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AS-6

DepreciationAccounting

Chapter-3

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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 obsolescencethrough technology and marketchanges.

Depreciation is allocated so as tocharge a fair proportion of thedepreciable amount in eachaccounting period during theexpected useful life of the asset.

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Whether Every Asset isSubject to depreciation

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 goodsand services, for rental to others, or

for administrative purposes and notfor the purpose of sale in the ordinarycourse of business.

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Computation Assessment of depreciation and the amount

to be charged in respect thereof in anaccounting period are usually based on thefollowing three factors:

(i) historical cost or other amountsubstituted for the historical cost of thedepreciable asset when the asset has beenrevalued;

(ii) expected useful life of the depreciableasset; and

(iii) estimated residual value of thedepreciable asset.

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Methods There are several methods of

allocating depreciation over theuseful life of the assets. Thosemost commonly employed inindustrial and commercialenterprises are the straightline

method and the reducing balancemethod.

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Which Method to Apply? The management of a business

selects the most appropriatemethod(s) based on variousimportant factors e.g.,

(i) type of asset, (ii) the nature of the use of such

asset and (iii) circumstances prevailing in

the business .

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Change in Method 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.

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Accounting For Change When such a change in the method of

depreciation is made, depreciation should be recalculated in accordancewith the new method from the date of the asset coming into use. Thedeficiency or surplus arising fromretrospective recomputation of depreciation in accordance with thenew method should be adjusted in theaccounts in the year in which themethod of depreciation is changed.

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What to do when Historical Cost Changes

subsequently due to Addition of capital Expenditure Price adjustment Interest Capitalisation FOREX capitalisation

Govt. Grant Refund Revaluation Impairment

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Change in Useful life Is to be treated as changes in

accounting estimates and aprospective effect shall be given

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Interesting fact aboutschedule XIV

Rates given in accordance with WDVand SLM in shift wise.

What is NESD Rates are to applied for per annum

rates Rates are applicable prorata at the

start and retirement of the asset Rates are minimum prescribed

Depreciation Rates.

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Interesting issues Correlation between rates of WDV Rate of temporary structure -100 %

Triple shift working v/s continuousprocess plants Depreciation on low cost items below

5000/-