1.26 Query
Provision for depreciation in accounts.
1.A public sector company is following a policy of providing depreciation on liberal basis. The policy has been duly approved by the Board of Directors in earlier years. The said depreciation policy has been disclosed under the accounting policies followed by the company. Generally, the rates of depreciation provided by the company in the past were more than the rates now required to be provided under Schedule XIV to the Companies Act, 1956. For any addition during the year, the depreciation for full year has been charged. However, on the assets disposed off/discarded during the year, no depreciation for that year has been provided. The rates of depreciation provided have been disclosed in the schedule of fixed assets as attached to the accounts. The querist feels that according to the amended Companies Act, it is not obligatory on the part of any company to provide depreciation according to Schedule XIV. The rates given in the Schedule are to be considered only for distribution of dividend under Section 205 and the payment of remuneration under Section 349 of the Companies Act. The Act only desires the disclosures of the following two information:
. (i) Depreciation method used;
(ii) Depreciation rates on the basis of useful life of assets if they are different from the rates specified in the schedule. Both the disclosures have been made by the company forming integral part of accounts for the year 1987-88.
2.Government audit has given comments, with regard to above, as under:
“Schedule XIV of the Companies Act, 1956, as amended by the Companies (Amendment) Act, 1988, where during financial year after 2.4.87: Any addition has been made to any asset or where any asset has been sold, discarded, demolished or destroyed, the depreciation on such asset shall be calculated on pro-rata basis from the date of such addition or as the case may be up to the date on which such asset has been sold, discarded, demolished or destroyed.
To the extent, depreciation provided in excess on additions during the year and not charged on assets sold, discarded, demolished, destroyed during the year on pro-rata basis as per requirement of Schedule XIV of the Act should be disclosed distinctly.”
3.The querist has sought the opinion of the Expert Advisory Committee on the following issues arising from above:
(i) Whether the treatment of depreciation adopted by the company as explained above is correct;
(ii) If the treatment is correct whether any further disclosure is called for;
(iii) If the treatment adopted is not appropriate, what should be the correct treatment in the circumstances explained above.
Opinion April 7, 1989
1.The Committee notes that the Research Committee of the Institute of Chartered Accountants of India has issued a guidance note on ‘Provision for Depreciation’, which is published in Compendium of Guidance Notes, Vol. I, (2nd Ed.). The said guidance note recommends as below:
“The Research Committee is of the opinion that it is open to a company to provide for depreciation either on the written-down value method or on the straight line basis. It is recommended that the method adopted for providing the depreciation should be disclosed in the accounts. 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 Section 350 or Section 205(2), the company should provide depreciation at such higher rate but if the rate so arrived at is lower than the rate mentioned in the above quoted sections, then the company should provide depreciation at the rates mentioned in those sections since these represent the minimum rates of depreciation to be provided.”
2.The Committee also notes that the Department of Company Affairs, vide its Circular No. 2/89, dated March 7, 1989, has clarified as below:
“It may be clarified that the rates as contained in Schedule XIV should be viewed as the minimum rates, and, therefore, a company shall 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. However, if, on the basis of a 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.The Committee also notes that Schedule XIV requires depreciation to be provided on pro-rata basis in respect of additions and disposals of assets.
4.The opinion of the Committee, on the issues raised by the querist in para 3 of the query, is as below:
(i) For any accounting year ending after the enforcement of the amended provisions relating to depreciation, the accounting policy followed by the company with regard to rates of depreciation is not correct unless the higher rates of depreciation adopted by the company are based on bona fide technological evaluation and therefore represent true commercial depreciation and this fact is disclosed properly. Depreciation on additions and disposals of assets should be provided on pro-rata basis from the date of such addition or, as the case may be, up to the date on which such asset has been sold.
(ii) Since the answer to question at 4(i) is in the negative, this question does not arise.
(ii) The correct treatment of depreciation is recommended in 4(i) above. __________________________
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