AS 6 - Depreciation Accounting

Purpose: This statement deals with disclosure of accounting policy for depreciation followed by an enterprise.

Definitions

• Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence due to technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortisation of assets whose useful life is predetermined.
• Depreciable Assets are assets which:
1. are expected to be used during more than one accounting period,
2. have a limited useful life, and
3. are held by an enterprise for use in the production or supply of goods and services, for renting to others, or for administrative purposes and not for the purpose of sale in the ordinary course of business.
• Useful Life is either:
1. the period over which a depreciable asset is expected to be used by the enterprise, or
2. the number of production or similar units expected to be obtained from the use of the asset by the enterprise.
• Depreciable Amount of a depreciable asset is its historical cost, or other amount substituted for historical cost in the financial statements, less the estimated residual value.

Explanations

Assessment of depreciation is usually based on the historical cost, expected useful life of the depreciable asset and estimated residual value of the depreciable asset.

Any addition or extension to an existing asset which is of a capital nature and which becomes a integral part of the existing asset is depreciated over the remaining useful life of that asset at the rate which is applied to an existing asset, but if such addition or extension retains a separate identity & is capable of being used after the existing asset is disposed off, then it is depreciated independently on the basis of an estimate of its own useful life.

If the original estimate of useful life of an asset is revised the unamortised depreciable amount of the asset is charged to revenue over the revised remaining useful life.

Where the historical cost of an asset has undergone a change due to increase or decrease in long term liability on account of exchange fluctuations, price adjustments, changes in duties or similar factors, the depreciation on the revised unamortised depreciable amount is provided prospectively over the residual life of the asset.

There are several methods of allocating depreciation the most common being Straightline method and the Reducing balance method. A method once chosen has to be applied consistently. A change from one method to another is 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. Such a change is treated as a change in accounting policy and its effect is quantified and disclosed.

If a change in the method of depreciation is made, depreciation is recalculated in accordance with the new method from the date of the asset coming into use. The deficiency or surplus arising from retrospective re-computation is adjusted in the profit and loss account in the year in which the method of depreciation is changed.

Disclosures

1. The historical cost or other amount substituted for historical cost of each class of depreciable assets.
2. Total depreciation for the period for each class of assets.
3. The related accumulated depreciation.
4. Depreciation methods used.
5. Depreciation rates or the useful lives of the assets are disclosed only if they are different from the principal rates specified in the statute governing the enterprise.