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Changes To Depreciation, Cos Act: A Welcome Move!

Published on Mon, Mar 31,2014 | 16:50, Updated at Mon, Mar 31 at 16:50Source : 

By: Sai Venkateshwaran, Partner & Head of Accounting Advisory Services, KPMG India

The Ministry of Corporate Affairs (MCA) has published an amendment to Schedule II of the Companies Act 2013 (‘2013 Act’) that provides companies with the option of depreciating assets over their useful lives which could be different from the useful lives prescribed in Schedule II. Further, the determination of residual value could also deviate from the five percent stated in Schedule II.

It is pertinent to note that prior to this amendment to Schedule II, prescribed class of companies (i.e. companies whose financial statements are required to comply with accounting standards prescribed under the 2013 Act), were required to consider the useful lives in accordance with the Schedule. However, if a prescribed company was to use a different useful life, it was required to disclose a justification for doing so. For ‘other companies’, the useful life and the residual value applied could not be higher than that prescribed. The useful lives prescribed in the Schedule for certain assets were significantly lower than those as per the Schedule XIV of the Companies Act 1956 (1956 Act)

The prescribed accounting standards were intended to be Ind-AS; since these standards have not yet been notified, all companies would fall into the category of ‘other companies’. Consequently, all companies could only depreciate their assets over the useful lives equal to or lower than the Schedule II. For instance, the useful life of a continuous process plant was reduced to 8 years and those of computers, data processing equipment were reduced to 3 years.

Pursuant to the amendment to Schedule II, a company that chooses to use a useful life or residual value different from the limits indicated in Schedule II, it can do so, provided it discloses a justification for the same in the financial statements.


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