1.22   Query:  

Calculation of double/triple shift depreciation under

Schedule XIV to the Companies Act, 1956.

1. A public limited company, having a number of units at different locations, has been providing depreciation for double/triple shift working by considering actual working hours of respective items of plant and machineries. The depreciation for double and triple shift working is calculated on the basis of such hours converted to 8 hours shift annually, as shown in Annexure I.

2. The querist has given an example of another public limited company, having a number of manufacturing units at various locations, which calculates the extra depreciation for double/triple shift working on the respective plant and machinery in the following manner, details of which are given in Annexure II:

a.         In case the plant and machinery has worked upto 8 hours in a day, the working is taken as single shift.

b.         In case the plant has worked in a day for more than 8 hours and upto 16 hours, the plant is treated to have worked for double shift.

c.         In case the plant has worked in a day for more than 16 hours, the same is treated to have worked triple shift.

This company has been calculating the extra shift depreciation as per the Companies Act, 1956, on the basis of such shifts, for the last several years.

3. The querist has stated that the rates for double and triple shift working seem to have been determined on the premise that the depreciation rates are a function of two factors, viz., efflux of time and wear and tear. Since the factor of efflux of time remains constant, whether an asset has worked single shift, double shift, or triple shift, the rates for extra shift working include only the incremental depreciation due to extra wear and tear.

4. The querist has quoted paragraphs 3(i) and 7(iii) of Accounting Standard (AS) 6 on ‘Depreciation Accounting’, issued by the Institute of Chartered Accountants of India, as follows:

“3(i)     Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising of 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 life of the asset. Depreciation includes amortisation of assets where useful life is pre-determined.”

“7(iii)    The useful life of a depreciable asset is 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.”

5. In the view of the querist, extra shift depreciation is provided for additional wear and tear of plant and machinery. Therefore, depreciation for extra working of plant in double/triple shift, should, as such, be provided with reference to actual number of hours the plant and machinery worked double/triple shift on annual basis so that the extra shift depreciation provided is directly related to the additional running/utilisation of plant and machinery, as is being done by the company in question.

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

(a)        Whether any of the methods stated at paragraphs 1 or 2 above is correct?

(b)        Is there any other correct method for calculation of shifts for the purpose of working out extra depreciation for double/triple shift working?

ANNEXURE I

Computation of hours for extra shifts worked during April, 1991- Asset ‘A’

Number of extra-shifts worked during the year on the above basis.

Accordingly double shift working will be 70 shifts (134-64) and triple shift working will be 64 shifts.

ANNEXURE II

Computation of extra shifts on the basis of daily extra hours for April, 1991 – Asset ‘A’

Number of extra shifts worked during the year on the above basis.

Accordingly, double shift working will be 78 shifts (257-179) and triple shift working will be 179 shifts.

                                                                             Opinion                                    July 15, 1993

1. The Committee notes note no. 6 of Notes to Schedule XIV to the Companies Act, 1956, which reads as follows:

“6.        The calculations of the extra depreciation for double shift working and for triple shift working shall be made separately in the proportion which the number of days for which the concern worked double shift or triple shift, as the case may be, bears to the normal number of working days during the year…”

2. The Committee notes that the term ‘shift’ has not been defined in the Companies Act, 1956. Therefore, in the view of the Committee, for the purposes of this Act, the term ‘shift’ has to be construed, as it is understood in the common commercial parlance. In this context, the Committee notes section 2(r) of the Factories Act, 1948, which defines the term ‘shift’ as follows:

“2 (r).   Where work of the same kind is carried out by two or more sets of workers working during different periods of the day, each of such sets is called “group” or “relay” and each of such periods is called a ‘shift’.”

3. The Committee notes from the above and the practice that the basic feature of the system of extra shifts is employment of a different set of workers for the period additional to the normal working hours. Generally, the shift system is operative for a certain number of consecutive working days and not extra hours worked on isolated working days. The extra hours worked by the same set of workers is generally termed and treated as overtime and is not referred to as shift.

4. The Committee is also of the view that a manifestation of extra-shift can also be a situation where a significant number of extra hours are worked beyond the normal working hours in a day, say, four hours or more over and above a shift of eight hours. However, calculation of a shift has to be with reference to a working day and not with reference to the entire year.

5. On the basis of the above, the Committee is of opinion that neither of the methods, stated at paragraphs 1 and 2 of the query, is correct. The calculation for the purpose of working out extra shift depreciation should be on the basis of extra shifts worked by a ‘concern’, in respect of the relevant day(s), as explained at paragraphs 3 and 4 above.

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