Expert Advisory Committee

1.25 Query:

Accounting for extra shift depreciation for a plant unit.

1. A public sector undertaking is carrying on the business of producing and selling iron and steel. The company has one integrated steel plant with different ‘plant units’ which are commissioned on different dates. After completion of trial run they are capitalised on different dates.

2. The company works on all days in the year as production is to be made under continuous process, though some of the plant units may not work on certain days during the year on account of waiting for inputs/maintenance and similar other reasons. Overall every day throughout the year at least one plant unit will be working. The policy of the company for providing extra shift depreciation is as follows:

“Provision for extra shift working is made considering each Plant/Mill as a separate unit for the purpose of reckoning the number of normal working days during the year.”

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

(a) Is the above policy in conformity with the provision of Schedule XIV to the Companies Act?

(b) Whether the normal number of working days during the year is to be taken for the company as a whole?

(c) If the company takes each plant unit separately and reckons the number of days, will the depreciation worked out be not more than what is required to be written off under Schedule XIV?

Opinion May 4, 1993

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

“6. The calculation 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. For this purpose, the normal number of working days during the year shall be deemed to be-

(a) In the case of a seasonal factory or concern, the number of days on which the factory or concern actually worked during the year or 180 days, whichever is greater;

(b) In any other case, the number of days on which the factory or concern actually worked during the year or 240 days, whichever is greater.”

2. The Committee notes that the term ‘concern’, as used in note no.6 of Notes to Schedule XIV, reproduced above, has been explained in paragraph 12 of the Guidance Note on Accounting for Depreciation in Companies, issued by the Research Committee of the Institute of Chartered Accountants of India, as follows:

“12. Schedule XIV requires that where the concern has worked extra shift, the multiple or extra shift depreciation will have to be provided on the plant and machinery, wherever applicable. In this regard, various units/departments/mills/factories should be taken as separate concerns.”

3. The Committee presumes that the company in question has used the expression ‘plant units’ in the same sense as “units/departments/mills/factories” mentioned in para 12 of the aforesaid Guidance Note.

4. On the basis of the above, the Committee is of the following opinion in respect of the issues raised by the querist in paragraph 3 of the query:

(a) Yes, subject to the presumption in para 3 above.

(b) No, the normal number of working days during the year is to be taken for each ‘concern’ separately.

__________________________________