Statements of
Accounting Standards (AS 6) Revised
Depreciation Accounting
The following is the text of the revised
Accounting Standard (AS) 6, 'Depreciation Accounting', issued by
the Council of the Institute of Chartered Accountants of India.
Introduction
1. This Statement deals with depreciation
accounting and applies to all depreciable assets, except the following
items to which special considerations apply:—
(i) forests, plantations and similar
regenerative natural resources;
(ii) wasting assets including expenditure
on the exploration for and extraction of minerals, oils, natural
gas and similar non-regenerative resources;
(iii) expenditure on research and development;
(iv) goodwill;
(v) live stock.
This statement also does not apply to
land unless it has a limited useful life for the enterprise.
2. Different accounting policies for
depreciation are adopted by different enterprises. Disclosure of
accounting policies for depreciation followed by an enterprise is
necessary to appreciate the view presented in the financial statements
of the enterprise.
Definitions
3. The following terms are used in this
Statement with the meanings specified:
3.1 Depreciation is a measure
of the wearing out, consumption or other loss of value of a depreciable
asset arising from use, effluxion of time or obsolescence through
technology and market changes. Depreciation is allocated so as to
charge a fair proportion of the depreciable amount in each accounting
period during the expected useful life of the asset. Depreciation
includes amortisation of assets whose useful life is predetermined.
3.2 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.
3.3 Useful life is either (i)
the period over which a depreciable asset is expected to be used
by the enterprise; or (ii) the number of production or similar units
expected to be obtained from the use of the asset by the enterprise.
3.4 Depreciable amount of a depreciable
asset is its historical cost, or other amount substituted for historical
cost in the financial statements, less the estimated residual value.
Explanation
4. Depreciation has a significant effect
in determining and presenting the financial position and results
of operations of an enterprise. Depreciation is charged in each
accounting period by reference to the extent of the depreciable
amount, irrespective of an increase in the market value of the assets.
5. Assessment of depreciation and the
amount to be charged in respect thereof in an accounting period
are usually based on the following three factors:
(i) historical cost or other amount
substituted for the historical cost of the depreciable asset when
the asset has been revalued;
(ii) expected useful life of the depreciable
asset; and
(iii) estimated residual value of the
depreciable asset.
6. Historical cost of a depreciable
asset represents its money outlay or its equivalent in connection
with its acquisition, installation and commissioning as well as
for additions to or improvement thereof. The historical cost of
a depreciable asset may undergo subsequent changes arising as a
result of increase or decrease in long term liability on account
of exchange fluctuations, price adjustments, changes in duties or
similar factors.
7. The useful life of a depreciable
asset is shorter than its physical life and is:
(i) pre-determined by legal or contractual
limits, such as the expiry dates of related leases;
(ii) directly governed by extraction
or consumption;
(iii) dependent on the extent of use
and physical deterioration on account of wear and tear which again
depends on operational factors, such as, the number of shifts for
which the asset is to be used, repair and maintenance policy of
the enterprise etc.; and
(iv) reduced by obsolescence arising
from such factors as:
(a) technological changes;
(b) improvement in production methods;
(c) change in market demand for the
product or service output of the asset; or
(d) legal or other restrictions.
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.
9. Any addition or extension to an existing
asset which is of a capital nature and which becomes an integral
part of the existing asset is depreciated over the remaining useful
life of that asset. As a practical measure, however, depreciation
is sometimes provided on such addition or extension at the rate
which is applied to an existing asset. Any addition or extension
which retains a separate identity and is capable of being used after
the existing asset is disposed of, is depreciated independently
on the basis of an estimate of its own useful life.
10. Determination of residual value
of an asset is normally a difficult matter. If such value is considered
as insignificant, it is normally regarded as nil. On the contrary,
if the residual value is likely to be significant, it is estimated
at the time of acquisition/installation, or at the time of subsequent
revaluation of the asset. One of the bases for determining the residual
value would be the realisable value of similar assets which have
reached the end of their useful lives and have operated under conditions
similar to those in which the asset will be used.
11. The quantum of depreciation to be
provided in an accounting period involves the exercise of judgement
by management in the light of technical, commercial, accounting
and legal requirements and accordingly may need periodical review.
If it is considered that the original estimate of useful life of
an asset requires any revision, the unamortised depreciable amount
of the asset is charged to revenue over the revised remaining useful
life.
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 straightline
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.
13. The statute governing an enterprise
may provide the basis for computation of the depreciation. For example,
the Companies Act, 1956 lays down the rates of depreciation in respect
of various assets. Where the management's estimate of the useful
life of an asset of the enterprise is shorter than that envisaged
under the provisions of the relevant statute, the depreciation provision
is appropriately computed by applying a higher rate. If the management's
estimate of the useful life of the asset is longer than that envisaged
under the statute, depreciation rate lower than that envisaged by
the statute can be applied only in accordance with requirements
of the statute.
14. Where depreciable assets are disposed
of, discarded, demolished or destroyed, the net surplus or deficiency,
if material, is disclosed separately.
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 recomputation
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.
16. Where the historical cost of an
asset has undergone a change due to circumstances specified in para
6 above, the depreciation on the revised unamortised depreciable
amount is provided prospectively over the residual useful life of
the asset.
Disclosure
17. The depreciation methods used, the
total depreciation for the period for each class of assets, the
gross amount of each class of depreciable assets and the related
accumulated depreciation are disclosed in the financial statements
alongwith the disclosure of other accounting policies. The depreciation
rates or the useful lives of the assets are disclosed only if they
are different from the principal rates specified in the statute
governing the enterprise.
18. In case the depreciable assets are
revalued, the provision for depreciation is based on the revalued
amount on the estimate of the remaining useful life of such assets.
In case the revaluation has a material effect on the amount of depreciation,
the same is disclosed separately in the year in which revaluation
is carried out.
19. A change in the method of depreciation
is treated as a change in an accounting policy and is disclosed
accordingly.
ACCOUNTING STANDARD
(The Accounting Standard comprises paragraphs
20–29 of this Statement. The Standard should be read in the context
of paragraphs 1–19 of this Statement and of the 'Preface to the
Statements of Accounting Standards'.)
20. The depreciable amount of a depreciable
asset should be allocated on a systematic basis to each accounting
period during the useful life of the asset.
21. The depreciation method selected
should be applied consistently from period to period. A change from
one method of providing depreciation to another should be 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 should be recalculated
in accordance with the new method from the date of the asset coming
into use. The deficiency or surplus arising from retrospective recomputation
of depreciation in accordance with the new method should be 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 should
be charged in the statement of profit and loss. In case the change
in the method results in surplus, the surplus should be credited
to the statement of profit and loss. Such a change should be treated
as a change in accounting policy and its effect should be quantified
and disclosed.
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.
23. 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 unamortised depreciable amount should be charged over the revised
remaining useful life.
24. Any addition or extension which
becomes an integral part of the existing asset should be depreciated
over the remaining useful life of that asset. The depreciation on
such addition or extension may also be provided at the rate applied
to the existing asset. Where an addition or extension retains a
separate identity and is capable of being used after the existing
asset is disposed of, depreciation should be provided independently
on the basis of an estimate of its own useful life.
25. Where the historical cost of a depreciable
asset has undergone a change due to increase or decrease in long
term liability on account of exchange fluctuations, price adjustments,
changes in duties or similar factors, the depreciation on the revised
unamortised depreciable amount should be provided prospectively
over the residual useful life of the asset.
26. Where the depreciable assets are
revalued, the provision for depreciation should be based on the
revalued amount and on the estimate of the remaining useful lives
of such assets. In case the revaluation has a material effect on
the amount of depreciation, the same should be disclosed separately
in the year in which revaluation is carried out.
27. If any depreciable asset is disposed
of, discarded, demolished or destroyed, the net surplus or deficiency,
if material, should be disclosed separately.
28. The following information should
be disclosed in the financial statements:
(i) the historical cost or other amount
substituted for historical cost of each class of depreciable assets;
(ii) total depreciation for the period
for each class of assets; and
(iii) the related accumulated depreciation.
29. The following information should
also be disclosed in the financial statements alongwith the disclosure
of other accounting policies:
(i) depreciation methods used; and
(ii) depreciation rates or the useful
lives of the assets, if they are different from the principal rates
specified in the statute governing the enterprise.
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