Accounting for
depreciation by Indian corporates is governed by the provision of Section 123
read with Schedule II of the Companies Act, 2013 and accounting standards, AS 6
and AS 10. To provide a practical guidance on accounting for depreciation
(Schedule II) to preparers and auditors of the financial statements, the
Institute of Chartered Accountants of India (ICAI) has released a guidance note
on the same. Major guidance provided by the guidance note are as follows:
(i)
Depreciation should be charged on the basis
of useful life. Useful life is specified in the Schedule II, but an entity may
use different useful life subject to certain disclosures.
(ii)
An entity may use a different residual value
of asset from the specified useful life of not more than 5& of the original
cost of the asset, subject to certain disclosures.
(iii)
In case of written down value method, a new
depreciation rate should be calculated.
(iv)
Unit of production method of depreciation
is generally considered suitable for those assets for which number of units
that can be produced or serviced from them is the major limiting factor for
their use rather than time.
(v)
Entities should identify significant
components of assets and should be accounted separately.
(vi)
Intangible assets created under “Build,
Operate and Transfer’, ‘Build, Own, Operate and Transfer’ or any other form of
public private partnership route can be amortised using revenue-based method.
(vii)
Entities should estimate useful life of
assets on the basis of single shift use if extra shift basis use is irregular
and if the extra shift use is regular then estimation should be made on the
basis of multiple shift use.
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