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Corporate Laws

 

THE NEW ERA OF DEPRECIATION – BASED ON USEFUL LIFE OF AN ASSET

 Your attention is invited to MCA notification no S.O.902(E) dated 26/03/2014, wherein the Depreciation on fixed asset (Schedule-II of Companies Act, 2013) depends on the useful life of the asset.

 The change in the method of providing depreciation from fixed percentage (Schedule-XIV of Companies Act 1956) to useful life (Schedule-II of Companies Act,2013) requires change in accounting policy of the company. 

 For change in accounting policy, provision contained in Accounting Standards-5 “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies” as well as AS-6 “Depreciation Accounting” both are required to be taken into consideration.

 Para- 21 of AS-6, Depreciation Accounting:

 “The depreciation method selected should be applied consistently from period to period. A change from one method of providing depreciation to another should be made only if the adoption of the new method is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise. When such a change in the method of depreciation is made, depreciation should be recalculated in accordance with the new method from the date of the asset coming into use. The deficiency or surplus arising from retrospective recomputation of depreciation in accordance with the new method should be adjusted in the accounts in the year in which the method of depreciation is changed. In case the change in the method results in deficiency in depreciation in respect of past years, the deficiency should be charged in the statement of profit and loss. In case the change in the method results in surplus, the surplus should be credited to the statement of profit and loss. Such a change should be treated as a change in accounting policy and its effect should be quantified and disclosed.

 Notes-7, to the Schedule-II of Companies Act 2013

 From the date this Schedule comes into effect, the carrying amount of the asset as on that date—

(a) shall be depreciated over the remaining useful life of the asset as per this Schedule;

(b) after retaining the residual value, shall be recognised in the opening balance of retained earnings where the remaining useful life of an asset is nil.

 

 

Remaining useful life of asset as per Companies Act, 2013 as on 1st April 2013

 

Sl.NO

NIL

Exists

 

1

•Net carrying Amount after Retaining residiual value charged to opening retain earnings

•Shall be depreciated over the remaining useful life of the asset

 

2

•Debit - Opening Retain Earnings

•Debit - Profit and Loss

 
 

 

Example :

Depreciation Treatment as per Companies Act, 2013

Name of the asset: Furniture & Fixtures

           

Year of Acquisition of asset

Original Cost

No of year used as on 31/03/2014

Depreciation Charged as on 31/03/2014 @ 6.33% (Sch-XIV CA-1956)

Net Carrying Amount as on 31/03/2014

Residual Value 5% of cost

Useful life as per Companies Act 2013

Remaining Useful life as on 31/03/2014

Amount to be charged from Opening retain earnings on 01/04/2014

Depreciation to be provided for 2014-15

1

2

3

4

5= 2-4

6=2 x 5%

7

8

9= 5-6

10=(5-6)/8

<2002-03

< 10,000

<11

< 6,963.00

< 3,037.00

500

10

             -  

< 2,537.00

               -  

<2003-04

< 10,000

<10

< 6,330.00

< 3,670.00

500

10

             -  

< 3,170.00

               -  

<2004-05

< 10,000

<9

< 5,697.00

< 4,303.00

500

10

         1.00

 

<3803.00

<2005-06

< 10,000

<8

< 5,064.00

< 4,936.00

500

10

         2.00

 

<2218.00

 

 

 

 

 

AS-6 Vs Schedule-II – 1

It is clear from the above table that, by virtue of useful life of depreciation as envisaged in Schedule-II of Companies Act, 2013 the carrying amount of Asset is charged to opening retain earnings if remaining useful life is NIL (Note-7(i) of Schedule-II). The above adjustment which is in due course of change in method of depreciation is not as per the requirement of AS-6.

 

AS-6 : Depreciation Accounting

Schedule-II of Companies Act,2013

AS-6 Depreciation Accounting envisaged that In case the change in the method results in deficiency in depreciation in respect of past years, the deficiency should be charged in the statement of profit and loss.

Note-7: From the date this Schedule comes into effect, the carrying amount of the asset as on that date—(a) shall be depreciated over the remaining useful life of the asset as per this Schedule;(b) after retaining the residual value, shall be recognised in the opening balance of retained earningswhere the remaining useful life of an asset is nil.

 

 AS-6 Vs Schedule-II –2

From the example cited above it is clearly understood that the depreciation on fixed asset which are having useful life charged to statement of profit and Loss on prospective basis not as per retrospective basis.

 

AS-6 : Depreciation Accounting

Schedule-II of Companies Act,2013

AS-6 Depreciation Accounting envisaged that The deficiency or surplus arising fromretrospective recomputation of depreciation in accordance with the new method should be adjusted in the accounts in the year in which the method of depreciation is changed

Note-7: From the date this Schedule comes into effect, the carrying amount of the asset as on that date—(a) shall be depreciated over the remaining useful life of the asset as per this Schedule;(b) After retaining the residual value, shall be recognised in the opening balance of retained earnings where the remaining useful life of an asset is nil.

 

 From the above analysis, It depicts that at the time of transition to new method of depreciation as per Schedule-II of Companies Act,2013, the requirement of Accounting Standard -6 “Depreciation Accounting” has been violated.

Earlier as per Companies Act, 1956, depreciation on fixed asset has been calculated as per the percentage provided in schedule-XIV of Companies Act,1956 and As far as Accounting of depreciation is concerned provision contained in Accounting Standards-6: “Depreciation Accounting” is required to be followed.

 But Companies Act,2013 vide its Schedule –II prescribe for both calculation of depreciation based on Useful life of individual Asset as well as accounting of depreciation.

 Hence, In author’s view the requirement of Schedule-II of companies Act,2013 is always prevail over the treatment prescribed in Accounting Standard-6.

 Credits to -

 

CA Debasis Sahoo @ http://taxguru.in/company-law/scheduleii-companies-act-2013-accounting-standard6-depreciation-accounting.html#sthash.Z71o8FOL.dpuf

 

 

MCA notifies Ind AS

MCA has notified Companies (Indian Accounting Standards) Rules, 2015 which shall come into effect from 1 April 2015. The said rules require adoption for Indian Accounting Standards (Ind AS) :-

1. From FY 15-16 : Any company can voluntary adopt Indian Accounting Standards from Financial year 15-16 with comparatives to be given for the period ending on 31 March 2015 or thereafter.

2. From FY 16-17 : Following companies to mandatorily adopt Ind AS from FY 16-17 onwards with comparatives for period ending 31 March 2016 or thereafter:-

·Companies with net worth of Rs 500 crores or more and whose equity or debt securities are either listed or in the process of listing in any Indian stock exchange.

·Companies other than above and whose net worth is Rs 500 crores or more.

●Holding, subsidiary, joint venture and associate of above companies.

3. From FY 17-18 : Following companies to mandatorily adopt Ind AS from FY 17-18 onwards with comparatives for period ending 31 March 2017 or thereafter:-

·Companies with net worth less than Rs 500 crores and whose equity or debt securities are either listed or in the process of listing in any Indian stock exchange.

·Companies other than above and whose net worth is Rs 250 crores or more but less than Rs 500 crores.

·Holding, subsidiary, joint venture and associate of above companies.

·Provided that nothing stated above, except companies adopting Ind AS voluntarily, shall apply to companies whose securities are listed or are in the process of being listed on SME exchange as referred to in Chapter XB or on the Institutional Trading Platform without initial public offering in accordance with the provisions of Chapter XC of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.

 

Note 1 :- 'Net worth' shall have the meaning assigned to it in clause (57) of section 2 of the Companies Act, 2013. The net worth shall be calculated in accordance with the stand-alone financial statements of the company as on 31st March, 2014 or the first audited financial statements for accounting period which ends after that date.

For companies which are not in existence on 31st March, 2014 or an existing company falling under any of thresholds specified above for the first time after 31st March, 2014, the net worth shall be calculated on the basis of the first audited financial statements ending after that date in respect of which it meets the thresholds specified above. Such companies should adopt Ind AS for immediately next year. For e.g. The companies meeting threshold for the first time as on 31st March, 2018shall apply Ind AS for the financial year 2018-19 onwards and so on.

Note 2 :- MCA has notified 39 Ind AS. The Ind AS should be adopted for standalone financial statements as well as consolidated financial statements.

Note 3 :- Overseas subsidiary, associate, joint venture and other similar entities of an Indian company may prepare its standalone financial statements in accordance with the requirements of the specific jurisdiction. Provided that such Indian company shall prepare its consolidated financial statements in accordance with the Indian Accounting Standards (Ind AS) either voluntarily or mandatorily if it meets the criteria as specified above.

Note 4 :- Indian company which is a subsidiary, associate, joint venture and other similar entities of a foreign company shall prepare its financial statements in accordance with the Indian Accounting Standards (Ind AS) either voluntarily or mandatorily if it meets the criteria as specified above.

Note 5 :- Once the option for applying Ind AS is applied then company should keep on applying Ind AS consistently.

Note 6 :- The insurance companies, banking companies and non-banking finance companies shall not be required to apply Indian Accounting Standards (Ind AS) for preparation of their financial statements either voluntarily or mandatorily.

Note 7 :- For the companies on which Ind AS is not applicable as per the rules mentioned above, such companies can continue to apply Accounting Standards as notified by Companies (Accounting Standards) Rules, 2006.

 

 

Centre tightens definition of ‘small company’

The Corporate Affairs Ministry has tightened the definition of a ‘small company’ in the new company law, to prevent misuse of the privileges available to this category.

The new company law enacted in 2013 had introduced this new category.

Under the earlier definition, a small company was one that met one of two criteria: paid-up share capital not exceeding Rs. 50 lakh or turnover not exceeding Rs. 2 crore. 

The main difficulty was that companies that met the first criterion but exceeded the monetary limit in respect of the second criterion were also getting classified as a ‘small company’.

Now, a company will have to clear both the tests — paid-up capital as well as turnover norm — to qualify as a ‘small company’.

Consequently, it is likely that several entities that were previously classified as small companies will cease to be categorised as such, said 

 

Recent Important Circulars related to Corporate Law:

 

Sl.No.CircularNumberDateDescription
1No.10/36/2001-CLB28/01/2015

Amendment in Regulations 4,14, Form No.4 and Annexure III; Substitution of Regulations 37 and insertion of Regulations 52,53 and Form Nos.6,7 and 8

2No.01/9/2013-CL.V (Part - II)19/01/2015Companies(Appointment and Quali-fication of Directors) Amendment Rules,2015 - Amendment in Rule 16
3No.GSR 43(E) 1/18/2013-CL V Part19/01/2015Companies(CSR Policy)Amendment Rules,2015 Amendment in Rule 4
4No.1/19/2013-CL-V Part16/01/2015Companies(Accounts) Amendment Rules,2015 - Amendment in Rules 6 and insertion of Rule 2A and Form AOC-5 regarding Notice of address at which books of accounts are maintained