Depreciation as per Companies Act, 2013 | Schedule II | Companies Act Integrated Ready Reckoner | Companies Act 2013 | CAIRR
Depreciation is the systematic allocation of the cost of an asset over its useful life. The Companies Act, 2013 prescribes the guidelines for calculating depreciation through Schedule II, which provides the useful lives of various asset classes. Depreciation includes amortization for intangible assets and is charged as an expense in the Profit & Loss Account.
Methods of Depreciation
The Act allows companies to adopt either of the following methods for calculating depreciation:
- Straight Line Method (SLM): Equal depreciation is charged every year.
- Written Down Value (WDV) Method: Higher depreciation is charged in the earlier years, reducing over time.
The method once selected should be consistently applied unless justified otherwise in financial statements.
Key Provisions of Depreciation under Companies Act, 2013
- Useful Life: The Act specifies the useful life of various assets, and companies must adhere to these unless technical advice supports a different useful life.
- Residual Value: The residual value of an asset cannot exceed 5% of the original cost.
- Component Accounting: If a significant part of an asset has a different useful life, it must be depreciated separately.
- Depreciation for First Year: Calculated proportionately from the date of acquisition.
- Disclosure Requirements: Companies must disclose the depreciation method used and any changes made in the financial statements.
Depreciation Schedule (Schedule II of Companies Act, 2013)
1. Buildings & Civil Structures
| Asset Type | Useful Life (Years) |
|---|---|
| Factory buildings | 30 |
| Office buildings (RCC) | 60 |
| Temporary structures | 3 |
2. Plant & Machinery
| Asset Type | Useful Life (Years) |
| General plant & machinery | 15 |
| Continuous process plant | 25 |
| Electrical equipment | 10 |
3. Vehicles
| Asset Type | Useful Life (Years) |
| Motor vehicles (general use) | 8 |
| Motor vehicles (hire business) | 6 |
4. Furniture & Fixtures
| Asset Type | Useful Life (Years) |
| General furniture | 10 |
| Furniture in hotels, schools, theaters | 8 |
5. IT Equipment
| Asset Type | Useful Life (Years) |
| Computers, laptops | 3 |
| Servers and networks | 6 |
Depreciation for Intangible Assets
For intangible assets, depreciation is calculated using the applicable Indian Accounting Standards (Ind AS). For assets such as toll roads under the Build, Operate, and Transfer (BOT) model, amortization is based on revenue projections over the concession period.
Depreciation for Multi-Shift Use
If an asset is used for multiple shifts:
- Double shift: Increase depreciation by 50%.
- Triple shift: Depreciation is 100% of the normal rate.
Difference Between Depreciation under Companies Act and Income Tax Act
- Companies Act: Based on the useful life of assets (Schedule II).
- Income Tax Act: Based on prescribed depreciation rates under the block of assets concept.
- Impact: This difference leads to timing differences, requiring adjustments in Deferred Tax Liability (DTL) or Deferred Tax Asset (DTA).
Conclusion
The Companies Act, 2013 ensures depreciation is charged systematically, maintaining accurate financial reporting. Businesses must comply with Schedule II, ensure proper disclosure, and adopt a consistent depreciation method. Proper depreciation calculation helps in better financial planning and tax compliance.
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