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Schedule II of Companies Act, 2013 (Depreciation) and Practical

Implication
So Friends, the time for Preparation of the first financial statements as per Companies Act is here. One of the
most important provisions of the Act for the Companies as well as Auditors to consider is the New Method of
calculating Depreciation as per Schedule II Part C of the Companies Act 2013 . I would start with a comparison
between Depreciation under Companies Act 1956 and under Companies Act 2013 and I believe after reading this
article everything would be Crystal Clear to you.
So have Patience and read it till the End.
Happy Reading!!!!!!
SCHEDULE II OF COMPANIES ACT 2013 V/S SCHEDULE XIV OF COMPANIES ACT 1956
Schedule II to the Companies Act, 2013 requires depreciating the asset over its useful life unlike Schedule
XIV of the Companies Act, 1956 which specifies minimum rates of depreciation to be provided by a
company. As Per Section 123 of the Companies Act 2013, depreciation shall be calculated as per
Schedule II and these have been bought into force from 1st April 2014.
Companies act 1956 does not deal with the amortization of intangible Assets but New Schedule by
companies act 2014 provides the method to amortize them. Now for the amortization of Intangible assets
the Provisions of AS-26 shall apply. Earlier no method was suggested for the amortization of Intangible
assets as Schedule XIV of the Companies Act 1956 deals only with the Depreciation of Tangible assets.
Instead of method and rates of Depreciation (whether WDV method or Straight line Method and Single shift
or double shift or triple shift) new Act prescribed only assets useful life. The Difference between WDV
and SLM will be removed. The useful life shall not be longer than the Specified life of the Asset as given
in Part C of the Act and the residual value shall not Exceed 5% of the Cost of the Asset. 95% of the
Original Cost of Asset only has to be depreciated.
If Company, being a class of company specifically prescribed by MCA, can adopt a different useful life longer than
what is prescribed in Schedule II, however the same shall be disclosed, as Note on Accounts together with
justification. For other companies, useful life cannot be longer than what is prescribed in Schedule II.
The concept of 100% depreciation of assets whose cost are less than Rs. 5000/- is deleted hence under
new act it will be depreciated as per other normal provisions of schedule II.
Under act if any component of Asset have significant cost and has useful life other than the assets then is
should be considered as separate asset for depreciation. As Per Schedule II of the Companies Act
Component Approach as Defined in Ind AS 16 becomes Mandatory whereas as per Schedule XIV of the
Companies Act 1956 Component Approach was Optional.
CALCULATION OF DEPRECIATION UNDER COMPANIES ACT 2013- THEORETICAL VIEW
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The depreciable
amount of an asset is the cost of an asset or other amount substituted for cost, less its residual value.
The useful life of an asset is the period over which an asset is expected to be available for use by an entity, or the
number of production or similar units expected to be obtained from the asset by the entity.
For the purpose of this Schedule, the term depreciation includes Amortization.

Date of Purchase is most important to calculate the remaining Useful life of the Asset as on 01.04.2014. Existing
assets are to be Depreciated Over the remaining Useful life as on 01.04.2014.Date of Purchase can be found in
the Fixed Asset register or the Depreciation Chart of the Company or can also be available in the Tax Audit report
of the Company for Various Years.
Transitional effect of Schedule II
The most important and challenging aspect of Schedule II is the effect to be given in the books of account on the
date of transition, i.e. 1st April, 2014.
Reproduced below is Note 7 to Part C of Schedule II,
7. From the date this Schedule comes into effect, the carrying amount of the asset as on that date(a) Shall be depreciated over the remaining useful life of the asset as per this Schedule;
(b) After retaining the residual value, shall be recognized in the opening balance of retained earnings where the
remaining useful life of an asset is nil.
There could be two possibilities regarding the assets as on 1st April, 2014 in context of the above note:
1. Assets remaining useful life as per Schedule II is nil :
In that case, as per Note 7(b), the carrying amount has to be adjusted in the opening balance of retained earnings
in the balance sheet after retaining the residual value.
2. Assets remaining useful life is as per Schedule II is not nil:
If one reads Note 7, specifically clause (a), then one has to continue depreciating the balance as on 1st April,
2014 systematically over the remaining useful life after recalculating the rate of depreciation. In that case, no
effect of restating the carrying amount will be needed to be given. Depreciation should be provided at a rate
prescribed as under based on the remaining useful life of the Asset.
CALCULATION OF DEPRECIATION UNDER COMPANIES ACT 2013- PRACTICAL VIEW
Let us now understand everything practically
Rate of Depreciation under WDV Method:
R= (1 n^s/c) x 100
Where R = Rate of Depreciation (in %),
n = Useful life of the asset (in years)
s = Scrap value at the end of useful life of the asset
c= Cost of the asset
Accordingly WDV rates have been worked out using this formula with 5% as the salvage value of the asset and
the table for the remaining life of the asset up to 10 years is as under:O/s Life on an Asset

WDV

SLM

% of Depreciation

% of Depreciation

*
95.00

95.00

77.64

47.50

63.16

31.67

52.71

23.75

45.07

19.00

39.30

15.83

34.82

13.57

31.23

11.88

28.31

10.56

10

25.89

9.50

11

23.84

8.64

12

22.09

7.92

13

20.58

7.31

14

19.26

6.79

15

18.10

6.33

Lets take an Example:Asset: Plant & Machinery

Original Cost: Rs. 100000
Useful Life and rate of Depreciation as per Old Provisions: 20 years & 13.91%
Useful Life and rate of Depreciation as per New Provisions: 15 Years & 18.10%
Expired Life: 5 years
Accumulated Depreciation for 5 years: 52711/Now the Carrying Amount as on 01.04.2014 will be 47289/- (100000-52711)
Remaining Useful life as on 01.04.2014 as per new provisions 10 years (15 years Expired Life)
Rate of Depreciation on the basis of remaining useful life i.e 10 years is 25.89% (Refer Table above)

Note 7(b) as mentioned above From the date this Schedule comes into effect, the carrying amount of the asset
as on that date after retaining the residual value, shall be recognized in the opening balance of retained earnings
where the remaining useful life of an asset is nil.
Lets take another Example to understand this note:Asset: Plant & Machinery
Original Cost: Rs.100000
Useful Life and rate of Depreciation as per Old Provisions: 20 years & 13.91%
Useful Life and rate of Depreciation as per New Provisions: 15 Years & 18.10%
Expired Life: 16 years
Accumulated Depreciation for 16 years: 90896/Now the Carrying Amount as on 01.04.2014 will be 9104/- (100000-90896)
Remaining Useful life as on 01.04.2014 as per new provisions nil (15 years Expired Life)
In such a case Note 7(b) comes into picture and the entry on 01.04.2014 would be
Retained Earnings

dr. 4104

To Plant & Machinery

4104.

(Being Shortfall in the depreciation consequent upon change in the Useful Life of Asset Provided for after retaining
Residual Value of 5% charged against opening balance of retained earnings)
Residual Value should not be more than 5% of Cost of Asset i.e Rs. 5000 and accordingly the amount to be
adjusted shall be Rs. 4104 ( 9104-5000).

Your Views and Comments are welcome even if they are contrary
Author: Mr. Rohit Kapoor E-mail: rohitkpr1992@gmail.com
Tags: Companies Act, Companies Act 2013
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