Depreciation and their impact in fin.A/c, fin.Mgt.,Income tax etc. By Prof.Augustin Amaladas M.Com.,AICWA.,B.ED.,PGDFM
Reduction in the value of fixed assets due to wear and tear and due to effluction of time.
All assets except land can be depreciated.
The underlying principle of depreciation is that cash flows generated by an asset over its life cannot be considered income until provision is made for asset’s replacement.
It is an allocation of past cash flows.
Depreciation expense appears on the income statement, but has no impact on the statement of cash flows.
Straight line method
Written down value method
Sinking fund method
Machine Hour rate method
Unit cost method
Depletion asset method
Depreciation Fund method
Sum of digits method
Accelerated depreciation method
Impact on books
Return on assets
Return on Equity
Impact of Tax
Block asset method
Purchase of Asset
Sale of Asset
Short term/Long-term Capital asset
Asset used less than 180 days during the previous year
Asset purchased preceding previous year but put into use less than 180 days during the current previous year
Impact of Tax
Rate decided by whom?
Inflation and Depreciation
If prices are rising, Incomes and taxes will be over stated / Under stated
U/S-32 of IT act
When own funds used in plant and machinery -18.66% saving
When borrowed funds used –Tax savings through depreciation-22.91%
Depreciation on intangible assets can be provided at 25% rate. The eligible assets are: Know how, patent right, copy right,
Trade mark, licenses, franchises, any other commercial rights
Carry forward and set of depreciation in the subsequent periods
Any number of years provided filed returns
Amalgamation, absorption, reconstruction and demerger
CAN NEW CO. CARRY FORWAD AND SET OF LOSS AND DEPRECIATION?
SEC 72 A TO BE FULFILLED
ACCUMULATED LOSSES REMAIN UNABSORBED FOR 3 OR MORE YEARS
75% OF BOOK VALUE TO BE HELD ATLEAST FOR 2 YEARS BEFORE AMALGAMATION
THE AMALGAMATED CO. CONTINUES TO HOLD 3/4 TH OF BOOK VALUE ATLEAST FOR 5 YEARS
NEW CO. SHOULD CONTINUE FOR ANOTHER 5 YEARS
NEW CO. SHOULD ACHIEVE ATLEAST 50%OF INSTALLED CAPACITY BEFORE END OF 5 YEARS AND SHOULD CONTINUE FOR 5 YEARS
A LTD AMALGAMATES WITH B LTD AS ON 2007 NO CAPITAL GAIN TAX & ACCUMULATED LOSSES & UNABSORBED DEPERICIATION CAN BE CARRIED FORWARD DOES NOT ATTRACT CAPITAL GAIN FOR A BUT NO GAIN FOR B NO BENEFIT TO A & B A MERGES WITH B (A GOES OUT) SATISFIES BOTH 2(1B) & 72 A SATISFIES 2(1B) BUT DOES NOT SATISFY 72 A DOES NOT SATISFY SEC 2(1B) & 72 A PARTICULARS
OTHER TAX BENEFITS
Expenditure on amalgamation or de-merger – allowed under sec 35DD both revenue and capital expenditure allowed
Expenditure on scientific research can be carried forward
Expenditure on acquisition of patent rights copyrights – depreciation can be provided
Expenditure for obtaining license for tele-communication service can be written off