Transcript
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
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