Depreciation Guidance Note – Some Important Points
Action items
1. Companies need to determine the useful life of fixed assets as at the commencement of each year for all the carrying assets as at that date and also for newly acquired assets during the course of the year as and when capitalized, 2. Companies need to assess whether there have been any changes to the estimated pattern of consumption/loss of value/wear and tear of assets during the year and in case of any such changes, the useful life of the related asset needs to be re-estimated, 3. The interpretation of the term ‘Continuous Process Plants’ should be made with reference to the inherent nature of the item of plant namely the technical design, 4. Where for an item of fixed asset, the useful life was estimated by the company on a single shift basis, but in reality used for more than one shift, then not only the related depreciation charge for the year should reflect the extra shifts used but the company should also determine at the commencement of the next fiscal year, whether the extra usage in the prior year was on a sporadic or non-sporadic basis. Where such an assessment concludes that the use would not be sporadic, then the company needs to reassess the useful life of the asset. Otherwise, such re-assessments are not required, 5. In applying the Unit of Production method for depreciation accounting, the limiting factor that needs to be considered is the number of units that can be produced or serviced from the use of the related asset. There also needs to be a periodic review of the same, 6. Those companies that used revaluation as a base for measurement of fixed assets and followed an accounting policy of recouping the related additional depreciation from the income statement would be permitted by Companies Act 2013 to recoup the additional depreciation only from revenue reserves and such companies need to disclose this accounting change as a change in accounting policy, 7. In order to implement component accounting for fixed assets, companies may use certain criteria in an order i.e. a) vendor provided break-up costs, b) internal/external technical expertise, c) fair value approach, or d) current replacement cost of the component of the related asset and applying the same basis on the assets historic cost, 8. Every company may adopt an accounting policy of fully depreciating fixed assets in the year of acquisition up to certain threshold limits by considering materiality aspects, 9. The use of different methods of accounting for depreciation for similar assets at different geographical locations by a company is permitted only if the depreciation methods selected are in compliance with the factors for depreciation prescribed by the related accounting standard AS 6.
Conclusion
A number of action items emanate from the release of the Guidance Note (GN (A) 35) by the ICAI. Companies and auditors would need to take these into consideration. At the same time, one would need to take a fresh look at other components of costs of fixed assets that are not specifically addressed in the latest guidance note namely, borrowing costs, foreign exchange differences etc., as all the components would to an extent work in tandem from the accounting standpoint. As companies gear for the upcoming changes to corporate financial reporting framework (IND-AS), depreciation and carrying amount of fixed assets would come in for a fresh re-look as one transitions for the first-time to Indian Accounting Standards (IND AS 101)
