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1. By Nihar Jambusaria
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
VASHI STUDY CIRCLE
July 10, 2015
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2. Key terms
Depreciation is a measure of the wearing out, consumption or other
loss of value of a depreciable asset arising from;
 use,
 efflux of time or
 obsolescence through technology and market changes.
Questions –
 Is depreciation required to be provided for Idle Assets ?
 Is depreciation required to be provided on Asset held for Disposal ?
July 10, 2015
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3. Key terms
Depreciable assets are assets which;
 are expected to be used during more than one accounting period;
and
 have a limited useful life; and
 are held by an enterprise for use in the production or supply of
goods and services, for rental to others, or for administrative
purposes and not for the purpose of sale in the ordinary course of
business.
Questions
 Is Goodwill required to be depreciated ? (Para 1 of AS-6) July 10, 2015
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4. Key terms
Useful life is either
(i) the period over which a depreciable asset is expected to be used
by the enterprise; or
(ii) the number of production or similar units expected to be obtained
from the use of the asset by the enterprise.
Depreciable amount of a depreciable asset is its historical cost, or
other amount substituted for historical cost in the financial statements,
less the estimated residual value.
July 10, 2015
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5.  Section 350 and
Schedule XIV red with
AS-6.
 Depreciation to be
provided on the basis of
Historic cost, before
declaration of dividend
and managerial
remuneration.
 95% of cost to be
depreciated at the
rates specified in
Schedule XIV (SLM or
WDV).
 Shift from rate based approach to useful life
approach.
 Depreciation to be provided on the
historical cost or amount substituted for the
historical cost.
 Schedule II has prescribed indicative useful
lives for certain tangible assets.
 The useful life shall not be ordinarily different
from the useful life specified in Part C.
 If useful life or residual value adopted is
different than that prescribed in Part C of
Schedule II, the company shall disclose
such difference and provide justification
that is duly supported by technical advice.
 The residual value shall not be more than
5% of the original cost of the asset.
1956 2013
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6.  Separate rates for
Intangibles,
electricity
companies, etc.
 Accounting Standards 26 – Intangible assets will
continue to apply for calculating the
amortisation of Intangible assets, except for
intangible assets created under ‘Build, Operate,
Transfer’ (BOT) or ‘Build, Own, Operate, Transfer’
(BOOT) model or any other form of Public Private
Partnership (PPP) Route.
 BOT Assets may use revenue based amortisation
as follows.
o Amortization Rate =
Amortization Amount X 100 / Cost of
Intangible Assets
o Amortization Amount =
Cost of Intangible Asset X Actual Revenue for
the year / Projected Revenue from Intangible
Asset (till the end of the concession period)
1956 2013
July 10, 2015
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7.  Units of
Production
method
prohibited.
 Separate rates
specified for
extra shift.
 Assets whose
actual cost does
not exceed Rs.
5000 are depre-
ciated at 100%.
 Component
approach was
optional.
 Company may be able to use Units of
Production method for depreciation.
 Separate rates not specified for extra shift.
o Double shift - Increase by 50%
o Triple shift - Increase by 100%
 No provision for low value items.
 Component approach is mandatory for
financial year commencing on or after 01-
04-2015. Components should be identified
on the transition date. It cannot be
restricted only to new assets acquired on or
after adoption of component approach by
the company.
1956 2013
July 10, 2015
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8. Some significant changes in useful life
Nature of Assets Useful life -
2013
Rate of
depreciation –
1956
Rate
converted to
years – 2013
Difference
Buildings (other than factory
buildings) other than RCC
Frame Structure
30 1.63 61.35 (31.35)
Bridges 30 1.63 61.35 (31.35)
General Plant and Machinery 15 4.75 21.05 (6.05)
Continuous process plant 25 5.28 18.94 6.06
General rate for furniture and
fittings
10 6.33 15.8 (5.8)
Furniture and fittings used in
hotels, etc.
8 9.5 10.52 (2.52)
Electrically operated vehicles 8 7 14.28 (6.28)
Computer 3 16.21 6.17 (3.17)July 10, 2015
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9. Key updates impacting depreciation
 The useful life or residual value of any specific asset, as notified for
accounting purposes by a Regulatory Authority constituted under
an Act of Parliament or by the Central Government shall be applied
in calculating the depreciation to be provided for such asset
irrespective of the requirements of this Schedule.
July 10, 2015
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10. Transitional Provision
From the date this Schedule comes into effect , the treatment for the
carrying amount of the asset as on that date shall be as follows -
 In case there is remaining useful life of the asset:
The same shall be depreciated over the remaining useful life as per
this Schedule;
 In case the remaining useful life is nil:
Retain the residual value, and balance carrying amount should be
adjusted against the opening balance of retained earnings. (an
option available to charge to P&L also – Notification no.
G.S.R.627(E), 29th August, 2014)
July 10, 2015
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11. Illustration
Name of the
Asset
Date put
to use
Cost Depreci
ation
WDV as
on
31.03.2014
Salvage
Value
No of
years
the
asset is
used
Balance
Useful
Life
Carrying
amount
adjusted
Against
Reserves
Depreciation
for C. Y. on
Residual
Carrying
amount
Plant &
Machinery
01.04.1996 5,00,000 4,51,440 48,560 25,000 18 - 23,560 -
Plant &
Machinery
01.04.2001 10,00,000 6,52,080 3,47,920 50,000 13 2 - 1,48,960
Furniture 01.04.2008 15,00,000 4,06,125 10,93,875 75,000 6 4 - 2,54,719
Computers 01.04.2011 10,00,000 4,61,985 5,38,015 50,000 3 - 4,88,015 -
Server 01.04.2011 10,00,000 4,61,985 5,38,015 50,000 3 3 - 1,62,672
July 10, 2015
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12. To calculate Rate of Depreciation
under WDV Method:
R = (1 - nth root of s/c ) x 100
Where,
R = Rate of Depreciation (in %),
n = Useful life of the asset (in years)
s = Scrap value at the end of useful life of the asset
c = Cost of the asset
July 10, 2015
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13. July 10, 2015
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14. Major differences – GAAP & Ind AS
Sr.
No.
Particulars Indian GAAP Ind AS
Property, Plant and equipment
1 Initial
Recognition
- deferred
settlement
term
PPE purchased on deferred
settlement terms are not explicitly
dealt with in AS 10. Cost of fixed
assets include purchase price for
deferred payment term unless
interest element is specifically
identified in the arrangement.
Difference between the
purchase price under normal
credit terms and the amount
paid, is recognized as interest
expense over the period of the
financing.
2 Component
Accounting
There is no mandatory requirement
for component accounting in
accounting standards.
Though as per the requirement of
Companies Act, 2013, component
accounting approach has to be
followed with effect from April 1,
2015.
Each major part of an item of
property, plant and equipment,
the cost of which is significant in
relation to the total cost of the
item, has to be depreciated
separately.
July 10, 2015
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15. Major differences – GAAP & Ind AS
Sr.
No.
Particulars Indian GAAP Ind AS
3 Replacement
Costs
Unless the expenditure
incurred increases the
future benefits from the
asset, beyond its original
standard of performance, it
should be expensed.
Replacement cost is capitalized if it meets
the recognition criteria. Carrying amount
of items replaced is derecognized.
4 Revaluations Revaluation is permitted
and there is no stipulation
as to the frequency of
revaluation.
Ind AS 16 requires an entity to choose
either the cost model or the revaluation
model as its accounting policy. If the
company adopts the revaluation model,
revaluations are required to be made with
sufficient regularity to ensure that the
carrying amount does not differ materially
from that which would be determined
using fair value at the end of the reporting
period.
July 10, 2015
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16. Major differences – GAAP & Ind AS
Sr.
No.
Particulars Indian GAAP Ind AS
5 Depreciation Schedule II to the Companies Act,
2013 has provided the limits for
maximum useful life and residual
value for calculating depreciation
on fixed asset. A company may use
different measures, provided
justification for the same is disclosed.
Depreciation is charged
over the estimated
useful life of the asset.
There is no concept of
minimum statutory
depreciation.
6 Periodic
review
There is no specific requirement as to
reassess the depreciation method,
residual value and
useful life at each balance sheet
date.
Depreciation method,
residual value and useful
life are reassessed at
each balance sheet
date.
July 10, 2015
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17. Major differences – GAAP & Ind AS
Sr.
No.
Particulars Indian GAAP Ind AS
7 Change in
method of
depreciation
Considered as change in accounting policy,
the effect of which is quantified and
disclosed. Requires retrospective calculation
of depreciation and adjustment of excess or
deficit in the period of change.
Considered as change
in accounting estimate
and the new method is
applied prospectively.
8 Capitalization
of exchange
differences
recognized in the statement of P&L.
However, an entity has an option to
recognize unrealized exchange differences
on translation of certain long-term monetary
assets/ liabilities directly in equity or as
adjustment to cost of an asset. The amount
so accumulated in equity shall be transferred
to profit or loss over the period of maturity of
such long-term monetary items in an
appropriate manner.
All exchange
differences arising on
translation of foreign
currency transactions
are generally
recognized in profit or
loss unless can be
regarded as borrowing
cost eligible for
capitalisation. July 10, 2015
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18. Major differences – GAAP & Ind AS
Sr.
No.
Particulars Indian GAAP Ind AS
9 Decomm-
ssioning and
Restoration
(ARO)
No specific guidance.
(Guidance Note on
Accounting for Oil and Gas
Activities contains specific
information relating to such
costs, but limited to the
industry)
Cost of an item of PPE includes the initial
estimates of the cost of dismantling &
removing the item & restoring the site on
which it is located, the obligation of
which an entity incurs either when the
item is acquired or as a consequence of
having used the item during a particular
period for purposes other than to
produce inventories during that period.
10 Cash flow
hedge
There is no specific guidance
on capitalisation on fair value
gains/losses on qualifying cash
flow hedge relating to
purchase of PPE in foreign
currency.
Fair value gains and losses on qualifying
cash flow hedges relating to purchase
of PPE in foreign currency can be
capitalized.
July 10, 2015
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19. Major differences – GAAP & Ind AS
Sr.
No.
Particulars Indian GAAP Ind AS
11 Transfer of
Assets from
Customers :
Recognition
of Asset
Recognition of
asset
No specific
guidance
Recognition of asset
1. When an entity receives an asset from customer, it
should assess whether the transferred item meets the
definition of an asset set out in the framework. If yes,
then the asset would be recognized as PPE as per Ind
AS 16 and measure its cost on initial recognition at its
fair value. The entity will recognize the corresponding
amount as revenue in accordance with Ind AS 18.
2. When the entity receives cash, it should assess
whether the asset to be constructed meets the
definition of the asset. If yes, then it is recognized as
PPE as per Ind AS 16 and revenue is recognized at the
amount of Cash received. July 10, 2015
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20. CA Nihar Jambusaria
jnihar@rediffmail.com
nihar.jambusaria@ril.com
+91 98202 37681 July 10, 2015
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