AS 6: Depreciation

Accounting
IPCC Paper 1: Accounting Chapter 1 Unit 2
Depreciation - AS 6
CA. Yagnesh Desai
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Introduction
This statement deals with depreciation
accounting and applies to all
depreciable assets;
Depreciation is allocated so as to
charge a fair proportion of depreciable
amount in each accounting period
during the expected useful life of asset.

Applicability
This standard was introduced in 1984
Revised later in the year 1994.
It is applicable to corporates as well all non
corporate entities since 1995
This standard is inextricably connected with
another standard ? Guess which ?
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AS 10 Fixed Asset

Scoped Out Not

applicable to
Forests, Plantations and similar regenerative natural resources
Wasting Assets including Mineral rights, Expenditure on the Exploration for and Extraction of Minerals,
Oil, Natural Gas and similar non-regenerative resources.

Expenditure on Research & Development;

Goodwill
Livestock
Land- unless it has limited life

Learning Objectives
At What rate should Fixed Assets be
depreciated ?
What is the concept of Useful life. ?
Can An Enterprise Change rates of
depreciation ?
If yes, How changes are dealt with ?
Retrospectively or Prospectively. ?

What is Depreciation ?
Para 3. Depreciation is a measure of the wearing out,
consumption or other loss of value of a depreciable asset
arising from use, effluxtion of time or obsolescence
through technology and market changes.
Depreciation includes amortisation of assets whose
useful life is predetermined. Amortisation is phrase used
for Intangible Assets.
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Definition Depreciable
Assets
Are assets expected to be used during more
than one accounting period;

Have a limited useful life; and

Are held by an enterprise for use in the production
or supply of good and services, for rentals to others,
or for administrative purposes & NOT for sale in the
ordinary course of business.

Definitions Useful Life

Is either the period over which a
depreciable asset is expected
to be used by the enterprise; or
The number of production or
similar units expected to be
obtained from the use of the
asset by the enterprise

Definitions
Depreciable Amount
Of a depreciable asset is
its historical cost, or
other amount substituted
for historical cost in the
financial statement,
LESS the estimated
residual value .

Usually following three factors help assess

Depreciation
Historical Cost
or Other
Amount
substituted for
HC

Residual
Value

Depreciable
Amount

Depreciable
Amount

Useful Life
(Years )

Amount of
Depreciation
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Historical Cost
Historical Cost includes any money
outlay or equivalent in connection with:
1.Acquisition,
2.Installation,
3.Commissioning,
4.Additions and
5.Improvement
In other words Initial Cost at which a
asset is recognized and measured.

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Historical Cost- When

can it Change ? ?
Subsequent Changes may occur
as a result of Long term liability
due to:
I. price adjustments,
II.changes in duties & similar
factors.

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Useful Life
Useful life of a depreciable asset is
estimated based on following factors:
Expected Physical wear and tear;
Obsolescence;
Legal or other limits on the use of the asset.

Periodic review of the useful life of major

depreciable assets may be required.
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Useful Life
Of a depreciable asset is shorter than the
physical life.
Some times pre-determined by legal or
contractual limits. Assets under Finance Lease.
Depends of the extent of use & physical
deterioration-Repairs and maintenance policy
Determination of useful life is a matter of
estimation.

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Useful Life gets reduced by

obsolescence
(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.
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Changes in Estimated Useful

Life
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.
Thus , the effect is Prospective and
NOT Retrospective

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Residual Value

If likely to be insignificant then considered NIL;

If likely to be significant then estimated at the time of

acquisition / subsequent revaluation of the asset.
One of the basis of the estimation would be realisable
value of similar assets which have reached the end of
their lives, and have operated under similar conditions.

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Method of Depreciation
Commonly employed
methods in industry and
commercial enterprise
are:

Straight-line
method (SLM),
and

Reducing Balance
method.
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A combination of more than one method is

sometimes used.

Basis for Selection of

Method.
Management selects most appropriate method
based on important factors such as:
1. Type of Asset,
2. The nature and use of asset, and
3. Circumstances prevailing in the business.

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Basic Accounting Entry

An allowance account is created for
Accumulated Depreciation
Viz. Accumulated Depreciation
This account is contra to Fixed Assets
Meaning to arrive at Net Book Value

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Materiality
Depreciation fully allocated in same
accounting period when the asset does
not have a material value. !!!
This in other words , remaining net
book value is fully charged as
Depreciation. The asset is effectively
de-recognised.
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Can Depreciation
Method be
Changed ?
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Change in Method of
Depreciation
Method of depreciation once selected is
consistently applied.
Change from one method to another made
only if:
1. Its required by a Statute, or
2. For compliance with an accounting std.,
3. Considered that such a change would result
in more appropriate preparation or
presentation of the financial statements.

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Change in Accounting
Policy OR Change in
Estimates
A Change in Method of Depreciation is
treated as a Change in ??
A change in accounting policy , and changes
in accounting policy is accounted for
retrospectively
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How Change in Method is

accounted for ? Retrospectively.
Depreciation is Re-calculated in accordance with
the new method
There arises either a surplus or
deficiency when such recalculation
is made.
In case of Surplus: Its credited to
the Statement of profit and loss
In case of Deficiency: Its charged
to the Statement of profit and loss.

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Change in other factors

1. Change in Historical Cost
Depreciation is calculated prospectively over Residual
useful life

2. Revision in Useful life

Unamortised depreciation charged over REVISED
remaining useful life

3. Addition or extension in the asset

- Calculate depreciation at the same rate over
remaining

useful life

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Rate of Depreciation !!!

The Statute governing an enterprise may provide
for Depreciation rates
Example:
Companies Act 1956 provides for Depreciation rates in
Schedule XIV for various assets.
Income tax Act provides rates of Depreciation for the Block
of assets .
The Moot Question Which Rate to apply ?
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Rate of Depreciation !!!

Useful Life as per management s estimate is higher
than the statue
This means lower rate of Depreciation need to
be applied
This is NOT Permissible
As per
managem
ent

20 Years

Rate of
Depreciati
on -SLM

05%

As per
Statue

10 Years

Rate of
Depreciati
on- SLM

10%

Can
The Rate
managem of
ent apply
Depreciati
rate based on will be
on its
estimate
No

10%

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Rate of Depreciation !!!

Useful Life as per management s estimate is shorter than
the statue.
This means higher rate of Depreciation need to be applied

This is permissible
As per
managem
ent

10 Years

Rate of
Depreciati
on -SLM

10 %

As per
Statue

20 Years

Rate of
Depreciati
on- SLM

5%

Can
The Rate
managem of
ent apply
Depreciati
rate based on will be
on its
estimate
Yes

10%

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Conclusion
Enterprise can not depreciate asset at rate
lower than the one prescribed under the
Companies Act,1956

To put in other words

The rates of depreciation may ideally be as

per useful life but not lower than the rates
prescribed under the Companies Act 1956.

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Component Accounting
Optional NOT compulsory to
implement
Airline companies follow this method

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Extract para 8.3 of AS

10
8.3. In certain circumstances, the accounting for an
item of fixed asset may be improved if the total
expenditure thereon is allocated to its component
parts, provided they are in practice separable, and
estimates are made of the useful lives of these
components.
For example, rather than treat an aircraft and its
engines as one unit, it may be better to treat the
engines as a separate unit if it is likely that their
useful life is shorter than that of the aircraft as a
whole.
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Component Accounting
Example: Air Craft
Description

Useful
Life

Dep.
Rate

10%

Rate at
Impact
which
should have
been Dep.
Under
20%

Landing
Gear

Frame

20

10%

5%

Over
Depreciated

Engine

10

10%

10%

Adequately
Depreciated

Depreciated

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Depreciation and
Disposal
In case of Disposal / Destruction/ Demolition/
or when assets are discarded :
Any Material Net Surplus or Deficiency are
disclosed

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Presentation in Financial
Statement Balance Sheet
Reduced from the Gross Book Value
Description
Fixed Assets Gross Book
Value
Less : Accumulated
Depreciation
Net Book Value

Amount
25,00,000
5,00,000
20,00,000
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Presentation in Financial
Statement Statement of Profit &
Loss

Depreciation Expenses is
presented on the debit side of the
Statement of Profit & Loss
Debit Profit & Loss Account / Depreciation Exp.
Credit Accumulated Depreciated

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Disclosures
The related accumulated depreciation.

Total depreciation for the period of each

class of assets,
Historical cost or other amount substituted
for Historical cost of each class of
depreciable assets;

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Additional disclosures

Note: Audio for this slide will be updated shortly

Following information should also be disclosed along
with disclosures of other accounting policies:
Depreciation methods used, and
Depreciation rates or useful lives of the assets
(if they are different from the principal rates specified in the
statute governing the enterprise e.g: Companies Act, 1956)

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Disclosures Revalued Assets

Note: Audio for this slide will be updated shortly

If 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.
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Thank You
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