Depreciation

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Depreciation

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Depreciation

  1. 1. Depreciation and their impact in fin.A/c, fin.Mgt.,Income tax etc. By Prof.Augustin Amaladas M.Com.,AICWA.,B.ED.,PGDFM
  2. 2. Meaning <ul><li>Reduction in the value of fixed assets due to wear and tear and due to effluction of time. </li></ul><ul><li>All assets except land can be depreciated. </li></ul><ul><li>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. </li></ul><ul><li>It is an allocation of past cash flows. </li></ul><ul><li>Depreciation expense appears on the income statement, but has no impact on the statement of cash flows. </li></ul>
  3. 3. Depreciation methods <ul><li>Straight line method </li></ul><ul><li>Written down value method </li></ul><ul><li>Sinking fund method </li></ul><ul><li>Machine Hour rate method </li></ul><ul><li>Unit cost method </li></ul><ul><li>Depletion asset method </li></ul><ul><li>Depreciation Fund method </li></ul><ul><li>Sum of digits method </li></ul><ul><li>Accelerated depreciation method </li></ul>
  4. 4. Impact on books <ul><li>Depreciation Expense </li></ul><ul><li>Net income </li></ul><ul><li>Asset </li></ul><ul><li>Equity </li></ul><ul><li>Return on assets </li></ul><ul><li>Return on Equity </li></ul><ul><li>Turnover Ratios </li></ul><ul><li>Cash flow </li></ul><ul><li>NPV </li></ul><ul><li>IRR </li></ul><ul><li>Pay back </li></ul>
  5. 5. Impact of Tax <ul><li>Block asset method </li></ul><ul><li>Purchase of Asset </li></ul><ul><li>Sale of Asset </li></ul><ul><li>Short term/Long-term Capital asset </li></ul><ul><li>Asset used less than 180 days during the previous year </li></ul><ul><li>Asset purchased preceding previous year but put into use less than 180 days during the current previous year </li></ul>
  6. 6. Impact of Tax <ul><li>Rate decided by whom? </li></ul>
  7. 7. Inflation and Depreciation <ul><li>If prices are rising, Incomes and taxes will be over stated / Under stated </li></ul><ul><li>Replacement? </li></ul>
  8. 8. Accounting Standard <ul><li>AS-06 </li></ul><ul><li>As-10 </li></ul>
  9. 9. Tax planning <ul><li>U/S-32 of IT act </li></ul><ul><li>When own funds used in plant and machinery -18.66% saving </li></ul><ul><li>When borrowed funds used –Tax savings through depreciation-22.91% </li></ul><ul><li>Depreciation on intangible assets can be provided at 25% rate. The eligible assets are: Know how, patent right, copy right, </li></ul><ul><li>Trade mark, licenses, franchises, any other commercial rights </li></ul>
  10. 10. Carry forward and set of depreciation in the subsequent periods <ul><li>Any number of years provided filed returns </li></ul>
  11. 11. Amalgamation, absorption, reconstruction and demerger <ul><li>CAN NEW CO. CARRY FORWAD AND SET OF LOSS AND DEPRECIATION? </li></ul><ul><li>SEC 72 A TO BE FULFILLED </li></ul><ul><li>ACCUMULATED LOSSES REMAIN UNABSORBED FOR 3 OR MORE YEARS </li></ul><ul><li>75% OF BOOK VALUE TO BE HELD ATLEAST FOR 2 YEARS BEFORE AMALGAMATION </li></ul><ul><li>THE AMALGAMATED CO. CONTINUES TO HOLD 3/4 TH OF BOOK VALUE ATLEAST FOR 5 YEARS </li></ul><ul><li>NEW CO. SHOULD CONTINUE FOR ANOTHER 5 YEARS </li></ul><ul><li>NEW CO. SHOULD ACHIEVE ATLEAST 50%OF INSTALLED CAPACITY BEFORE END OF 5 YEARS AND SHOULD CONTINUE FOR 5 YEARS </li></ul>
  12. 12. 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
  13. 13. OTHER TAX BENEFITS <ul><li>Expenditure on amalgamation or de-merger – allowed under sec 35DD both revenue and capital expenditure allowed </li></ul><ul><li>Expenditure on scientific research can be carried forward </li></ul><ul><li>Expenditure on acquisition of patent rights copyrights – depreciation can be provided </li></ul><ul><li>Expenditure for obtaining license for tele-communication service can be written off </li></ul><ul><li>Preliminary expenses </li></ul><ul><li>Capital expenditure on family planning </li></ul><ul><li>Bad debts are allowed </li></ul>

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