Query No. 29

Subject:     

Depreciation on low cost items as per Schedule XIV to the Companies Act, 1956^[1]

A. Facts of the Case

1. A government company, having the main business of marketing and distribution of petroleum products, proposes to enter into the business of marketing and distribution of Liquified Petroleum Gas (LPG).

2. The company plans to purchase LPG and LPG equipment like cylinder, valves and regulators in bulk.  LPG would be bottled in small sized cylinders fitted with valve and regulator and sold through distributors to be appointed in different locations throughout the country.

3. The cost of one such LPG equipment comprising LPG cylinder, regulator and valve is around Rs. 1200.

4. The company’s annual procurement of LPG equipment is likely to range from Rs. 12 crore to Rs. 60 crore for the first five years of operation.  The querist has given the following estimates of purchase of LPG equipment and other items of plant and machinery during the first five years of operation.

                                                              (Rs. Crore)

5. Schedule XIV to the Companies Act, 1956, provides a rate of depreciation of 16.21% on straightline basis for ‘gas cylinders including valves and regulators’.

6. The querist has made a reference to note number 8 of Schedule XIV to the Companies Act, 1956, which states as below:

“8.  Notwithstanding anything mentioned in this Schedule, depreciation on assets, whose actual cost does not exceed five thousand rupees, shall be provided at the rate of hundred percent.

Provided that where the aggregate actual cost of individual items of plant and machinery costing Rs. 5000 or less constitutes more than 10 percent of the total actual cost of plant and machinery, rates of depreciation applicable to such items shall be the rates as specified in Item II of the Schedule.”

B. Queries

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

(a)  Whether the rate of depreciation in respect of LPG equipment for the purpose of preparation of financial statements would be 100 per cent or 16.21 per cent on straightline basis.

 

(b) With the fluctuation in the quantum of annual purchase of the LPG equipment over a period of 5 years as mentioned in paragraph 4 above, whether a uniform rate of depreciation (i.e., 16.21 per cent or 100 per cent) would be applicable throughout the period of five years.

 

(c) In case depreciation rate varies from year to year considering the annual purchase and cumulative value of the plant and machinery, whether any disclosure in the financial statements would be necessary

.

C. Points Considered by the Committee

8. The Committee takes note of the requirement of Schedule XIV that where the aggregate actual cost of individual items of plant and machinery costing Rs. 5,000 or less constitutes more than 10 per cent of total actual cost of plant and machinery, the rates of depreciation specified in item II of the Schedule should be applied to such items.

9. The Committee also notes that Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, requires (paragraph 25) that “fixed asset should be eliminated from financial statements on disposal or when no further benefit is expected from its use and disposal.”  The above requirement of AS 10 implies that a fixed asset which is in use should continue to appear in the books of account and financial statements even if depreciation thereon has been provided at the rate of 100 per cent.

10. Considering the above, the Committee is of the view that the expression ‘aggregate actual cost of individual items of plant and machinery costing Rs. 5,000 or less’ used in Note no. 8 of Schedule XIV should be construed to mean the aggregate cost of such items (i.e., those costing Rs. 5000 or less individually) as appearing in the books of account. As already stated in paragraph 9 above, the aforesaid figure would also include those low-cost items purchased and fully depreciated in earlier years which are still in use. The expression ‘total actual cost of plant and machinery’ should also be construed in a like-wise manner. If, in a year, the aggregate cost of low-cost items of plant and machinery works out to 10 per cent or less of the total actual cost of plant and machinery (both figures computed in the manner described earlier in this paragraph and including the low-cost items acquired during the year), depreciation in respect of low-cost items of plant and machinery acquired during the year should be provided at 100 per cent.  If the threshold limit of 10 per cent is exceeded, the applicable rate of depreciation in respect of the aforesaid items would be the rate specified in Item II of Schedule XIV, i.e., 16.21 per cent on straight line basis in the instant case.

11. Accounting Standard (AS) 1, ‘Disclosure of Accounting Policies’, requires (paragraph 24) that “all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed”.  Accordingly, the Committee is of the view that the company should disclose its accounting policy relating to depreciation in respect of LPG equipment.

D. Opinion

12. Based on the above, the Committee is of the following opinion on the issues raised in paragraph 7:

 

(a) Whether the rate of depreciation in respect of LPG equipment would be 100 per cent or 16.21 per cent would have to be determined in accordance with paragraph 10 above.

 

(b) The rate of depreciation determined in accordance with paragraph 10 can be different for different years.

 

(c) The accounting policy relating to depreciation in respect of LPG equipment should be disclosed in accordance with the requirements of AS 1, ‘Disclosure of Accounting Policies’.

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^[1] Opinion finalised by the Committee on 23.10.1999.