1.15 Query:

Computation of extra shift depreciation.

1. A public sector company, engaged in the manufacture of telecom cables, has three units in three different states. The company has a manpower strength of 6510 as on 31.3.96.

2. The company generally works on triple shift basis to meet the demand of the suppliers and, accordingly, provides for depreciation in accordance with the provisions of Schedule XIV to the Companies Act, 1956, as applicable for three shift operation.

3. During the current financial year, one of the plants of the company is facing acute shortage of working capital which caused a substantial under-utilisation of the installed capacity. Although, for administrative reasons such as payment of wages without attendance, constraint of space in the shop floor etc., the particular plant is working on triple shift, the utilisation of the plant and machinery, however, stood restricted to the working hours available under the single shift basis.

4.  According to the querist, assessment of depreciation and amount to be charged in respect thereof in an accounting period is based on three factors, i.e., cost, expected useful life of the assets and its estimated residual value. The useful life of the assets on the other hand is dependent on the wear and tear which again depends on operational factors such as number of shifts and repair and maintenance policy of the enterprise. The single most important factor in determining the quantum of depreciation, therefore, is the use and physical deterioration of the assets. In the view of the querist, the provision for depreciation on account of extra shift allowance as provided in Schedule XIV has to be viewed in the above perspective.

5.  In view of the fact that the utilisation of plant and machinery stood restricted to the working hours available under single shift operation because of substantial under-utilisation of the capacity, the company intends to provide depreciation on single shift basis although the particular plant is working on triple shift basis due to administrative reasons.

6. The opinion of the Expert Advisory Committee has been solicited on the proposed treatment of depreciation in the books of account of the company.

                                                                Opinion                                         September 23,1997

1. The Committee notes that clause 6 of the Notes to Schedule XIV to the Companies Act, 1956, prescribes as below:

“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 also notes that para 12 of the Guidance Note on Accounting for Depreciation in Companies inter alia, recommends as below:

“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 notes from the above that extra depreciation for double or triple shifts has to be worked out on the basis of number of days for which the ‘concern’ worked double or triple shift. Thus, the actual utilisation of capacity of the plant and machinery items in the concern is not relevant for the purpose of computing extra shift deprecation under the Companies Act, 1956.

4. The Committee also notes that as per the requirements of Schedule XIV, the unit of usage of assets is ‘shift’ and not utilisation of capacity. Thus, in the present case since the plant has worked triple shift, although there is a substantial under-utilisation of capacity the depreciation thereon should be charged on triple shift basis.

5. On the basis of the above, the Committee is of the opinion that depreciation on the plant and machinery is required to be charged on triple shift basis.

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