IAS 6

Accounting Standard (AS) 6

(revised 1994)

Depreciation Accounting

Contents

INTRODUCTION Paragraphs 1-3

Definitions 3

EXPLANATION 4-19

Disclosure 17-19

ACCOUNTING STANDARD 20-29

94 AS 6 (issued 1982)

Accounting Standard (AS) 6*

(revised 1994)

DepreciationAccounting

(This Accounting Standard includes paragraphs 20-29 set in bold italic

type and paragraphs 1-19 set in plain type, which have equal authority.

Paragraphs in bold italic type indicate the main principles. This

Accounting Standard should be read in the context of the Preface to the

Statements of Accounting Standards1.)

The following is the text of the revised Accounting Standard (AS) 6,

‘Depreciation Accounting’, issued by the Council of the Institute of Chartered

Accountants of India.

* Accounting Standard (AS) 6, Depreciation Accounting, was issued by the Institute

in November 1982. Subsequently, in the context of insertion of Schedule XIV in the

Companies Act in 1988, the Institute brought out a Guidance Note on Accounting for

Depreciation in Companies which came into effect in respect of accounting periods

commencing on or after 1st April, 1989. The Guidance Note differed from AS 6 in

respect of accounting treatment of (a) change in the method of depreciation, and (b)

change in the rates of depreciation. It was clarified in the Guidance Note, with regard

to the matter at (a), that AS 6 would be revised to bring it in line with the recommendations

of the Guidance Note.

Based on the recommendations of the Accounting Standards Board, the Council

of the Institute at its 168th meeting, held on May 26-29, 1994, decided to bring AS 6

in line with the Guidance Note in respect of both of the aforementioned matters.

Accordingly, it was decided to modify paragraphs 11, 15, 22 and 24 and delete paragraph

19 of AS 6. Also, in the context of delinking of rates of depreciation under the

Companies Act from those under the Income-tax Act/Rules by the Companies

(Amendment) Act, 1988, the Council decided to suitably modify paragraph 13 of AS

6. An announcement to this effect was published in the August 1994 issue of The

Chartered Accountant (pp. 218-219).

AS 6 is mandatory in respect of accounts for periods commencing on or after

1.4.1995. Reference may be made to the section titled ‘Announcements of the Council

regarding status of various documents issued by the Institute of Chartered

Accountants of India’ appearing at the beginning of this Compendium for a detailed

discussion on the implications of the mandatory status of an accounting standard.

From the date of Accounting Standard (AS) 26, ‘Intangible Assets’, becoming

mandatory for the concerned enterprises, this Standard stands withdrawn insofar as

it relates to the amortisation (depreciation) of intangible assets (See AS 26).

1Attention is specifically drawn to paragraph 4.3 of the Preface, according to which

Accounting Standards are intended to apply only to items which are material.

Introduction

Depreciation Accounting 101

1. This Statement deals with depreciation accounting and applies to all

depreciable assets, except the following items to which special considerations

apply:—

(i) forests, plantations and similar regenerative natural resources;

(ii) wasting assets including expenditure on the exploration for and

extraction ofminerals, oils, natural gas and similar non-regenerative

resources;

(iii) expenditure on research and development;

(iv) goodwill;

(v) live stock.

This statement also does not apply to land unless it has a limited useful life

for the enterprise.

2. Different accounting policies for depreciation are adopted by different

enterprises. Disclosure of accounting policies for depreciation followed by

an enterprise is necessary to appreciate the view presented in the financial

statements of the enterprise.

Definitions

3. The following terms are used in this Statement with the meanings

specified:

3.1 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 through 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.

3.2 Depreciable assets are assets which

(i) are expected to be used during more than one accounting period;

and

102 AS 6 (revised 1994)

(ii) have a limited useful life; and

(iii) are held by an enterprise for use in the production or supply of

goods and services, for rental to others, or for administrative

purposes and not for the purpose of sale in the ordinary course of

business.

3.3 Useful life is either (i) the period over which a depreciable asset is

expected to be used by the enterprise; or (ii) the number of production or

similarunitsexpectedtobeobtainedfromtheuseof theassetbytheenterprise.

3.4 Depreciable amount of a depreciable asset is its historical cost, or

other amount substituted for historical cost2 in the financial statements, less

the estimated residual value.

Explanation

4. Depreciation has a significant effect in determining and presenting the

financial position and results of operations of an enterprise. Depreciation is

chargedineachaccountingperiodbyreferencetotheextentof thedepreciable

amount, irrespective of an increase in the market value of the assets.

5. Assessment of depreciation and the amount to be charged in respect

thereof in an accounting period are usually based on the following three

factors:

(i) historical cost or other amount substituted for the historical cost

of the depreciable asset when the asset has been revalued;

(ii) expected useful life of the depreciable asset; and

(iii) estimated residual value of the depreciable asset.

6. Historical cost of a depreciable asset represents its money outlay or its

equivalent in connection with its acquisition, installation and commissioning

as well as for additions to or improvement thereof. The historical cost of a

depreciable asset may undergo subsequent changes arising as a result of

increase or decrease in long termliability on account of exchange fluctuations,

price adjustments, changes in duties or similar factors.

2 This statement does not deal with the treatment of the revaluation difference

which may arise when historical costs are substituted by revaluations.

Depreciation Accounting 103

7. The useful life of a depreciable asset is shorter than its physical life and

is:

(i) pre-determined by legal or contractual limits, such as the expiry

dates of related leases;

(ii) directly governed by extraction or consumption;

(iii) dependent on the extent of use and physical deterioration on

account of wear and tear which again depends on operational

factors, such as, the number of shifts for which the asset is to be

used, repair and maintenance policy of the enterprise etc.; and

(iv) reduced by obsolescence arising from such factors as:

(a) technological changes;

(b) improvement in production methods;

(c) change in market demand for the product or service output

of the asset; or

(d) legal or other restrictions.

8. Determination of the useful life of a depreciable asset is a matter of

estimation and is normally based on various factors including experience

with similar types of assets. Such estimation is more difficult for an asset

using new technology or used in the production of a new product or in the

provision of a new service but is nevertheless required on some reasonable

basis.

9. Any addition or extension to an existing assetwhich is of a capital nature

and which becomes an integral part of the existing asset is depreciated over

the remaining useful life of that asset. As a practical measure, however,

depreciation is sometimes provided on such addition or extension at the rate

which is applied to an existing asset.Any addition or extensionwhich retains

a separate identity and is capable of being used after the existing asset is

disposed of, is depreciated independently on the basis of an estimate of its

own useful life.

10. Determination of residual value of an asset is normally a difficultmatter.

If such value is considered as insignificant, it is normally regarded as nil. On

104 AS 6 (revised 1994)

the contrary, if the residual value is likely to be significant, it is estimated at

the time of acquisition/installation, or at the time of subsequent revaluation of

the asset. One of the bases for determining the residual value would be the

realisable value of similar assets which have reached the end of their useful

lives and have operated under conditions similar to those in which the asset

will be used.

11. The quantum of depreciation to be provided in an accounting period

involves the exercise of judgement by management in the light of technical,

commercial, accounting and legal requirements and accordingly may need

periodical review. If it is considered that the original estimate of useful life of

an asset requires any revision, the unamortised depreciable amount of the

asset is charged to revenue over the revised remaining useful life.

12. There are several methods of allocating depreciation over the useful

life of the assets. Those most commonly employed in industrial and

commercial enterprises are the straightline method and the reducing balance

method. The management of a business selects the most appropriate

method(s) based on various important factors e.g., (i) type of asset, (ii) the

nature of the use of such asset and (iii) circumstances prevailing in the

business. A combination of more than one method is sometimes used. In

respect of depreciable assets which do not have material value, depreciation

is often allocated fully in the accounting period in which they are acquired.

13. The statutegoverningan enterprisemayprovide the basis for computation

of the depreciation. For example, the Companies Act, 1956 lays down the

rates of depreciation in respect of various assets.Where the management’s

estimate of the useful life of an asset of the enterprise is shorter than that

envisaged under the provisions of the relevant statute, the depreciation

provision

is appropriately computed by applying a higher rate. If the management’s

estimate of the useful life of the asset is longer than that envisaged under the

statute, depreciation rate lower than that envisaged by the statute can be

applied only in accordance with requirements of the statute.

14. Where depreciable assets are disposed of, discarded, demolished or

destroyed, the net surplus or deficiency, if material, is disclosed separately.

15. The method of depreciation is applied consistently to provide

comparability of the results of the operations of the enterprise fromperiod to

period. A change from one method of providing depreciation to another is

made only if the adoption of the new method is required by statute or for

Depreciation Accounting 105

compliance with an accounting standard or if it is considered that the change

would result in amore appropriate preparation or presentation of the financial

statements of the enterprise. When such 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 arisingfromretrospective recomputation of depreciation in accordance

with the new method is 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 is charged

in the statement of profit and loss. In case the change in the method results

in surplus, the surplus is credited to the statement of profit and loss. Such a

change is treated as a change in accounting policy and its effect is quantified

and disclosed.

16. Where the historical cost of an asset has undergone a change due to

circumstances specified in para 6 above, the depreciation on the revised

unamortised depreciable amount is provided prospectively over the residual

useful life of the asset.

Disclosure

17. The depreciationmethods used, the total depreciation for the period for

each class of assets, the gross amount of each class of depreciable assets and

the related accumulated depreciation are disclosed in the financial statements

alongwith the disclosure of other accounting policies. The 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.

18. In case the depreciable assets are revalued, the provision for

depreciation is based on the revalued amount on the estimate of the remaining

useful life of such assets. In case the revaluation has a material effect on the

amount of depreciation, the same is disclosed separately in the year in which

revaluation is carried out.

19. A change in the method of depreciation is treated as a change in an

accounting policy and is disclosed accordingly.3

3Refer to AS 5.

106 AS 6 (revised 1994)

Accounting Standard

20. The depreciable amount of a depreciable asset should be allocated

on a systematic basis to each accounting period during the useful life of

the asset.

21. 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.

22. The useful life of a depreciable asset should be estimated after

considering the following factors:

(i) expected physical wear and tear;

(ii) obsolescence;

(iii) legal or other limits on the use of the asset.

23. The useful lives of major depreciable assets or classes of

depreciable assets may be reviewed periodically. Where there is a revision

of the estimated useful life of an asset, the unamortised depreciable

amount should be charged over the revised remaining useful life.

24. Any addition or extension which becomes an integral part of the

existing asset should be depreciated over the remaining useful life of

that asset. The depreciation on such addition or extension may also be

Depreciation Accounting 107

provided at the rate applied to the existing asset. Where an addition or

extension retains a separate identity and is capable of being used after

the existing asset is disposed of, depreciation should be provided

independently on the basis of an estimate of its own useful life.

25. Where the historical cost of a depreciable 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

should be provided prospectively over the residual useful life of the

asset.

26. Where the depreciable assets are revalued, the provision for

depreciation should be based on the revalued amount and on the estimate

of the remaining useful lives of such assets. In case the revaluation has

a material effect on the amount of depreciation, the same should be

disclosed separately in the year in which revaluation is carried out.

27. If any depreciable asset is disposed of, discarded, demolished or

destroyed, the net surplus or deficiency, if material, should be disclosed

separately.

28. The following information should be disclosed in the financial

statements:

(i) the historical cost or other amount substituted for historical

cost of each class of depreciable assets;

(ii) total depreciation for the period for each class of assets; and

(iii) the related accumulated depreciation.

29. The following information should also be disclosed in the financial

statements alongwith the disclosure of other accounting policies:

(i) depreciation methods used; and

(ii) depreciation rates or the useful lives of the assets, if they are

different from the principal rates specified in the statute

governing the enterprise.