ICAI’s Guidance Note on “Depreciation Accounting” by Companies as per Schedule II to the Companies Act, 2013
Accounting for depreciation is generally a significant matter for the purpose of true and fair determination of the operating results of a company as reflected in its statement of profit and loss as well as its financial position as depicted in its balance sheet.
Though Accounting Standard (AS) 6, Depreciation Accounting has already been issued by the ICAI, in the case of companies, some issues have arisen due to the practical application of Schedule II to the Companies Act, 2013, in the context of AS 6.
To solve issues arising out of Schedule II to the Companies Act, 2013, the ICAI has formulated Guidance Note on Accounting for Depreciation in Companies in the context of Schedule II to the Companies Act, 2013.
The guidance note establishes uniform accounting principles for accounting of depreciation as per Schedule II to the Companies Act, 2013. Also it provides guidance on multiple shift depreciation, revaluation of assets, as well as component approach besides providing guidance on estimation of residual value, depreciation on low value items, pro rata depreciation etc. Few illustrations have also been included with view to provide guidance on application of the principles provided in the Guidance Note.
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.
It may be noted that ICAI had issued Exposure Draft of the ‘Guidance Note on Some Important Issues Arising from Schedule II to the Companies Act, 2013’ on 9 Nov., 2015 inviting comments / suggestions from stakeholders. Accordingly, the above Guidance Note has been issued by the ICAI.