THIS IS ALL ABOUT ACCOUNTING STANDARD - 6 I.E., DEPRECIATION ACCOUNTING. THE RULES AND REGULATIONS TO BE FOLLOWED WHILE CALCULATING DEPRECIATION OF A DEPRECIABLE FIXED ASSET.

1. AS – 6
DEPRECIATION
ACCOUNTING
-SUSMITA PATRA

2. INTRODUCTION
 FIXED ASSETS – Assets meant to be
used in the business for production of
goods and services during a period
longer than a year.
 Cost of a fixed asset is spread over its
expected useful life through
depreciation.

3. DEPRECIATION
 AS – 6 deals with depreciation.
 It focuses on measuring the cost and
depreciable amount of fixed asset,
calculation and accounting treatment
of annual depreciation.
 DEPRECIATION represents the
decline in the value of FA due to wear
and tear, usage, obsolescence, etc.

4. AS – 6
APPLICABILITY
Deals with depreciation accounting and
applies to all depreciable assets
except:
 Forest, plantations & natural
resources
 Wasting assets
 Expenditure on R&D
 Goodwill & other intangible assets
 Live stock

5. DEPRECIATION
 DEFINITION- measure of wearing out,
consumption or other loss of value of
a depreciable asset arising from use,
effluxion of time or obsolescence
through technology and market
changes.
 Significant role in determining and
presenting the financial position and
results of operations of a company.
 Charged in each accounting period.

6. CONT..
CALCULATION OF DEPRECIAITION
On the basis of :
 Historical cost / Revalued figure of
asset
 Expected useful life of depreciable
asset
 Estimated residual value of
depreciable asset / scrap value
 Formula
cost –scrap value at the end of useful life
estimated useful life (no. of years)

7. DEPRECIABLE ASSET
Those which are :
 Expected to be used for more than
one accounting year.
 Have a limited useful life.
 Are held by an enterprise for
production/supply of goods and
services, rental and administrative
purposes (not for sale in ordinary
course of business.

8. CONT..
HISTORICAL COST OF DEPRECIABLE
ASSETS :
 Cost spent in connection with its
acquisition, installation & commissioning as
well as additions and improvements.
 It may change due to :
• Increase/decrease in long term liability
• Price adjustment
• Change in duties
• Revaluation of depreciable assets
• Other similar factors

9. USEFUL LIFE OF
DEPRECIABLE ASSET
 Period over which a depreciable
asset is expected to be used by the
enterprise.
 Number of productions or similar
units expected to be obtained from
the use of the asset by the
enterprise.

10. CONT...
FACTORS FOR ESTIMATION OF
USEFUL LIFE :
 Pre determined by contractual or legal
limits
 Directly governed by extractions or
consumption
 Depends on extent of use
 Obsolescence
Difficult to estimate

11. DEPRECIABLE AMOUNT
 It is the historical cost or other
amount in substitution for in the
financial statements, less the
estimated residual value.
 Allocated over the estimated useful
life of depreciable assets.

12. ADDITION / EXTENSION
TO AN EXISTING ASSET
 Integral part- capital nature-
depreciated over remaining useful
life of asset- same rate of
depreciation.
 Not an integral part- depreciated
over its own estimated useful life.

13. ESTIMATED RESIDUAL
VALUE OF DEPRECIABLE
ASSETS
 Difficult to estimate
 Estimated at the end of its useful life
 If insignificant- nil
 Significant- estimated at time of
acquisition/installation
 Basis- realizable value of similar
assets which have reached their end
of useful life

14. QUANTUM OF
DEPRECIATION
 Involves exercise of judgment by
management in purview of-
• Technical, commercial, accounting
and legal requirements
 Need periodical review

15. CHANGE IN ESTIMATED
USEFUL LIFE
 Outstanding depreciable amount on the
effective date of change should be allocated
over the revised remaining useful life of the
asset
 For E.g. - Asset amount- 100 lakhs
useful life- 10 years
end of 5th year useful life re-estimated to
7 years..
Charges SLM of depreciation.
Calculate depreciation charged from 6th year?

16. METHODS OF
DEPRCIATION
STRAIGHT LINE METHOD (SLM)
 Equal amount of depreciation
charged each year during the
estimated useful life of asset
 Based on three factors
• Cost of fixed asset
• Estimated scrap value
• Estimated useful life

17. CONT..
 Formula of annual depreciation=
 Cost of FA- Estimated Resale value
No. of years of useful life
 (Cost – Residual value) × Rate of
depreciation
 Rate of depreciation is the % of useful
life that is consumed in a single
accounting period
1
𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒
×100%

18. CONT..
REDUCING BALANCE METHOD
 Fixed % of depreciation applied each
year to the reducing un depreciated
balance of the cost of the FA to
calculate depreciation
 1st year- same % charged on cost of fixed
asset
 2nd and later years- same % charged on
reduced un depreciated balance of the cost
of fixed asset.
 Also known as Written Down Value Method

19. CONT..
 Estimation of rate of depreciation
r= 1 − 𝑛
𝑠/𝑐
Where, r= rate of depreciation
n= useful life of years
c= cost of fixed asset
 Closing balance of a year becomes
the opening balance of next year on
which depreciation is calculated.

20. SELECTION OF
APPROPRIATE METHOD
OF DEPRECIATION
 It depends on :
◦ Type of asset
◦ Nature of the use of asset
◦ Circumstances prevailing in the
business
 A combination of one or more
method is also sometimes used.

21. GOVERNING STATUTE &
DISCARDED ASSETS
 The statute governing an enterprise
may provide the basis for computation
of the depreciation
 When the depreciable assets are
disposed off, discarded, demolished or
destroyed the net surplus/deficiency, if
material is disclosed properly

22. CHANGES IN
DEPRECIATION
METHOD
 Method of depreciation is consistently
applied to provide comparability of
results of the operations of the
enterprise
 Change of method can be done in
following conditions
◦ For compliance of statute
◦ For compliance of accounting standards
◦ For more appropriate presentation of FS

23. CONT..
 Procedure to be followed:
• Depreciation recomputed applying new
method from date of acquisition till date of
change of method
• Difference of depreciation between new
method and old method- surplus/deficiency
• If surplus- Cr. To P/l account under head
“depreciation written back”
• If deficiency- charged to P/l account
 Should be quantified and disclosed

24. CHANGE IN HISTORICAL
COST
 Due to exchange in variation on long term
foreign liability, price adjustment and
change in duties, etc.
 Increase/decrease in amount of historical
cost is +/- from the outstanding WDV on the
date of change
 Depreciation will be provided on revised
WDV over remaining useful life of asset
 In case of revaluation depreciation is
charged on the revalued figure on
remaining useful life of assets.

25. DISCLOSURES
 Total cost, total depreciation,
accumulated depreciation of each
class of assets
 Historical cost/ revalued cost
 Other accounting policies and
depreciation methods
 Depreciation rates and useful life of
assets if they are different from the
principal rates specified in governing
statute

26. CONT..
 In case of revaluation of fixed asset,
depreciation is charged on the
revalued asset on the basis of
remaining useful life of such asset &
incase it has any material effect on the
amount of depreciation the same is
disclosed separately in the year in
which it is disclosed.
 A change in the method of
depreciation is treated as a change in
the accounting policy & is disclosed

27. SIGNIFICANT
DIFFERENCES
BETWEEN AS- 6,
IFRS/IAS & US GAAP Depreciation on revalued value of assets
◦ AS-6 - allows
◦ US GAAP- prohibits
◦ IAS- 16- allows fair value accounting
 Change in depreciation method
◦ AS-6 – treated as change in accounting
policy
◦ IAS-16 & US GAAP- treated as change in
estimate