A brief description on New Accounting Standard 6 & 28 based on IFRS

1. A Presentation on AS-6
& AS-28
An Effort by Pravin Kashyap
MSM, Meerut

2. AS-6. Depreciation Accounting
 Applicability :- Mandatory w.e.f. 1/04/1995 for all enterprises
 Purpose :- Deals with the disclosure of accounting policy for depreciation
followed by an enterprise
 What is Depreciation ? :- It is a measure of the wearing out, consumption or
other loss of value of a depreciable asset arising from use, effluxion of time or
obsolescence due to technology and market changes
 What are Depreciable Assets ? :-
 Are expected to be used during more than one accounting period
 Have a limited useful life
 Are held by an enterprise for use in the production or supply of goods and
services, for renting to others, or for administrative purposes and not for the
purpose of sale in the ordinary course of business

3.  How to follow AS-6 :-
 Allocate depreciable amount on systematic basis to each accounting year
over useful life of asset
 Useful life may be reviewed periodically
 Basis must be consistently followed and disclosed. Any change to be
quantified and disclosed.
 A change in method of depreciation be made only if required by statute, for
compliance with an accounting standard or for appropriate presentation of
the financial statements
 What to do under certain circumstances?
 On Revaluation of the Asset ?
 Depreciation should be based on revalued amount over balance useful life

4.  In case of addition or extension of assets ? :-
 Depreciation should be provided on adjusted figure prospectively
over the residual useful life of the asset
 Where the historical cost undergoes a change due to fluctuation
in exchange rate, price adjustment etc. ? :-
 Depreciation on the revised unamortized amount should be provided
over the balance useful life of the asset
 Where does this standard do not apply ? :-
 In respect of forests, plantations and similar regenerative natural
resources, wasting assets including expenditure on exploration and
extraction of minerals, oils, natural gas and similar non-regenerative
resources, expenditure on research and development, goodwill and
livestock.

5.  Other points to be considered :-
 Deficiency or surplus in case of disposal, destruction, demolition etc.
be disclosed separately, if material.
 Historical cost, amount substituted for historical cost, depreciation for
the year and accumulated depreciation be disclosed.
 Depreciation method used should be disclosed.
 If rates applied are different from the rates specified in the governing
statute then the rates and the useful life be also disclosed.

6. AS-28. Impairment of Assets
 Impairment of Assets means :-
 Reduction in value of assets due to any market factors or performance
of assets
 Applied to fixed assets including intangible assets
 Assets excluded out of coverage of Impairment rules :-
 Inventories (AS 2)
 Assets arising from construction contracts (AS 7)
 Financial assets, including investments (AS 13)
 Deferred tax assets (AS 22)

7.  Important Terms :-
 Carrying amount :-
 It means the book value of an asset after depreciation and after any
revaluation which is carried by an enterprise in its balance sheet
 Carrying amount of fixed assets = Gross book value less accumulated
depreciation
 Carrying amount of Intangible assets = Original cost less total
amortisation till date.
 Recoverable Amount :-
 Recoverable amount =Net selling amount or Value in use whichever
is higher
 Net selling price =Expected selling price – Expected cost of Disposal
 Value in use = Future cash inflow x Pvf

8.  Impairment Loss:-
 Carrying amount of an asset – Recoverable amount
 Accounting Treatment :-
 Impairment loss a/c Dr.
To Assets
 P&L a/c Dr.
To Impairment loss a/c
 Cash Generating Units(CGU) :-
 It is the smallest identifiable group of assets that generates cash
inflows largely independent of the cash inflows from other assets

9.  Applicability of AS-28 are based on Indicators :-
 External Indicators :-
 Decline in the value of asset due to change in technology
 Increase in the market interest rate
 Decline in market price of shares
 Restriction on the use of asset due to legal environment
 Ratio b/w market capitalization and book value of the asset is less
than one
 Internal Indicators :-
 Physical damage of assets
 Announcement of discontinuing of operations
 Poor economic performance of assets
 Entity has plan of restructuring

10.  Recognition and Measurement of Loss:
 Adjust depreciation (amortization) charge for the asset in future
periods.
 Allocate the asset’s revised carrying amount less its residual value on
a systematic basis over its remaining useful life.
 Bottom Up’ Test – Goodwill and Corporate Assets :-
 Compare recoverable amount of cash generating unit (CGU) to its CA
(including goodwill or corporate asset) and recognise impairment
loss.
 Top Down’ Test – Goodwill and Corporate Assets :-
 Identify smallest CGU that includes the CGU under review and to
which goodwill or corporate asset can be allocated on a reasonable
basis then compare RA of the above CGU to its CA (including
goodwill or corporate asset) and recognise impairment loss.

11.  Treatment of Impairment Loss for a CGU :-
 The carrying amount of an asset (which is part of CGU) should not be
reduced below the highest of:
 (a) Net selling price.
 (b) Value in use.
 REVERSAL OF IMPAIREMENT LOSS :-
 If the recoverable amount exceeds the carrying amount then the
impairment loss can be reversed and such reversal is to be treated as
income.
 Reversal of impairment loss is lower of the following:-
 (a)Intangible loss already recognised less saving in depreciation.
 (b)Recoverable amount less carrying amount.

12. Thank You