Nilesh Vikamsey, the Vice- Chairman of the
Committee for his valuable suggestions. Further, I thank all the colleagues in
the Committee for their inputs and comments.
CA. Dhinal Shah, Member of CL & CGC, and the Convenor of the Study
Group with six members CA. Suresh Yadav, CA. Pavan Jain, CA. Ranjiv
Loddha, CA. Himanshu Kishnadwala, CA. Bharat Zinzuvadia, CA. Santosh
Aggarwal deserves special compliments for their extensive work and time to
bring out this Application Guide.
The Secretariat to the Committee (comprising CA. Sarika Singhal and Ms. S.
Rita) also deserves appreciation for their effort in working on this project.
I sincerely believe that the members of the profession and the corporates will
find this publication very useful.
5th February, 2015 CA. S. Santhanakrishnan
Corporate Laws & Corporate Governance Committee
S. Contents Page
1. Introduction 1
2. Objective 2
3. Scope 2
4. Shift from Rate based Guidance to Useful Life 2
5. Assessment of Useful Life and Residual Value 5
6. Useful Life or Residual Value governed by other Regulatory 7
7. Depreciation for Intangible Assets 7
8. Component Accounting 8
9. Continuous process plane 12
10. Double/triple shift working 12
11. Transitional Provision under Schedule II 13
12. Charging of depreciation in case of revaluation of Assets 14
13. Practical Examples 15
14. Annexure A - Schedule II to the Companies Act, 2013 23
15. Annexure B - Schedule XIV to the Companies Act, 1956 32
16. Annexure C - Circulars and Notifications related to 45
Schedule II issued by MCA so far
1. The Council of the Institute of Chartered Accountants of India has
issued Accounting Standard (AS) 6 on `Depreciation Accounting'. This
Standard lays down general principles of accounting for depreciation
applicable to all entities. As such, the Standard is also applicable to
companies in all matters where there are no specific requirements under the
Companies Act. AS 6 also provides that the statute governing an enterprise
may provide the basis for computation of depreciation.
The Companies Act, 2013 requires companies to compute the depreciation in
accordance with the Schedule II to the Companies Act which provides useful
lives to compute the depreciation. Accordingly, provisions governing charge
of depreciation in the erstwhile Schedule XIV to the Companies Act, 1956
have been replaced with Schedule II to the Companies Act, 2013.
2. Overview of some of the key changes in the Schedule II to the
Companies Act, 2103 as compared to erstwhile Schedule XIV to the
Companies Act, 1956 are as follows:
Schedule II prescribes indicative useful lives of various assets instead
of Straight Line Method (SLM)/ Written Down Value (WDV) rates for
Useful lives prescribed for tangible assets only
No life prescribed for intangible assets. Notified accounting standard to
govern the same
Depreciation is systematic allocation of the depreciable amount of an
asset over its useful life.
The depreciable amount of an assets is the cost of an asset or other
amount substituted for cost, less its residual value
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 of
Companies Act, 1956 does not include such requirement.
Companies are allowed to follow different useful lives/residual value if
an appropriate justification is given supported by technical advice.
Component accounting and useful life of a significant part 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 of the Companies
No reference to depreciation on low value assets.
3. The subject of depreciation has always been a matter of crucial
importance for the purpose of true and fair determination of the operating
results of an entity and the depiction of its financial position through its
statement of profit and loss and the balance sheet, respectively.
In case of companies, some new issues have arisen in this regard because
of the introduction of Schedule II to the Companies Act, 2013. With a view to
provide an authoritative position of the ICAI on the issues arising out of the
said amendment in this regard, ICAI has brought out this Application Guide
on the Provisions of Schedule II to the Companies Act, 2013.
4. This application guide includes provisions of the Companies Act and
Schedule II relating to depreciation and provides application guidance for
implementing the requirements of the Schedule II.
5. This application guide is applicable to all companies for preparation of
its financial statements commencing on or after April 1, 2014.
ICAI had issued "Guidance Note on Accounting for Depreciation in
Companies" and "Guidance note on Some Important Issues Arising from the
Amendment to Schedule XIV to the Companies Act, 1956" in past. These
guidance notes will continue to also apply to the extent applicable post
implementation of Schedule II of the Companies Act, 2013 and this
application guide provides clarifications and examples for issues arising on
implementation of Schedule II.
Shift from Rate based guidance to Useful Life
6. Schedule II of the Companies Act and AS 6 state that 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.
The methods of depreciation which are generally followed by the Companies
include straight-line method, the diminishing balance method (Written Down
Value method) and the units of production method. The method used is
selected on the basis of the expected pattern of consumption of the expected
future economic benefits embodied in the asset and is applied consistently
from period to period, unless there is a change in the expected pattern of
consumption of those future benefits.
7. AS 6 defines Depreciable assets as follows:
Depreciable assets are assets which (i) are expected to be used during more
than one accounting period; and (ii) have a limited useful life; and (iii) are
held by an enterprise for use in the production or supply of goods and
services, for rental to others, or for administrative purposes and not for the
purpose of sale in the ordinary course of business.
8. Further, In Schedule II originally notified on March 27, 2014, all
companies were divided into three classes.
Class I basically included companies which may eventually apply Ind-
AS. These companies were permitted to adopt a useful life or residual
value, other than those prescribed under the schedule, for their assets,
provided they disclose justification for the same.
Class II covered companies or assets where useful lives or residual
value are prescribed by a regulatory authority constituted under an act
of the Parliament or by the Central Government. These companies will
use depreciation rates/useful lives and residual values prescribed by
the relevant authority.
Class III covered all other companies. For these companies, the useful
life of an asset will not be longer than the useful life and the residual
value will not be higher than that prescribed in Schedule II.
Pursuant to an amendment to Schedule II notified on March 31, 2014-,
distinction between class (i) and class (iii) has been removed. Rather,
the provision now reads as under:
"The useful life of an asset shall not ordinarily 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."
9. In accordance with the above amendments to the Schedule II of the
Companies Act, 2013, all companies now will have an option of depreciating
assets over their useful life which could be different from the useful life
prescribed in the Schedule II. Also, the residual value of the assets could
also be different from the five percent stated in the Schedule II. In case the
Company uses a different useful life (higher or lower) or a residual value of
more than five percent, then it will have to disclose such difference and
provide justification in this behalf in the financial statements. Such
justification should be supported by technical advice.
10. Schedule XIV of the old Companies Act prescribed Depreciation rates
to be applied under SLM and WDV methods for different class of assets.
Accounting Standard (AS) 6 "Depreciation Accounting" states that the
statute governing an enterprise may provide the basis for computation of the
depreciation. The depreciation rates prescribed under the Schedule XIV was
the minimum rates, and, a company was not permitted to charge depreciation
at rates lower than those specified in the Schedule. If, however, on the basis
of bona fide technological evaluation, higher rates of the depreciation were
justified, it may have provided for with the proper disclosure by way of a note
forming part of the financial statements.
11. As Accounting Standard 6 states that depreciation rates prescribed
under the statute are minimum, if management's estimate of the useful life of
an asset is shorter than that envisaged under the statute, depreciation is
computed by applying the higher rate. The requirements of the Schedule II
and AS 6 is explained with simple examples:
The management has estimated the useful life of an asset to be 10
years. The life envisaged under the Schedule II is 12 years. In this
case, AS 6 requires the company to depreciate the asset using 10
year life only. In addition, Schedule II requires disclosure of
justification for using the lower life. The company cannot use 12 year
life for depreciation.
The management has estimated the useful life of an asset to be 12
years. The life envisaged under the Schedule II is 10 years. In this
case, the company has an option to depreciate the asset using either
10 year life prescribed in the Schedule II or the estimated useful life,
i.e., 12 years. If the company depreciates the asset over the 12 years,
it needs to disclose justification for using the higher life. The company
should apply the option selected consistently.
Similar position will apply for the residual value. The management has
estimated that AS 6 life of an asset and life envisaged in the Schedule
II is 10 years. The estimated AS 6 residual value of the asset is nil.
The residual value envisaged under the Schedule II shall not be more
than 5%. In this case, AS 6 depreciation is the minimum threshold.
The company cannot use 5% residual value. In addition, Schedule II
requires disclosure of justification only in case residual value exceeds
5% of the cost.
Alternatively, let us assume that the management has estimated AS 6
residual value of the asset to be 10% of the original cost, as against
5% value envisaged in the Schedule II. In this case, the company has
an option to depreciate the asset using either 5% residual value
prescribed in the Schedule II or the estimated AS 6 residual value, i.e.,
10% of the original cost. If the company depreciates the asset using
10% estimated residual value, it needs to disclose justification for
using the higher residual value. The company should apply the option
Assessment of useful life and residual value
12. In accordance with the Schedule II, if the company uses a different
useful life or a residual value of more than 5%, it is required to disclose the
same in the financial statements and provide justification duly supported by
the technical advice. Hence, determination of useful life is a matter of
judgement and may be decided on a case to case basis. It is not merely an
accounting exercise; rather, it involves technical expertise. Hence, the
Companies will have to necessarily involve technical experts to determine
the useful life of the asset.
13. As per Schedule II, useful life is either (i) the period over which a
depreciable asset is expected to be used by an entity; or (ii) the number of
production or similar units expected to be obtained from the use of the asset
by the entity. Similar definition of useful is also mentioned in AS 6.
14. 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.
15. As a general principle, the following factors shall be considered in
determining the useful life of an asset
(a) expected usage of the asset. Usage is assessed by reference to the
asset's expected capacity or physical output.
(b) expected physical wear and tear, which depends on operational
factors such as the number of shifts for which the asset is to be used
and the repair and maintenance programme, and the care and
maintenance of the asset while idle.
(c) technical or commercial obsolescence arising from changes or
improvements in production, or from a change in the market demand
for the product or service output of the asset. Expected future
reductions in the selling price of an item that was produced using an
asset could indicate the expectation of technical or commercial
obsolescence of the asset, which, in turn, might reflect a reduction of
the future economic benefits embodied in the asset.
(d) legal or similar limits on the use of the asset, such as the expiry dates
of related leases.
The useful life of an asset is defined in terms of the asset's expected utility to
the entity. The asset management policy of the entity may involve the
disposal of assets after a specified time or after consumption of a specified
proportion of the future economic benefits embodied in the asset. Therefore,
the useful life of an asset may be shorter than its economic life based on the
management's intention. This presumption can only be overcome when the
facts and circumstances clearly indicate otherwise. The estimation of the
useful life of the asset is a matter of judgement based on the experience of
the entity with similar assets.