Pro-rata depreciation consequent to introduction of Schedule

XIV to the Companies Act, 1956.

1.A public limited company has equity holding by Government and financial institutions exceeding 74%. The statutory auditors are appointed by the Comptroller and Auditor General of India (CAG) under sub-section (2) of section 619 of the Companies Act read with the Department of Company Affairs’ Notification No. GSR/ 443(F) dated 18.10.1972. After the accounts are audited by the statutory auditors, the supplementary audit is taken up by the Accountant General (AG) on behalf of CAG pursuant to the provisions of section 619(4) of the Companies Act.

2. During the year 1988-89 (1.1.1988 to 31.3.1989), the company has provided depreciation on additions to plant and machinery (except those items of Rs. 5,000/- and below in each case) on pro-rata basis as required under Schedule XIV to the Companies Act, 1956. However, on additions to other assets, depreciation for the full year has been charged irrespective of the date on which additions took place. The aforesaid method of charging depreciation is consistently followed and is disclosed in the Accounting Policies forming the part of accounts as under:

“Consequent upon the incorporation of Schedule XIV to the Companies Act, 1956 by the Companies (Amendment) Act, 1988, depreciation on fixed assets has been provided on ‘Straight Line Method’ at the rates prescribed in the said schedule. Hitherto, depreciation on additions to plant & machinery (except ‘X’ Unit) was provided for full year irrespective of the date on which these assets were put to use. From the current year, depreciation on additions to plant & machinery (except those of Rs. 5,000/- and below) has been provided on pro-rata basis as laid down in Schedule XIV. Depreciation on fixed assets has been provided for full year irrespective of the date of their being put to use/purchase. Depreciation on assets disposed off during the year has been charged upto the date of disposal.”

3.During the audit of accounts for 1988-89, the auditors have observed that depreciation has been overstated by Rs. 9.95 lakhs (total depreciation charged is Rs. 2596 lakhs) due to provision of the full year depreciation on additions to fixed assets other than plant and machinery instead of provision on pro-rata basis as prescribed in Schedule XIV to the Companies Act, 1956. This has resulted in understatement of profit by the same amount.

4.The querist has sought the opinion of Expert Advisory Committee on the following issues:

a) Whether the provisions of Companies Act and Schedule XIV therefore make it obligatory for the company to provide depreciation on additions to all fixed assets on pro-rata basis. In other words whether the company can provide higher depreciation by providing the same on full year basis subject to necessary disclosure in the accounts.

b) Whether the provision of higher depreciation amounts to understatement of profit as observed by the auditors.

Opinion November 8, 1989

1.The Committee notes para 24 of the ‘Guidance Note on Accounting for Depreciation in Companies’ (First Edition, 1989) issued by the Research Committee of the Institute of Chartered Accountants of India, which states:

“24. Note No. 4 in Schedule XIV to the Companies Act, 1956, prescribes that “where, during any financial year, any addition has been made to any asset, or where any asset has been sold, discarded, demolished or destroyed, the depreciation on such assets shall be calculated on a pro-rata basis from the date of such addition or, as the case may be, upto the date on which such asset has been sold, discarded, demolished or destroyed.” The Committee is of the view that a company may group additions and disposals in appropriate time period (s), e.g., 15 days, a month, quarter etc. for the purpose of charging pro-rata depreciation in respect of additions and disposals of its assets keeping in view the materiality of the amounts involved.”

2.On the basis of the above the opinion of the Committee on the issues raised by the querist in para 4 of the query is as below:

(a) Schedule XIV to the Companies Act, which has to be read along with the sections 205 and 350 of the Act, makes it obligatory to provide depreciation on pro-rata basis on additions to all fixed assets.

(b) The Committee is also of the opinion that where a company provides higher depreciation by providing the same on full year basis, even with necessary disclosure in accounts, the provision of such higher depreciation will amount to understatement of profits as well as understatement of assets.

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