1.27 Query:

Whether depreciation on helicopters can be charged on the

basis of actual hours flown during the year.

1. A government company, established under the Companies Act, 1956, under the administrative control of the Ministry of Civil Aviation, is presently engaged in operation and maintenance of a fleet of helicopters. The company provides necessary logistic support to another government company (X Ltd.) to transport their men/materials at both off-shore and on-shore locations. Besides this, the company is catering to the needs of some other PSUs, state governments and remote areas like North-Eastern states.

2. Depreciation is being provided by the company on straight line basis at the rates prescribed under Schedule XIV to the Companies Act, 1956. According to the querist, the Department of Company Affairs has revised the rates of depreciation vide its Circular dated 4^th November, 1994, in respect of aeroplanes/aero engines. Accordingly, at the rate of 5.6% per annum on SLM, 95% of the total cost of helicopters/aero engines is being depreciated over a specified period of 17 years.

3. The company has recently purchased two new Mi-172 helicopters for Rs. 21.50 crores (approx.) from a Russian company. The useful life of each helicopter, as specified by the manufacturers, is 7000 hours or 15 years, whichever is earlier. The corresponding life of a Western machine is much longer, without limitation in terms of flying hours unlike the Russian machines.

4. The average flying hours in a month and during the year for each helicopter for the company’s main customer, viz, X Ltd., is 100 hours and 1200 hours, respectively. Accordingly, the Mi-172 helicopter will complete its useful economic life in 5.8 years as against 17 years being the specified period under the Companies Act, 1956. If depreciation is charged at the statutory rate of 5.6% p.a. on SLM basis, there will be under-recovery of cost of helicopters as they will have a useful life of less than 17 years. Therefore, it is imperative that the company should depreciate 95% of the original cost of the helicopter in a span of 5.8 years, the actual useful economic life in case it is used continuously for the task of X Ltd. In this case, the effective depreciation rate on SLM basis will come to 16.38% p.a. However, if these helicopters are utilised with other customers where utilisation is lower than 100 hours p.m./1200 hours p.a., the effective rate of depreciation will vary. As these Mi-172 helicopters may be dedicated to a customer and their deployment would vary from one contract to another from time to time, it is difficult to predict the annual utilisation over a period of time. Accordingly, it is difficult to determine the rate of depreciation in view of the limitation of the total flying hours of 7000/15 years.

5. Considering the above facts, it is felt by the querist that the best alternative available with the company is to charge depreciation on these newly purchased helicopters on the basis of actual hours flown by the respective helicopters during the year at the hourly rate arrived at by dividing 95% of the cost of helicopter by 7000 hours, the useful economic life of the helicopter in terms of flying hours as specified by the manufacturers, as these hours are expected to be utilised before 15 years.

                                                                          Opinion                                 December 3, 1997

1. The Committee notes that Accounting Standard (AS) 6 on ‘Depreciation Accounting’, issued by the Institute of Chartered Accountants of India, defines ‘useful life’ of a depreciable asset as follows:

“useful life is either (i) the period over which a depreciable asset is expected to be used by the enterprise; or (ii) the number of production or similar units expected to be obtained from the use of the asset by the enterprise.”

2. The Committee also notes paras 9 and 10 of the ‘Guidance Note on Accounting for Depreciation in Companies’, issued by the Institute of Chartered Accountants of India, which recommend as below:

“9. The Committee is of the view that in arriving at the rates at which depreciation should be provided, the company must consider the true commercial depreciation, i.e., the rate which is adequate to write off the asset over its normal working life. If the rate so arrived at is higher than the rates prescribed under Schedule XIV the company should provide depreciation at such higher rate but if the rate so arrived at is lower than the rate prescribed in Schedule XIV, then the company should provide depreciation at the rates prescribed in Schedule XIV, since these represent the minimum rates of depreciation to be provided. Since the determination of commercial life of an asset is a technical matter, the decision of the Board of Directors based on technological evaluation should be accepted by the auditor unless he has reason to believe that such decision results in a charge which does not represent true commercial depreciation. In case a company adopts the higher rates of depreciation as recommended above, the higher depreciation rates/lower lives of the assets must be disclosed as required in Note no. 5 of Schedule XIV to the Companies Act, 1956.

10. The view is supported by the Department of Company Affairs and it has clarified that “the rates as contained in Schedule XIV should be viewed as the minimum rates, and, therefore, a company will not be permitted to charge depreciation at rates lower than those specified in the Schedule in relation to assets purchased after the date of applicability of the Schedule. If, however, on the basis of bona fide technological evaluation, higher rates of depreciation are justified, they may be provided with proper disclosure by way of a note forming part of annual accounts.”

3. On the basis of the above, the Committee is of the following opinion in respect of the issue raised in para 6 of the query:

(i)         Minimum depreciation for a year as worked out on the basis of Schedule XIV to the Companies Act, 1956, is required to be charged, even if the computation on the basis of number of hours is lower.

(ii)        Depreciation higher than that arrived as per (i) above, should be charged on the basis of actual hours flown by each helicopter every year, multiplied by the hourly rate (computed by dividing 95% of the original cost by the estimated number of total flying hours being the useful life of the asset, provided it is based on bona fide technological evaluation).