Depreciation-Companies Act, 2013

With the introduction of the revamped Company Law, changes have been brought about in quite a few areas of interest. We’re focusing on the changes in depreciation in this article.

Schedule XIV of the erstwhile Companies Act prescribed minimum SLM (straight line

method) and WDV (written down value) rates for depreciation. The Companies could charge higher depreciation, if the useful life of an asset was shorter than that envisaged under Schedule XIV.

The Companies Act, 2013 replaces Schedule XIV by Schedule II which requires systematic allocation of the depreciable amount of an asset over its useful life.

Meaning of Useful Life

Useful life may be considered as a period over which:

• an asset is available for use; or
• as the number of production or similar units expected to be obtained from the asset by the entity; or
• specified time after which the assets are planned to be disposed off; or
• after consumption of a specified proportion of the future economic benefits embodied in the asset.

The useful life of the asset may therefore be shorter than its economic life. The estimation of the useful life of the asset is a matter of judgement based on the experience of the entity with similar assets. The useful lives specified in Part C of Schedule II of the 2013 Act for various assets will result in their depreciation over a different period than what was applicable under Schedule XIV of the Act.

In case the companies choose to calculate depreciation on the basis of useful lives which are different from the life specified in the Schedule II, the information will have to be disclosed in the financial statements.

Assets Useful life Chart as per schedule II

Nature of Assets				Useful Life
I	Buildings [NESD]
	(a)	Building (other   than factory buildings)   RCC Frame Structure		60 Years
	(b)	Building (other than factory buildings) other than RCC Frame Structure		30 Years
	(c)	Factory buildings		30 Years
	(d)	Fences, wells, tube wells		5 Years
	(e)	Other (including temporary structure, etc.)		3 Years
II	Bridges, culverts, bunkers, etc. [NESD]			30Years
III	Roads [NESD]
	(a)	Carpeted Roads
		(i)	Carpeted Roads – RCC	10 Years
		(ii)	Carpeted Roads – other than RCC	5 Years
	(b)	Non-carpeted roads		3 Years
IV	Plant and Machinery
	(i)	General rate applicable to Plant and Machinery not covered under Special Plant and Machinery
		(a)	Plant and   Machinery other than   continuous process plant not covered under specific industries [NESD]	15 Years
		(b)	continuous process plant for which no special rate has been prescribed under (ii) below [NESD]	8 Years
	(ii)	Special Plant and Machinery
		(a)	Plant and Machinery related to production and exhibition of Motion Picture Films
			1. Cinematograph films—Machinery used in the production and exhibition of cinematograph films, recording and reproducing equipments, developing machines, printing machines, editing machines, synchronizers and studio lights except bulbs	13 Years
			2. Projecting equipment for exhibition of films	13 Years
		(b)	Plant and Machinery used in glass manufacturing
			1. Plant and Machinery except direct fire glass melting furnaces —Recuperative and regenerative glass melting furnaces	13 Years
			2. Plant and Machinery except direct fire glass melting furnaces —Moulds [NESD]	8 Years
			3. Float Glass Melting Furnaces [NESD]	10 Years
		(c)	Plant and Machinery used in mines and quarries—Portable underground machinery and earth moving machinery used in open cast mining [NESD]	8 Years
		(d)	Plant and Machinery used in Telecommunications [NESD]
			1. Towers	18 Years
			2. Telecom transceivers, switching   centres, transmission and other network equipment	13 Years
			3. Telecom – Ducts, Cables and optical fibre	18 Years
			4. Satellites	18 Years
		(e)	Plant and Machinery used in exploration, production and refining oil and gas [NESD]
			1. Refineries	25 Years
			2. Oil and gas assets (including wells), processing plant and facilities	25 Years
			3. Petrochemical Plant	25 Years
			4. Storage tanks and related equipment	25 Years
			5. Pipelines	30 Years
			6. Drilling Rig	30 Years
			7. Field operations (above ground) Portable boilers, drilling tools, well-head tanks, etc.	8 Years
			8. Loggers	8 Years
		(f )	Plant and Machinery used in generation, transmission and distribution of power [NESD]
			1. Thermal/ Gas/ Combined Cycle Power Generation Plant	40 Years
			2. Hydro Power Generation Plant	40 Years
			3. Nuclear Power Generation Plant	40 Years
			4. Transmission lines, cables and other network assets	40 Years
			5. Wind Power Generation Plant	22 Years
			6. Electric Distribution Plant	35 Years
			7. Gas Storage and Distribution Plant	30 Years
			8. Water Distribution Plant including pipelines	30 Years
		(g)	Plant and Machinery used in manufacture of steel
			1. Sinter Plant	20 Years
			2. Blast Furnace	20 Years
			3. Coke Ovens	20 Years
			4. Rolling mill in steel plant	20 Years
			5. Basic oxygen Furnace Converter	25 Years
		(h)	Plant and Machinery used in manufacture of non-ferrous metals
			1. Metal pot line [NESD]	40 Years
			2. Bauxite crushing and grinding section [NESD]	40 Years
			3. Digester Section [NESD]	40 Years
			4. Turbine [NESD]	40 Years
			5. Equipments for Calcination [NESD]	40 Years
			6. Copper Smelter [NESD]	40 Years
			7. Roll Grinder	40 Years
			8. Soaking Pit	30 Years
			9. Annealing Furnace	30 Years
			10. Rolling Mills	30 Years
			11. Equipments for Scalping, Slitting , etc. [NESD]	30 Years
			12. Surface Miner, Ripper Dozer, etc., used in mines	25 Years
			13. Copper refining plant [NESD]	25 Years
		(i)	Plant and Machinery used in medical and surgical operations [NESD]
			1. Electrical Machinery, X-ray and electrotherapeutic apparatus and accessories thereto, medical, diagnostic equipments, namely, Cat-scan, Ultrasound Machines, ECG Monitors, etc.	13 Years
			2. Other Equipments.	15 Years
		(j)	Plant and Machinery used in manufacture of pharmaceuticals and chemicals [NESD]
			1. Reactors	20 Years
			2. Distillation Columns	20 Years
			3. Drying equipments/Centrifuges and Decanters	20 Years
			4. Vessel/storage tanks	20 Years
		(k)	Plant and Machinery used in civil construction
			1. Concreting, Crushing, Piling Equipments and Road Making Equipments	12 Years
			2. Heavy Lift Equipments—
			-Cranes with capacity of more than 100 tons	20 Years
			-Cranes with capacity of less than 100 tons	15 Years
			3. Transmission line, Tunneling Equipments [NESD]	10 Years
			4. Earth-moving equipments	9 Years
			5. Others including Material Handling /Pipeline/Welding Equipments [NESD]	12 Years
		(l)	Plant and Machinery used in salt works [NESD]	15 Years
V.	Furniture and fittings [NESD]
	(i)	General furniture and fittings		10 Years
	(ii)	Furniture and fittings used in hotels, restaurants and boarding houses, schools, colleges and other educational institutions, libraries; welfare centres; meeting halls, cinema houses; theatres and circuses; and furniture and fittings let out on hire for use on the occasion of marriages and similar functions.		8 Years
VI.	Motor Vehicles [NESD]
	1	Motor cycles, scooters and other mopeds		10 Years
	2	Motor buses, motor lorries, motor cars and motor taxies used in a business of running them on hire		6 Years
	3	Motor buses, motor lorries and motor cars other than those used in a business of running them on hire		8 Years
	4	Motor tractors, harvesting combines and heavy vehicles		8 Years
	5	Electrically operated vehicles including battery powered or fuel cell powered vehicles		8 Years
VII
		Ocean-going ships
		(i)	Bulk Carriers and liner vessels	25 Years
		(ii)	Crude tankers, product carriers and easy chemical carriers with or without conventional tank coatings.	20 Years
		(iii)	Chemicals and Acid Carriers:
			(a) With Stainless steel tanks	25 Years
			(b) With other tanks	20 Years
		(iv)	Liquified gas carriers	30 Years
		(v)	Conventional large passenger vessels which are used for cruise purpose also	30 Years
		(vi)	Coastal service ships of all categories	30 Years
		(vii)	Offshore supply and support vessels	20 Years
		(viii)	Catamarans and other high speed passenger for ships or boats	20 Years
		(ix)	Drill ships	25 Years
		(x)	Hovercrafts	15 Years
		(xi)	Fishing vessels with wooden hull	10 Years
		(xii)	Dredgers, tugs, barges, survey launches and other similar ships used mainly for dredging purposes	14 Years
	2.	Vessels ordinarily operating on inland waters—
		(i)	Speed boats	13 Years
		(ii)	Other vessels	28 Years
VIII.	Aircrafts or Helicopters [NESD]			20 Years
IX.	Railways sidings, locomotives, rolling stocks, tramways and railways used by concerns, excluding railway concerns [NESD]			15 Years
X.	Ropeway structures [NESD]			15 Years
XI.	Office equipment [NESD]			5 Years
XII.	Computers and data processing units [NESD]
	(i)	Servers and networks		6 Years
	(ii)	End user devices, such as, desktops, laptops, etc.		3 Years
XIII.	Laboratory equipment [NESD]
	(i)	General laboratory equipment		10 Years
	(ii)	Laboratory equipments used in educational institutions		5 Years
XIV.	Electrical Installations and Equipment [NESD]			10 years
XV.	Hydraulic works, pipelines and sluices [NESD]			15 Years

 What Is The Component Approach?

Schedule II states that the useful life specified is for whole of the asset. However, where a part of the asset is significant to total cost of the asset and the part’s useful life is different from the useful life of the remaining asset, the said significant part shall be depreciated separately. This method of breaking a fixed asset into components for depreciation purposes is known as the ‘component approach’ to compute depreciation. Companies will now have to estimate the useful life of each such component (in case it is not provided in Schedule II) and depreciate the cost of that specific component over the estimated useful life.

How To Apply Component Approach?

To apply the component approach, it is crucial to identify the various significant parts of an asset.

There are two reasons for identifying the parts:

• Depreciation, and
• The replacement of parts.

Generally, it is done by looking for items that will require replacement before the end of the asset’s useful life, and to treat these items as separate components.

Upon replacement of a part, the remaining book value of the replaced part is derecognized and the cost of the new part recognized, irrespective of whether the replaced part was depreciated separately or not.

How Many Components?

There is no minimum requirement for the number of parts of a fixed asset that should be identified. The number of parts may vary depending on the nature and the complexity of the fixed asset.

Ind AS 16 requires each significant part of a fixed asset to be depreciated separately. Significant parts which have the same useful life and depreciation method may be depreciated together. Additionally, such parts that are individually not significant are combined in the remainder and are depreciated together.

Componentization requires professional judgment. In many situations, a company may not have a good understanding of the cost of the individual components purchased. In that case, the cost of individual components should be estimated based on reference to:

• current market prices (if available),
• discussion with experts in valuation, or
• use of other reasonable approaches.

It might also be considered necessary to request an expert opinion (for example, construction experts) in order to determine the parts of a fixed asset. This will also depend on the size of the organization and whether the component and related depreciation will have a material effect on the financial statements.

For instance, the following practices are commonly used to identify the parts of a building:

• Exterior walls
• Interior walls
• Windows
• Roof
• Staircase
• Elevators
• Air condition
• Heating system
• Water system
• Electrical system
• Major inspections

The following can also help in identifying components:

• Review plant maintenance programs. If the replacement of a component is significant enough to be listed on maintenance schedule, it may have a cost that is significant in comparison to the total cost of the asset;
• Review historical retirement patterns to evaluate what constitutes a component; Analyze major capital expenditures.
• ‘‘Continuous process plant’’ means a plant which is required and designed to operate for twenty-four hours a day.
• Factory Building does not include offices, godowns and staff quarters.

 Where, during any financial year, any addition has been made to any asset, or where any asset has been sold, discarded, demolished or destroyed, the depreciation on such assets shall be calculated on a 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.

if an asset is used for any time during the year for double shift, the depreciation will increase by 50% for that period and incase of the triple shift the depreciation shall be calculated on the basis of 100% for that period.

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

• shall be depreciated over the remaining useful life of the asset as per this Schedule;
• after retaining the residual value, shall be recognized in the opening balance of retained earnings where the remaining useful life of an asset is nil.