AS – 6DEPRECIATION ACCOUNTING

-SUSMITA PATRA

INTRODUCTIONFIXED ASSETS – Assets meant to

be used in the business for production of goods and services during a period longer than a year.

Cost of a fixed asset is spread over its expected useful life through depreciation.

DEPRECIATIONAS – 6 deals with depreciation.It focuses on measuring the cost

and depreciable amount of fixed asset, calculation and accounting treatment of annual depreciation.

DEPRECIATION represents the decline in the value of FA due to wear and tear, usage, obsolescence, etc.

AS – 6 APPLICABILITY

Deals with depreciation accounting and applies to all depreciable assets except:Forest, plantations & natural

resourcesWasting assetsExpenditure on R&DGoodwill & other intangible

assetsLive stock

DEPRECIATIONDEFINITION- measure of 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.

Significant role in determining and presenting the financial position and results of operations of a company.

Charged in each accounting period.

CONT..CALCULATION OF DEPRECIAITIONOn the basis of :Historical cost / Revalued figure of assetExpected useful life of depreciable assetEstimated residual value of depreciable

asset / scrap valueFormula cost –scrap value at the end of useful life estimated useful life (no. of years)

DEPRECIABLE ASSETThose which are :Expected to be used for more

than one accounting year.Have a limited useful life.Are held by an enterprise for

production/supply of goods and services, rental and administrative purposes (not for sale in ordinary course of business.

CONT..HISTORICAL COST OF DEPRECIABLE ASSETS :Cost spent in connection with its

acquisition, installation & commissioning as well as additions and improvements.

It may change due to :• Increase/decrease in long term liability• Price adjustment• Change in duties• Revaluation of depreciable assets• Other similar factors

USEFUL LIFE OF DEPRECIABLE ASSET

Period over which a depreciable asset is expected to be used by the enterprise.

Number of productions or similar units expected to be obtained from the use of the asset by the enterprise.

CONT...FACTORS FOR ESTIMATION OF USEFUL LIFE :Pre determined by contractual or legal

limitsDirectly governed by extractions or

consumptionDepends on extent of useObsolescence

Difficult to estimate

DEPRECIABLE AMOUNTIt is the historical cost or other

amount in substitution for in the financial statements, less the estimated residual value.

Allocated over the estimated useful life of depreciable assets.

ADDITION / EXTENSION TO AN EXISTING ASSETIntegral part- capital nature-

depreciated over remaining useful life of asset- same rate of depreciation.

Not an integral part- depreciated over its own estimated useful life.

ESTIMATED RESIDUAL VALUE OF DEPRECIABLE

ASSETSDifficult to estimateEstimated at the end of its

useful lifeIf insignificant- nilSignificant- estimated at time of

acquisition/installationBasis- realizable value of similar

assets which have reached their end of useful life

QUANTUM OF DEPRECIATION

Involves exercise of judgment by management in purview of-• Technical, commercial, accounting and legal requirements

Need periodical review

CHANGE IN ESTIMATED USEFUL LIFE

Outstanding depreciable amount on the effective date of change should be allocated over the revised remaining useful life of the asset

For E.g. - Asset amount- 100 lakhsuseful life- 10 years

end of 5th year useful life re-estimated to 7 years..Charges SLM of depreciation. Calculate depreciation charged from 6th year?

METHODS OF DEPRCIATION

STRAIGHT LINE METHOD (SLM)Equal amount of depreciation

charged each year during the estimated useful life of asset

Based on three factors• Cost of fixed asset• Estimated scrap value• Estimated useful life

CONT..Formula of annual depreciation= Cost of FA- Estimated Resale value No. of years of useful life

(Cost – Residual value) × Rate of depreciation

Rate of depreciation is the % of useful life that is consumed in a single accounting period

100%

CONT..REDUCING BALANCE METHODFixed % of depreciation applied each

year to the reducing un depreciated balance of the cost of the FA to calculate depreciation

1st year- same % charged on cost of fixed asset2nd and later years- same % charged on

reduced un depreciated balance of the cost of fixed asset.

Also known as Written Down Value Method (WDV)

CONT..Estimation of rate of depreciation

r=Where, r= rate of depreciation

n= useful life of years c= cost of fixed asset

Closing balance of a year becomes the opening balance of next year on which depreciation is calculated.

SELECTION OF APPROPRIATE METHOD

OF DEPRECIATIONIt depends on :

◦Type of asset◦Nature of the use of asset◦Circumstances prevailing in the business

A combination of one or more method is also sometimes used.

GOVERNING STATUTE & DISCARDED ASSETS

The statute governing an enterprise may provide the basis for computation of the depreciation

When the depreciable assets are disposed off, discarded, demolished or destroyed the net surplus/deficiency, if material is disclosed properly

CHANGES IN DEPRECIATION

METHODMethod of depreciation is

consistently applied to provide comparability of results of the operations of the enterprise

Change of method can be done in following conditions◦For compliance of statute◦For compliance of accounting

standards◦For more appropriate presentation of

FS

CONT..Procedure to be followed:

• Depreciation recomputed applying new method from date of acquisition till date of change of method

• Difference of depreciation between new method and old method- surplus/deficiency

• If surplus- Cr. To P/l account under head “depreciation written back”

• If deficiency- charged to P/l account

Should be quantified and disclosed

CHANGE IN HISTORICAL COST

Due to exchange in variation on long term foreign liability, price adjustment and change in duties, etc.

Increase/decrease in amount of historical cost is +/- from the outstanding WDV on the date of change

Depreciation will be provided on revised WDV over remaining useful life of asset

In case of revaluation depreciation is charged on the revalued figure on remaining useful life of assets.

DISCLOSURESTotal cost, total depreciation,

accumulated depreciation of each class of assets

Historical cost/ revalued costOther accounting policies and

depreciation methodsDepreciation rates and useful life

of assets if they are different from the principal rates specified in governing statute

CONT..In case of revaluation of fixed

asset, depreciation is charged on the revalued asset on the basis of remaining useful life of such asset & incase it has any material effect on the amount of depreciation the same is disclosed separately in the year in which it is disclosed.

A change in the method of depreciation is treated as a change in the accounting policy & is disclosed separately.

SIGNIFICANT DIFFERENCES

BETWEEN AS- 6, IFRS/IAS & US GAAPDepreciation on revalued value of assets

◦AS-6 - allows◦US GAAP- prohibits◦ IAS- 16- allows fair value accounting

Change in depreciation method◦AS-6 – treated as change in accounting

policy◦ IAS-16 & US GAAP- treated as change in

estimate