The Hindu Business Line : Depreciation as in pronouncements

THE requirements of the Companies Act are applicable only to companies. In the case of other entities, such as partnership firms, proprietary concerns and so on, there is no law governing the charging of depreciation. The ICAI made it mandatory for auditors to ensure compliance with the Accounting Standards while carrying out attest functions. It is significant to note that Accounting Standard (AS) 6 on depreciation does not suggest any rate of depreciation.

Depreciation amount: While company law requires 95 per cent of cost of an asset to be depreciated over its life, the Income-Tax Act does not stipulate such a condition. But AS 6 requires that the historic cost of the asset less its estimated realisable value to be depreciated over its useful life.

Deferment of depreciation: Schedule XIV of the Companies Act lays down the schedule of the depreciation rates to be charged by companies. It allows companies to charge rates of depreciation independent of it. Section 205 suggests that a company can postpone charging of depreciation until the company proposes to pay dividends. (A note is, at times, appended to the balance-sheet and the auditor puts in his qualification under Section 211(3) a, b and c). But a dividend-paying company has to write off depreciation on its assets before declaring any dividends.

Thus, while there is a possibility that a company may postpone depreciation, the I-T Act does not allow such a deviation. Following a recent amendment, assessees will have to compulsorily provide for depreciation, there being a loss notwithstanding.

Rigid provisions: The depreciation numbers mentioned in Schedule XIV are the minimum rates and a company may choose to charge more than the rates specified therein. If this is done, does it amount to non-compliance with AS 6? Perhaps the company justifies increased rate of depreciation by providing a basis for charging an increased rate of depreciation.

Methods of depreciation: While AS 6 does not suggest any method of depreciation, company law provides an option between the straight-line and written-down value (WDV) methods. But under income-tax, one has to only follow the WDV method.

Concept of block of assets: The I-T Act provides for charging of depreciation on a block of assets. Under company law, each asset is considered independent. Any profit on sale of assets is reduced from the block of assets, whereas for accounting purposes, the profits are to be transferred to profit and loss (P&L) account.

Time concept: Company law requires depreciation to be charged on time basis, for the period the asset was actually put to use. Under income-tax, depreciation is allowed at the normal rates for full year if the asset is used for more than 180 days during the initial year. If it is used for less than 180 days, depreciation is allowed at half the normal rates. Thus, if an asset is bought even on 31.03.xxxx, half of the normal rates can be claimed under income-tax. Depreciation cannot be claimed for income-tax deduction in the year of sale of the asset. Even if the asset is sold on 31.03.xxxx, the seller cannot claim depreciation. But the buyer can claim half of normal depreciation.

Option of depreciation method: Every company can have its own accounting policy for depreciation. Consistency should be followed. A company can choose to claim depreciation under the straight-line method for one class of assets and WDV for other class of assets. Under the same class of assets, too, the company can claim one method for assets held by it and another method for assets leased out. Well, income tax does not allow any method other than WDV and that, too, only at the rates specified by it under Section 32.

Depreciation on leased assets: AS 19 on leases permits the lessor to claim depreciation on assets under operating lease and the lessee to claim on assets held under finance lease. Under income-tax, the lessor only can claim depreciation no matter whether the lease is a finance or operating lease.

Auditor and depreciation: Depreciation in a routine simple estimate (AAS 18) requires the auditor to prepare his estimate of the value and compare it with the estimate made by the entity to satisfy himself with the value arrived at. An auditor should consider the implications of all these factors while calculating depreciation on assets.

AAS 20 requires the auditor to have knowledge of business. Such a knowledge of business would include the intricacies of the usage of assets and estimated useful life of the asset.

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