Understand the rule of depreciation as per the Companies Act 2013   The Companies Act, 2013 and the amendment in the same always create bewilderment. Concerning the depreciation to be charged on the assets, there has been hefty changes in the new Act. Part C of Schedule II of the 2013 Act requires systematic allocation of the depreciation amount of an asset over its USEFUL LIFE as against Schedule XIV of the old Act which specified minimum rate of depreciation to be provided by a company.   From the useful life provided by the Act, we shall calculate the rate of depreciation. The following formula helps to derive the rate of depreciation which shall be charged to the respective assets every year commencing from FY 2014-15:  

{1-(s/c) ^ (1/n)}*100

Where, s = Salvage Value, c= Carrying Amount as on 01-04-14, n= Difference of useful life as per new and old schedule   The rate computed shall be charged on the Written Down Value of the asset. If any purchased in the current year then depreciation shall be calculated for the number of days used.   Under the new act, asset shall be depreciated over the useful life as prescribed under the act but the same is not mandatory. Assets can be depreciated using shorter life but the same should be disclosed along with the reason of using such shorter life period in “Notes to Account”.   The new concept of RESIDUAL VALUE has also been introduced in the new Act. The residual value of each asset shall not be more than 5% of the original cost. This can be hardship on the companies as the residual value is calculated on the original cost of the asset. Let say if the asset is purchased 15 years back then it will be difficult to ascertain the cost of the said asset. The adversities in the new methods are:

• Ascertaining the original cost of each asset
• Calculating the remaining useful life of each asset
• Calculating the rate of depreciation as per useful life of each asset

  Where the new asset acquired during the year in the 1st year then Pro rata depreciation shall be charged.

• Calculate the period from the date of purchase to the closing of accounting year
• Find out rate of depreciation per annum by using useful life as per Schedule II
• Calculate the depreciation for the fraction of period calculated above

  From subsequent years:

• Carrying amount as on the beginning of year
• If WDV method is used then find out rate of depreciation as per following formula
• If SLM is used then carrying amount is amortized over the remaining useful life.

  Where the remaining useful life is Zero then no depreciation shall be charged from the current year on such asset.   Deferred Tax The rate of depreciation charged in the books of accounts are different from the rate allowed as per Income Tax Act. So, the difference amount of depreciation is Deferred Tax Asset or Liability. Now, as per the new rule of depreciation, the rate of depreciation is higher than the old depreciation rate. The effect of this can change the nature of Deferred Tax from the current year i.e., Deferred Tax Asset may change to Deferred Tax Liability or vice versa. In relation to the asset whose useful life is Zero, the Deferred Tax Asset or Liability shall be adjusted in the subsequent years. _________________________________________________________________