AS 6 Depreciation Accounting Revised Notes | Applicability

AS 6 Depreciation Accounting Revised Notes | Applicability. In the previous articles, we have given complete details of AS 2 Valuation of Inventory and AS 10 Fixed Assets. Today we are providing the full details of Accounting Standard – 6 Deprecation accounting. In this article, you can get the definition of A.S – 6, Applicability, Non-Applicability etc. This notes is useful for IPCC students.

AS 6 Depreciation Accounting Revised Notes

Depreciation:

It is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, passage 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 amortization of assets whose useful life is predetermined.

Applicability

AS 6 Depreciation though an old accounting standard is considered very significant, as it affects the preparation and presentation of financial statements for all enterprises. For the same reason, AS 6 is made applicable to all level of enterprises i.e. it applies in its entirety to level I, II, and III enterprises.

To which assets, AS 6 Depreciation Accounting is not applicable ?

AS 6 Depreciation accounting applies to all depreciable assets except the following items to which special considerations apply–

(i) forest, 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) Good will

(v) live stock

(vi) Land, unless it has a limited useful life to the enterprise.

Definitions :

The following terms are used in this Statement with the meanings specified:

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.

Depreciable assets are assets which

(i) are expected to be used during more than one accounting period; and 102 AS 6 (revised 1994)

(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.

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.

Under the following circumstances, 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 :

technological changes
improvement in production methods
change in market demand for the product or service output of the asset or
legal or other restrictions.

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.

There are two methods of depreciation:

Straight Line Method (SLM)
Written Down Value Method (WDVM)

Note: A combination of more than one method may be used.

Points to Remember:

1. The depreciation method selected should be applied consistently from period to period. The change in method of depreciation should be made only if;

2. The adoption of the new method is required by statute; or

3. For compliance with an accounting standard; or

4. If it is considered that change would result in a more appropriate preparation of financial statement;

5. When there is change in method of depreciation, depreciation should be recalculated in accordance with the new method from the date of the assets coming into use. (i.e RETROSPECTIVELY). The deficiency or surplus arising from such recomputation should be adjusted in the year of change through profit and loss account. Such change should be treated as a change in accounting policy and its effect should be quantified and disclosed.

6. The useful lives of major depreciable assets may be reviewed periodically. Where there is a revision of the estimated useful life, the unamortized depreciable amount should be charged over the revised remaining useful life. (i.e. PROSPECTIVELY)

Disclosure requirements:

1. the historical cost
2. total depreciation for each class charged during the period
3. the related accumulated depreciation
4. depreciation method used ( Accounting policy)
5. depreciation rates if they are different from those prescribed by the statute governing the enterprise.

Depreciation vis-à-vis Amortization :

The accounting profession as well as the industry in India, have been extensively using only one terminology i.e. Depreciation. However, over last few years the concept of amortisation is gaining equal importance. The words depreciation and amortisation are used for different assets. For fixed assets of tangible nature such as Building, Plant and Machinery, Vehicles, Furniture & Fixtures the word depreciation is used, whereas fixed assets of intangible nature such as Patents, Trade Marks, Goodwill, Software, Technical know-how etc. the word amortisation is used. AS 6 Depreciation – specifically deals with depreciation where as AS 26, deals with Intangible assets and its amortisation. Thus, now we have different accounting standards which deal with hus, now we have different accounting standards which deal with

Thus, now we have different accounting standards which deal with hus, now we have different accounting standards which deal with write-off of fixed assets either in form of depreciation or amortisation. The rates of write-off will again differ depending upon various factors. As regards depreciation is concerned, in India ready made rates are made available in schedule XIV of the Companies Act, 1956. Whereas AS 26 which is of recent origin, permits amortisation based on Management’s estimate of useful life of the asset, but not to exceed ten years except where there is a persuasive evidence that the useful life of an intangible asset will be a specific period longer than ten years.

Both Tangible and Intangible assets are shown under the head fixed assets but presented separately. Thus, now we encounter the word Depreciation and Amortisation instead of one terminology Depreciation. Disclosure requirements of AS 6, Depreciation Accounting and AS 26, Intangible Assets have to be complied with in presentation of financial statements.

With AS 26 becoming applicable w.e.f. 1-4-03 for listed companies, a common item say Goodwill or Trade Mark appearing in Financial Statements is subject to amortization. Thus, intangible assets such as Goodwill or Trademark can no more be carried indefinitely in financial statements at cost.

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AS 6 Depreciation Accounting Revised Notes
Under the following circumstances, useful life of a depreciable asset is shorter than its physical life and is :