Expert Advisory Committee

1.5 Query

Depreciation rates applicable to assets existing on the date of

Companies (Amendment) Act, 1988, coming into force.

1.Prior to the amendment to the Companies Act in 1988, in quintessence, the law and its interpretation stood as follows, in the views of the querist:

(a) Section 205(2) of the Act required that the depreciation shall be provided to the extent specified in Section 350 or on a straight-line method at a rate whereby 95% of the original cost of the fixed assets was depreciated over a specified period, which in turn, was linked to the life of the asset computed in accordance with the provisions of section 350.

(b) Section 350 of the Companies Act provided the depreciation rates as per the Indian Income-tax Act and the rules made thereunder for the time being in force.

(c) The interpretation of the rates under the Income-tax Act has been provided by the Government of India, Ministry of Industry, Department of Company Affairs vide their circular 1/85 dated January 10, 1985 as amended by their circular No. 1/86, dated May 21, 1986. The circular of May 21, 1986, provides that in determining the rate of depreciation the “specified period” is determined at the time of purchase of an asset, viz., the rate of depreciation under the Income-tax Act at that time, (i.e., on acquisition of the assets) and that the rates so fixed need not be changed subsequently consequent on changes in the rates of depreciation under the Income-tax Act.

2.As per the amendment to the Companies Act in 1988, while a provision under section 205(2) for providing depreciation continues to refer to section 350 of the Companies Act, section 350 of the Companies Act has been modified. The revised section 350 of the Companies Act, inter alia, provides for calculation of depreciation at the rates specified in Schedule XIV to the Act. The Schedule provides rates of depreciation to be applied where methods followed are written down value method of depreciation or straightline method of depreciation. Section 350 also requires depreciation to be computed on the written down values shown by the books at the end of financial year expiring or at the commencement of the next year.

3.The amended section 350 of the Companies Act has certain features, viz., (a) it excludes any reference to the rates under the Income-tax Act, (b) it does not specifically state that the SLM method of depreciation will be applied on the first cost of the asset at the commencement of this Act or immediately thereafter.

4.In the above context, the querist has sought the opinion of the Expert Advisory Committee on the following issues:

(a) In respect of fixed assets acquired prior to commencement of the amendment to section 350 in 1988, whether the rates of depreciation in use prior to the amendment would be applicable for 1988 and subsequent years. Alternatively, whether in respect of the assets, irrespective of the date of their acquisition, the rates as in Schedule XIV would be applicable.

(b) Whether the rates indicated in Schedule XIV for the SLM method for computing depreciation would be applicable on the written down values of the assets or on the first cost of the assets. In case the rates are applicable on the written down value, will the written down value be as on the date the amendment to section 350 became effective or any other date?

Opinion November 23, 1989

1.The Committee notes paragraphs 15, 16, 22, 23 and paragraphs 27 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 state, inter alia;

“15. Applicability of the rates prescribed in Schedule XIV to existing assets would depend upon whether the company has been charging depreciation on its assets as per the written down value method or the straight line method.

16. Where a company has been following the written down value method of depreciation in respect of its assets, the WDV rates prescribed in Schedule XIV should be applied to the written down value as at the end of the precious financial year as per the books of the company.

22. The Committee is accordingly of the view that where a company has been following straight line method of depreciation in respect of its assets existing on the date of Schedule XIV coming into force, the following alternative bases may be adopted for computing the depreciation charge:

(a) Where a company follows the manner of charging depreciation recommended by the Department of Company Affairs in its Circular No. 1/85, it has to change its depreciation rates as follows:

(i) The specified period should be recomputed by applying to the original cost, the revised rate as prescribed in Schedule XIV;

(ii) Depreciation charge should be calculated by allocating the unamortized value as per the books of account over the remaining part of the recomputed specified period.

(b) A company which follows the Circular No. 1/86, can continue to charge depreciation on straight line basis at old rates in respect of assets existing on the date on which the new provisions relating to depreciation came into force.

(c) SLM rates prescribed Schedule XIV can be straightaway applied to the original cost of all the assets including the existing assets from the year of change of the rates.

23. A company which changes the rates of depreciation should make an appropriate disclosure in its accounts pertaining to the year in which the change is made.

27. The Department of Company Affairs, as per its circular no. 3/19/88-CL. V, dated April 13, 1989, has stated that “For the purpose of determining net profits of any financial year the amount of depreciation required to be deducted in pursuance of clause (k) of sub-section (4) of Section 349 read with Section 350 shall be the amount calculated as per the written down value method at the rate specified in Schedule XIV, on the assets as shown by the books of the Company at the end of the relevant financial year”. The Committee is of the opinion that the language of Section 350 as it stands at present, does not permit the use of Straight Line Method. The aforesaid section makes reference to ‘written-down value of the assets’ indicating thereby that for the purposes of computation of managerial remuneration, only the WDV method can be used as the SLM rates, by definition, are applicable only to the original cost of the assets and not to the WDV of the assets.”

2.The Committee is accordingly of the following opinion:

(a) (i) Where the company is following WDV method of depreciation in

respect of the fixed assets acquired prior to the date of Schedule XIV coming into force, the WDV rates prescribed in the said Schedule should be applied to the written down value as at the end of the previous financial year as per the books of the company.

(ii) Where the company is following SLM method of depreciation in respect of the fixed assets acquired prior to the date of Schedule XIV coming into force, the following alternative bases may be adopted for computing the depreciation charge:

(A) Where the company follows Circular No. 1/85 dated 10.1.1985 issued by the Department of Company Affairs, the specified period should be recomputed by applying the revised rates prescribed in Schedule XIV to the original cost and the depreciation charge should be calculated by allocating the unamortized value as per the books of account over the remaining part of the recomputed specified period.

(B) Where the company follows Circular No. 1/86 dated 21.5.1986 issued by the Department of Company Affairs, it can continue to charge depreciation at old rates.

(iii) In respect of assets purchased after Schedule XIV came into force, the rates specified in Schedule will be applicable.

(b) The language of section 350, (as it stands at present) does not permit the use of the straight line method. Section 350 makes reference to the ‘written down value of the assets’ indicating thereby that for the purposes of computation of managerial remuneration, only the WDV method can be used since the SLM rates by definition are applicable to the original cost of the assets and not to the written down value of the assets. In view of this, the rates indicated in Schedule XIV for the SLM method of depreciation are applicable to the original cost of the assets.

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