as – 6 depreciation accounting accounting. depreciation is loss of value of an asset it is a...
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AS – 6AS – 6
DEPRECIATIONDEPRECIATION
ACCOUNTINGACCOUNTING
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Depreciation is loss of value of an Depreciation is loss of value of an assetasset
It is a measure of wearing out, consumption or other loss of value of depreciable asset arising from use and passes of time
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Depreciable AssetsDepreciable Assets
• Are expected to be used for more than one accounting period
• Have a limited useful life• Are held for use in production of
goods & services
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Applicability of AS-6Applicability of AS-6Except the followings:• Forests, Plantations• Wasting assets, Minerals & Natural
Gas• Expenditure on research &
development• Goodwill• Live Stock – Cattle, Animal
husbandry
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Calculation of DepreciationCalculation of Depreciation
• Historical cost or other amount in place of historical cost
• Estimate useful life of depreciable assets
• Estimated residual/scrap value
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Cost of Depreciable AssetCost of Depreciable Asset
• Increase/decrease in long-term liability
• Price adjustments• Changes in duties• Revaluation of depreciable assets• Other similar reasons
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Estimated useful life of Depreciable Estimated useful life of Depreciable AssetAsset
• Pre-determined by legal or contractual limits
• Depends upon the number of shifts for which the asset is to be used
• Repair & maintenance policy • Other similar reasons
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Estimated useful life of Depreciable Estimated useful life of Depreciable AssetAsset
• Technological obsolescence
• Innovation/improvements
• Legal or other restrictions
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Estimated residual /scrap value of Estimated residual /scrap value of depreciable assetdepreciable asset
It is estimated value of depreciable assets at the end of its useful life
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Depreciable amountDepreciable amount
Historical Cost
Less
Residual Value
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Method of DepreciationMethod of Depreciation
• Straight Line Method (SLM)
• Written Down Value Method (WDVM)
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Selection of appropriate methodSelection of appropriate method
• Type of assets• Nature of the use of such asset• Circumstances prevailing in the
business• A combination of more than one
method may be used
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Change in depreciation method Change in depreciation method
• For compliance of statute
• For compliance of accounting standards
• For more appropriate presentation of the financial statement
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Procedure to be followed in case of Procedure to be followed in case of change in depreciation methodchange in depreciation method
Change of depreciation method should be treated as change in accounting policy and its effect should be quantified and disclosed
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Change in estimated useful lifeChange in estimated useful life
Should be allocated over the revised remaining useful life of assets
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Change in historical costChange in historical cost
Provided prospectively over the remaining useful life of the assets
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Change in historical cost due to Change in historical cost due to revaluationrevaluation
Estimate of the remaining useful lives of the such assets
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Depreciation charge on Depreciation charge on addition/extension to an existing addition/extension to an existing assetasset
• Addition/extension is an integral part of existing asset
Remaining useful life of the asset
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Depreciation charge on Depreciation charge on addition/extension to an existing addition/extension to an existing assetasset
• Addition/extension is not an integral part of existing assets Estimated useful life of
additional assets Depreciable asset is disposed of,
discarded, demolished or destroyed
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Disclosure Disclosure
• Total cost of each class of assets
• Total depreciation
• Accumulated depreciation
• Depreciation method
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DisclosureDisclosure • Depreciation rate, useful life of assets,
if they are different than the rate specified in governing statute
• A change in method of depreciation
• Effect of the revaluation
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Significant differences with Significant differences with IAS/IFRS & US GAAPIAS/IFRS & US GAAP
• AS-6 allows the depreciation on revalued value however, US GAAP prohibits revaluation. IAS-16 allows fair value accounting.
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Significant differences with Significant differences with IAS/IFRS & US GAAPIAS/IFRS & US GAAP
• Change in depreciation method under AS-6 is treated as a change in accounting policy; whereas IAS-16 and US GAAP it is change in estimate.
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IssuesIssues
• Depreciation on fixed assets where title not clear
• Depreciation on the assets not own by the company
• Depreciation on live stock held as fixed assets
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IssuesIssues
• Income-tax rate Vs. Companies Act Vs. AS-6
• Depreciation on Addition to Building with Nil WDV
• Continuous Vs. Non-continuous process plant
• Depreciation in case of electricity company
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IssuesIssues
• Depreciation on investment property• Useful life of asset acquired under
amalgamation
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THANK
YOU
D.S. Rawat, FCAPartner, Basal & Co.