Analysis of Depreciation

Transcription

1 Analysis of Depreciation

2 Comparison Particulars Schedule II Schedule XIV Depreciation and Depreciable amount Depreciation model Defined Useful life regime Not defined Rate regime Useful life Defined Not defined Shiftbased depreciation Useful lives determinedon single shift basis Componentisation Mandatory Assets costing less than Rs 5,000 No such concept Separaterates provided No specific reference 100% depreciate

3 Analysis of Schedule II Part -A: Definitions Depreciation is Systematic allocation of Depreciable amount over Useful life Depreciable amount is cost of asset less residual value Useful life Period over which asset is expected to be available for use or Number of production units to be obtained Useful life followed shall not be longer than useful life given in Part -C Residual value shall not be more than 5% of cost of the asset Part - B : Statutory corporations to follow rates as per their respective statue Part -C: Useful lives of various tangible assets

4 FAQ -Useful life 1. Can a company follow a longer useful life and higher residual value than that specified in Schedule II? 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 5% of the original cost of the asset If useful life or residual value is different from the above limits, justification for the difference shall be disclosed in its financial statement If not disclosed consider modification of report as appropriate Non compliance with laws and regulations Take cognizance of AS -6

5 FAQ -Compenentisation 2. What are the requirement of componentisation? Separation of an asset into its significant components is mandated in Schedule II aims for fair measurement of depreciation charge Cost of the component should be significant to the total cost AND Useful life should be different from remaining assets Involves technical estimation and ascertainment of element of cost Assessment required for all existing assets as of April 1, 2014 AS 10 and AS 6 provide limited guidance on compenentisation Some examples: I. lining of a blast furnace replaced periodically II. buildings no longer include culverts, wells and tube wells

6 FAQ -Compenentisation 3. How do we as auditors ensure that Compenentisation of assets is done correctly? Identification of significant component requires technical knowledge Look for components that undergo major inspections or overhauls at regular intervals Engage plant s engineering and maintenance personnel Suggest companies on formulating compenentisation policy keeping reasonable thresholds in mind Consider engaging technical expert Take cognizance of SA 620

7 FAQ -Transitional Provision 4. Financial year end of a company is December 31, 2014, would the provisions of schedule II be applicable? Circular 8/2014 -clarifies for financial year that commenced before April 1, 2014 provisions of 1956 Act applies Hence follow existing accounting policy as per the 1956 Act 5. Remaining useful life of a tangible asset is Nil, as at the date of transition i.e. April 1, What would be the treatment as per Schedule II? Carrying value of the asset net of residual value, if any, should be recognised in the retained earnings as of that date Treatment applies even if retained earnings is negative

8 FAQ -Depreciation Computation 6. When the estimated useful life of an asset is changed, should the depreciation be charged prospectively or retrospectively? Charge depreciation prospectively over the remaining useful life Apply method of depreciation followed by the company 7. What are the provisions relating to assets working on double shift or triple shift basis? Useful life given in Part C assumes single shift working Double shift - increase depreciation by 50% Triple shift increase depreciation by 100% Take note of number days for which the company has worked double shift and triple shift

9 Impact Analysis Overall, many companies may need to charge higher depreciation because of pruning of useful lives. Impacts profits and EPS Application of component accounting is likely to cause change in accounting for replacement cost Transitional provision requiring remaining carrying value to be depreciated over remaining useful life can provide harsh outcomes Consequential effect would be felt on items dependent on profits buy back limit computation managerial remuneration net worth computations

10 Recommend Educate clients - Schedule II of the Act Notification G.S.R. 237 (E) dated March 31, 2014 Circular 8/2014 dated April 4, 2014 Suggestions on updating the Fixed assets register Provide technical guidance on determination of useful life and compenentisation and framing a policy Consider making presentation on Companies Act 2013 to the Audit committee Suggest clients on revisiting the loan agreements, since loan covenants are based on financial statements and profitability

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