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.