New Delhi: Providing more clarity for companies, the government has made changes to norms for determining depreciation of assets.
The new Companies Act emphasises on the concept of useful life of assets by providing indicative life and residual value for assets in Schedule II. In the Companies Act, 1956, there were specified minimum rates in this regard.
The Corporate Affairs Ministry has now said that useful lives of assets and the residual value specified in Schedule II should be ordinarily used by companies.
In case, companies are using values that are different from the Schedule II, then they would be required to adequate disclosures in their financial statements to justify the variation along with technical advice.
“These changes bring in some anti-abuse provisions on the application of the new requirements on estimation of life of assets and also consistency in their application,” Sai Venkateshwaran, Partner and Head of Accounting Advisory Services, KPMG in India said in a statement.
They were long awaited as there was inconsistency in the way companies had applied these new depreciation requirements when reporting their first quarter results, he noted.
The changes have been made through a notification issued by the Ministry on August 29.
Further, the concept of component accounting has been included in Schedule II.
In case of an fixed asset, where there are significant individual components having different useful lives, then each such component would have to be depreciated separately.
“With the inclusion of this concept in the Schedule (II), it is expected that these principles would now be applied in practice by Indian companies.
“However, for capital intensive companies, this is a detailed and burdensome exercise which involves technically determining components within an asset and their useful lives,” Venkateshwaran said.
According to the Ministry, the requirement would be voluntary this fiscal and mandatory for financial statements with respect to fiscal starting on or after April 1, 2015.
Besides there are specific transitional guidance to enable firms to cross over to the new Act.
It required companies to depreciate carrying value less residual value over balance life under the new Schedule II.
In case useful life under the 2013 Act is exhausted, companies had to adjust opening balance of retained earnings.
With the latest changes, the requirement to adjust the difference directly to the opening balance of retained earnings has now been made optional.
“This amendment would be beneficial to companies under Minimum Alternate Tax (MAT) as they would be able to charge the additional depreciation as per the transitional provisions to the profit or loss account instead of adjusting it directly to the reserves,” Venkateshwaran said.