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Statements of Accounting Standards
(AS 6) Revised
Depreciation Accounting
The following is the text of the revised
Accounting Standard (AS) 6, 'Depreciation Accounting', issued
by the Council of the Institute of Chartered Accountants of India.
Introduction
1. This Statement deals with depreciation
accounting and applies to all depreciable assets, except the following
items to which special considerations apply:—
(i) forests, plantations and similar
regenerative natural resources;
(ii) wasting assets including expenditure
on the exploration for and extraction of minerals, oils, natural
gas and similar non-regenerative resources;
(iii) expenditure on research and
development;
(iv) goodwill;
(v) live stock.
This statement also does not apply
to land unless it has a limited useful life for the enterprise.
2. Different accounting policies for
depreciation are adopted by different enterprises. Disclosure
of accounting policies for depreciation followed by an enterprise
is necessary to appreciate the view presented in the financial
statements of the enterprise.
Definitions
3. The following terms are used in
this Statement with the meanings specified:
3.1 Depreciation 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 through
technology and market changes. Depreciation is allocated so as
to charge a fair proportion of the depreciable amount in each
accounting period during the expected useful life of the asset.
Depreciation includes amortisation of assets whose useful life
is predetermined.
3.2 Depreciable assets are
assets which
(i) are expected to be used during
more than one accounting period; and
(ii) have a limited useful life; and
(iii) 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.
3.3 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.
3.4 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.
Explanation
4. Depreciation has a significant
effect in determining and presenting the financial position and
results of operations of an enterprise. Depreciation is charged
in each accounting period by reference to the extent of the depreciable
amount, irrespective of an increase in the market value of the
assets.
5. Assessment of depreciation and
the amount to be charged in respect thereof in an accounting period
are usually based on the following three factors:
(i) historical cost or other amount
substituted for the historical cost of the depreciable asset when
the asset has been revalued;
(ii) expected useful life of the depreciable
asset; and
(iii) estimated residual value of
the depreciable asset.
6. Historical cost of a depreciable
asset represents its money outlay or its equivalent in connection
with its acquisition, installation and commissioning as well as
for additions to or improvement thereof. The historical cost of
a depreciable asset may undergo subsequent changes arising as
a result of increase or decrease in long term liability on account
of exchange fluctuations, price adjustments, changes in duties
or similar factors.
7. The useful life of a depreciable
asset is shorter than its physical life and is:
(i) pre-determined by legal or contractual
limits, such as the expiry dates of related leases;
(ii) directly governed by extraction
or consumption;
(iii) dependent on the extent of use
and physical deterioration on account of wear and tear which again
depends on operational factors, such as, the number of shifts
for which the asset is to be used, repair and maintenance policy
of the enterprise etc.; and
(iv) reduced by obsolescence arising
from such factors as:
(a) technological changes;
(b) improvement in production methods;
(c) change in market demand for the
product or service output of the asset; or
(d) legal or other restrictions.
8. Determination of the useful life
of a depreciable asset is a matter of estimation and is normally
based on various factors including experience with similar types
of assets. Such estimation is more difficult for an asset using
new technology or used in the production of a new product or in
the provision of a new service but is nevertheless required on
some reasonable basis.
9. Any addition or extension to an
existing asset which is of a capital nature and which becomes
an integral part of the existing asset is depreciated over the
remaining useful life of that asset. As a practical measure, however,
depreciation is sometimes provided on such addition or extension
at the rate which is applied to an existing asset. Any addition
or extension which retains a separate identity and is capable
of being used after the existing asset is disposed of, is depreciated
independently on the basis of an estimate of its own useful life.
10. Determination of residual value
of an asset is normally a difficult matter. If such value is considered
as insignificant, it is normally regarded as nil. On the contrary,
if the residual value is likely to be significant, it is estimated
at the time of acquisition/installation, or at the time of subsequent
revaluation of the asset. One of the bases for determining the
residual value would be the realisable value of similar assets
which have reached the end of their useful lives and have operated
under conditions similar to those in which the asset will be used.
11. The quantum of depreciation to
be provided in an accounting period involves the exercise of judgement
by management in the light of technical, commercial, accounting
and legal requirements and accordingly may need periodical review.
If it is considered that the original estimate of useful life
of an asset requires any revision, the unamortised depreciable
amount of the asset is charged to revenue over the revised remaining
useful life.
12. There are several methods of allocating
depreciation over the useful life of the assets. Those most commonly
employed in industrial and commercial enterprises are the straightline
method and the reducing balance method. The management of a business
selects the most appropriate method(s) based on various important
factors e.g., (i) type of asset, (ii) the nature of the use of
such asset and (iii) circumstances prevailing in the business.
A combination of more than one method is sometimes used. In respect
of depreciable assets which do not have material value, depreciation
is often allocated fully in the accounting period in which they
are acquired.
13. The statute governing an enterprise
may provide the basis for computation of the depreciation. For
example, the Companies Act, 1956 lays down the rates of depreciation
in respect of various assets. Where the management's estimate
of the useful life of an asset of the enterprise is shorter than
that envisaged under the provisions of the relevant statute, the
depreciation provision is appropriately computed by applying a
higher rate. If the management's estimate of the useful life of
the asset is longer than that envisaged under the statute, depreciation
rate lower than that envisaged by the statute can be applied only
in accordance with requirements of the statute.
14. Where depreciable assets are disposed
of, discarded, demolished or destroyed, the net surplus or deficiency,
if material, is disclosed separately.
15. The method of depreciation is
applied consistently to provide comparability of the results of
the operations of the enterprise from period to period. A change
from one method of providing depreciation to another is made only
if the adoption of the new method is required by statute or for
compliance with an accounting standard or if it is considered
that the change would result in a more appropriate preparation
or presentation of the financial statements of the enterprise.
When such a change in the method of depreciation is made, depreciation
is recalculated in accordance with the new method from the date
of the asset coming into use. The deficiency or surplus arising
from retrospective recomputation of depreciation in accordance
with the new method is adjusted in the accounts in the year in
which the method of depreciation is changed. In case the change
in the method results in deficiency in depreciation in respect
of past years, the deficiency is charged in the statement of profit
and loss. In case the change in the method results in surplus,
the surplus is credited to the statement of profit and loss. Such
a change is treated as a change in accounting policy and its effect
is quantified and disclosed.
16. Where the historical cost of an
asset has undergone a change due to circumstances specified in
para 6 above, the depreciation on the revised unamortised depreciable
amount is provided prospectively over the residual useful life
of the asset.
Disclosure
17. The depreciation methods used,
the total depreciation for the period for each class of assets,
the gross amount of each class of depreciable assets and the related
accumulated depreciation are disclosed in the financial statements
alongwith the disclosure of other accounting policies. The depreciation
rates or the useful lives of the assets are disclosed only if
they are different from the principal rates specified in the statute
governing the enterprise.
18. In case the depreciable assets
are revalued, the provision for depreciation is based on the revalued
amount on the estimate of the remaining useful life of such assets.
In case the revaluation has a material effect on the amount of
depreciation, the same is disclosed separately in the year in
which revaluation is carried out.
19. A change in the method of depreciation
is treated as a change in an accounting policy and is disclosed
accordingly.
ACCOUNTING STANDARD
(The Accounting Standard comprises
paragraphs 20–29 of this Statement. The Standard should be read
in the context of paragraphs 1–19 of this Statement and of the
'Preface to the Statements of Accounting Standards'.)
20. The depreciable amount of a depreciable
asset should be allocated on a systematic basis to each accounting
period during the useful life of the asset.
21. The depreciation method selected
should be applied consistently from period to period. A change
from one method of providing depreciation to another should be
made only if the adoption of the new method is required by statute
or for compliance with an accounting standard or if it is considered
that the change would result in a more appropriate preparation
or presentation of the financial statements of the enterprise.
When such a change in the method of depreciation is made, depreciation
should be recalculated in accordance with the new method from
the date of the asset coming into use. The deficiency or surplus
arising from retrospective recomputation of depreciation in accordance
with the new method should be adjusted in the accounts in the
year in which the method of depreciation is changed. In case the
change in the method results in deficiency in depreciation in
respect of past years, the deficiency should be charged in the
statement of profit and loss. In case the change in the method
results in surplus, the surplus should be credited to the statement
of profit and loss. Such a change should be treated as a change
in accounting policy and its effect should be quantified and disclosed.
22. The useful life of a depreciable
asset should be estimated after considering the following factors:
(i) expected physical wear and tear;
(ii) obsolescence;
(iii) legal or other limits on the
use of the asset.
23. The useful lives of major depreciable
assets or classes of depreciable assets may be reviewed periodically.
Where there is a revision of the estimated useful life of an asset,
the unamortised depreciable amount should be charged over the
revised remaining useful life.
24. Any addition or extension which
becomes an integral part of the existing asset should be depreciated
over the remaining useful life of that asset. The depreciation
on such addition or extension may also be provided at the rate
applied to the existing asset. Where an addition or extension
retains a separate identity and is capable of being used after
the existing asset is disposed of, depreciation should be provided
independently on the basis of an estimate of its own useful life.
25. Where the historical cost of a
depreciable asset has undergone a change due to increase or decrease
in long term liability on account of exchange fluctuations, price
adjustments, changes in duties or similar factors, the depreciation
on the revised unamortised depreciable amount should be provided
prospectively over the residual useful life of the asset.
26. Where the depreciable assets are
revalued, the provision for depreciation should be based on the
revalued amount and on the estimate of the remaining useful lives
of such assets. In case the revaluation has a material effect
on the amount of depreciation, the same should be disclosed separately
in the year in which revaluation is carried out.
27. If any depreciable asset is disposed
of, discarded, demolished or destroyed, the net surplus or deficiency,
if material, should be disclosed separately.
28. The following information should
be disclosed in the financial statements:
(i) the historical cost or other amount
substituted for historical cost of each class of depreciable assets;
(ii) total depreciation for the period
for each class of assets; and
(iii) the related accumulated depreciation.
29. The following information should
also be disclosed in the financial statements alongwith the disclosure
of other accounting policies:
(i) depreciation methods used; and
(ii) depreciation rates or the useful
lives of the assets, if they are different from the principal
rates specified in the statute governing the enterprise.
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