Accounting Standard 6Depreciation accounting

Presentad By:Nishmitha P H2nd M.COm

Background• In India Accounting Standards are prepared and issued by the ‘Accounting

standard Board’ (ASB)constituted by ICAI on 21st April, 1977

• The accounting standard have been granted legal recognition under the Companies Act, 1956

• The parallel international body is the International accounting standard committee (IASC) and ICAI is a member of the IASC.

• While Formulating standards, ASB takes into consideration the standards issued by IASC, called ‘International Accounting Standards

Accounting Standard (AS) 6

Issued by the Accounting Standards Board on

“Depreciation Accounting”

The standard deals with the depreciation accounting followed in preparing and presenting financial statements

Introduction

• Accounting Standard (AS) 6, Depreciation Accounting, was issued by the Institute in November 1982. Subsequently, in the context of insertion of Schedule XIV in the Companies Act in 1988, the Institute brought out a Guidance Note on Accounting for Depreciation in Companies which came into effect in respect of accounting periods commencing on or after 1st April, 1989. The Guidance Note differed from AS 6 in respect of accounting treatment of (a) change in the method of depreciation, and (b) change in the rates of depreciation. It was clarified in the Guidance Note, with regard to the matter at (a), that AS 6 would be revised to bring it in line with the recommendations of the Guidance Note.

• Based on the recommendations of the Accounting Standards Board, the Council of the Institute at its 168th meeting, held on May 26-29, 1994, decided to bring AS 6 in line with the Guidance Note in respect of both of the aforementioned matters.

Depreciation Meaning :

• A reduction in the value of an asset over time, due in particular to wear and tear

Definition:

•AS-6,Depreciation Accounting defines depreciation as 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 or market changes.

Features of Depreciation:

•Depreciation is a part of operating cost.

•It is a reduction in the value of an asset.

•The decrease in the value of an asset is gradual & continuous

Depreciation includes amortization of assets whose useful life is predetermined

.

Depreciable Asset:

• Any type of asset that is eligible for depreciation treatment

• Depreciable assets are assets which are expected to be used during more than one accounting period; have a limited useful life; and 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.

Applicability of AS-6:

This Statement applies to all depreciable assets, expect:• Forests, Plantation•Wasting Assets, Minerals•Expenditure on R & D•Goodwill•Live-stock cattle, Animal Husbandry

This statement also does not apply to land unless it has a limited useful life for the enterprise.

Causes of Depreciation

• Physical wear & tear

• Physical Deterioration

• Expiry of legal rights

• Obsolescence

Calculation of Depreciation

The amount of Depreciation is calculated as under:

1)Historical cost of the asset.

2)Estimated useful life of depreciable asset.

3)Estimated residual/scrap value of depreciable assets.

Methods of Depreciation

1. Fixed Installment Method

2. Reducing Balance Method

3. Sinking Fund Method

4. Insurance Policy Method

5. Sums of the digit Method

6. Revaluation Method

7. Depletion Method

8. Machine Hour Rate Method

9. Replacement Method

Method Of depreciation: Selection

• Types of asset• Nature of the use of such asset• Circumstances prevailing in the business

A combination of more than one method may be used.Selected depreciation method should be applied consistently from period to period

DEPRICIABLE AMOUNT :

• The amount of an asset's cost that will be depreciated. It is the cost minus the expected salvage value. For example, if equipment has a cost of $30,000 but is expected to have a salvage value of $3,000 then the depreciable cost is $27,000.

• Depreciable Amt= Historical Cost- ERV

E.g: Cost of asset=500000, ERV=25000

Depreciable Amt = H.C –ERV

=500000-25000

= 475000.

• Depreciable amount is allocated over the estimated useful life of depreciable asset.

Useful Life

• Useful Life is either:– the period over which a depreciable asset is expected to be

used by the enterprise, or– the number of production or similar units expected to be

obtained from the use of the asset by the enterprise.• Useful Life of a depreciable asset should be estimated based on Expected physical wear and tear Obsolescence legal and other limits on the use of assets

The useful life of a depreciable assets is shorter than its physical life. This is due to:

Legal and contractual limits, such as the expiry of related leases; Extent of use and physical deterioration obsolescence arising from technological changes, change in

market demand, legal and other restriction

Dep. On Addition/ Extensions

• 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 provided at the rate applied to the existing asset

• where an addition on 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

Change in Method of Depreciation

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 statement 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 change

• If any depreciable asset is disposed of, discarded, demolished or destroyed, the net surplus or deficiency, if material, should be disclosed separately

• Changes in depreciation amount due to change in method is to be given retrospective effect but in all other cases ( like change in cost, life, revaluation etc) change in deprecation is given prospective effect

• The Depreciation method used, the total Depreciation for the period, gross amount of Depreciation of each class has to be disclosed in the Fin. Statements.

• If the asset is revalued , the provision for Depreciation is based on the revalued amount.

• A change in method of depreciation is treated as change in an accounting policy.

• Accumulated Depreciation for each class of asset

Minimum Depreciation

• The department of company affairs has clarified that the rate contained in Schedule X1V to the company act, 1956 should be viewed as the minimum rates, and therefore company cannot charge depreciation at rates lower than specified in the schedule in relation to the assets. However, if on technical evaluation, higher rate of depreciation are applied.

• When rates other than schedule X1V rates are applied, appropriate disclosers in the notes to the account would be required

Depreciation on item Below Rs 5000

As per companies act, individual items of fixed asset below rs 5000?/- should be depreciated at 100%

In case of Plant and machinery:

Where the aggregate actual cost of individual item of plant and machinery costing Rs 5000 or less constitutes more than 10% of total actual cost of plant and machinery normal Schedule XlV rates should be used

(Note number of 8of schedule XlV of the Companies Act, 1956)

Conclusion

• Accounting standards are useful for calculating correct and accurate depreciation on various class of asset and preparation of accurate Financial Statement. It also Helps to avoid manipulation in Depreciation Accounting.