THIS IS ALL ABOUT ACCOUNTING STANDARD - 6 I.E., DEPRECIATION ACCOUNTING.
THE RULES AND REGULATIONS TO BE FOLLOWED WHILE CALCULATING DEPRECIATION OF A DEPRECIABLE FIXED ASSET.
2. INTRODUCTION
FIXED ASSETS – Assets meant to be
used in the business for production of
goods and services during a period
longer than a year.
Cost of a fixed asset is spread over its
expected useful life through
depreciation.
3. DEPRECIATION
AS – 6 deals with depreciation.
It focuses on measuring the cost and
depreciable amount of fixed asset,
calculation and accounting treatment
of annual depreciation.
DEPRECIATION represents the
decline in the value of FA due to wear
and tear, usage, obsolescence, etc.
4. AS – 6
APPLICABILITY
Deals with depreciation accounting and
applies to all depreciable assets
except:
Forest, plantations & natural
resources
Wasting assets
Expenditure on R&D
Goodwill & other intangible assets
Live stock
5. DEPRECIATION
DEFINITION- measure of wearing out,
consumption or other loss of value of
a depreciable asset arising from use,
effluxion of time or obsolescence
through technology and market
changes.
Significant role in determining and
presenting the financial position and
results of operations of a company.
Charged in each accounting period.
6. CONT..
CALCULATION OF DEPRECIAITION
On the basis of :
Historical cost / Revalued figure of
asset
Expected useful life of depreciable
asset
Estimated residual value of
depreciable asset / scrap value
Formula
cost –scrap value at the end of useful life
estimated useful life (no. of years)
7. DEPRECIABLE ASSET
Those which are :
Expected to be used for more than
one accounting year.
Have a limited useful life.
Are held by an enterprise for
production/supply of goods and
services, rental and administrative
purposes (not for sale in ordinary
course of business.
8. CONT..
HISTORICAL COST OF DEPRECIABLE
ASSETS :
Cost spent in connection with its
acquisition, installation & commissioning as
well as additions and improvements.
It may change due to :
• Increase/decrease in long term liability
• Price adjustment
• Change in duties
• Revaluation of depreciable assets
• Other similar factors
9. USEFUL LIFE OF
DEPRECIABLE ASSET
Period over which a depreciable
asset is expected to be used by the
enterprise.
Number of productions or similar
units expected to be obtained from
the use of the asset by the
enterprise.
10. CONT...
FACTORS FOR ESTIMATION OF
USEFUL LIFE :
Pre determined by contractual or legal
limits
Directly governed by extractions or
consumption
Depends on extent of use
Obsolescence
Difficult to estimate
11. DEPRECIABLE AMOUNT
It is the historical cost or other
amount in substitution for in the
financial statements, less the
estimated residual value.
Allocated over the estimated useful
life of depreciable assets.
12. ADDITION / EXTENSION
TO AN EXISTING ASSET
Integral part- capital nature-
depreciated over remaining useful
life of asset- same rate of
depreciation.
Not an integral part- depreciated
over its own estimated useful life.
13. ESTIMATED RESIDUAL
VALUE OF DEPRECIABLE
ASSETS
Difficult to estimate
Estimated at the end of its useful life
If insignificant- nil
Significant- estimated at time of
acquisition/installation
Basis- realizable value of similar
assets which have reached their end
of useful life
14. QUANTUM OF
DEPRECIATION
Involves exercise of judgment by
management in purview of-
• Technical, commercial, accounting
and legal requirements
Need periodical review
15. CHANGE IN ESTIMATED
USEFUL LIFE
Outstanding depreciable amount on the
effective date of change should be allocated
over the revised remaining useful life of the
asset
For E.g. - Asset amount- 100 lakhs
useful life- 10 years
end of 5th year useful life re-estimated to
7 years..
Charges SLM of depreciation.
Calculate depreciation charged from 6th year?
16. METHODS OF
DEPRCIATION
STRAIGHT LINE METHOD (SLM)
Equal amount of depreciation
charged each year during the
estimated useful life of asset
Based on three factors
• Cost of fixed asset
• Estimated scrap value
• Estimated useful life
17. CONT..
Formula of annual depreciation=
Cost of FA- Estimated Resale value
No. of years of useful life
(Cost – Residual value) × Rate of
depreciation
Rate of depreciation is the % of useful
life that is consumed in a single
accounting period
1
𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒
×100%
18. CONT..
REDUCING BALANCE METHOD
Fixed % of depreciation applied each
year to the reducing un depreciated
balance of the cost of the FA to
calculate depreciation
1st year- same % charged on cost of fixed
asset
2nd and later years- same % charged on
reduced un depreciated balance of the cost
of fixed asset.
Also known as Written Down Value Method
19. CONT..
Estimation of rate of depreciation
r= 1 − 𝑛
𝑠/𝑐
Where, r= rate of depreciation
n= useful life of years
c= cost of fixed asset
Closing balance of a year becomes
the opening balance of next year on
which depreciation is calculated.
20. SELECTION OF
APPROPRIATE METHOD
OF DEPRECIATION
It depends on :
◦ Type of asset
◦ Nature of the use of asset
◦ Circumstances prevailing in the
business
A combination of one or more
method is also sometimes used.
21. GOVERNING STATUTE &
DISCARDED ASSETS
The statute governing an enterprise
may provide the basis for computation
of the depreciation
When the depreciable assets are
disposed off, discarded, demolished or
destroyed the net surplus/deficiency, if
material is disclosed properly
22. CHANGES IN
DEPRECIATION
METHOD
Method of depreciation is consistently
applied to provide comparability of
results of the operations of the
enterprise
Change of method can be done in
following conditions
◦ For compliance of statute
◦ For compliance of accounting standards
◦ For more appropriate presentation of FS
23. CONT..
Procedure to be followed:
• Depreciation recomputed applying new
method from date of acquisition till date of
change of method
• Difference of depreciation between new
method and old method- surplus/deficiency
• If surplus- Cr. To P/l account under head
“depreciation written back”
• If deficiency- charged to P/l account
Should be quantified and disclosed
24. CHANGE IN HISTORICAL
COST
Due to exchange in variation on long term
foreign liability, price adjustment and
change in duties, etc.
Increase/decrease in amount of historical
cost is +/- from the outstanding WDV on the
date of change
Depreciation will be provided on revised
WDV over remaining useful life of asset
In case of revaluation depreciation is
charged on the revalued figure on
remaining useful life of assets.
25. DISCLOSURES
Total cost, total depreciation,
accumulated depreciation of each
class of assets
Historical cost/ revalued cost
Other accounting policies and
depreciation methods
Depreciation rates and useful life of
assets if they are different from the
principal rates specified in governing
statute
26. CONT..
In case of revaluation of fixed asset,
depreciation is charged on the
revalued asset on the basis of
remaining useful life of such asset &
incase it has any material effect on the
amount of depreciation the same is
disclosed separately in the year in
which it is disclosed.
A change in the method of
depreciation is treated as a change in
the accounting policy & is disclosed
27. SIGNIFICANT
DIFFERENCES
BETWEEN AS- 6,
IFRS/IAS & US GAAP Depreciation on revalued value of assets
◦ AS-6 - allows
◦ US GAAP- prohibits
◦ IAS- 16- allows fair value accounting
Change in depreciation method
◦ AS-6 – treated as change in accounting
policy
◦ IAS-16 & US GAAP- treated as change in
estimate