AS6: Depreciation Accounting

Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, passage 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.

• 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.

Depreciable assets are assets which
[1] are expected to be used during more than one accounting period; and
[2] have a limited useful life; and
[3] are held by an enterprise for use in the production or supply or for administrative purposes.

Depreciable amount of a depreciable asset is its historical cost, or other amount substituted for historical cost less the estimated residual value.

Useful life is the period over which a depreciable asset is expected to be used by the enterprise.
The useful life of a depreciable asset is shorter than its physical life.

There are two method of depreciation:

1] Straight Line Method (SLM)

2] Written Down Value Method (WDVM)

Note: A combination of more than one method may be used.

The depreciation method selected should be applied consistently from period to period. The change in method of depreciation 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 change would result in a more appropriate preparation of financial statement; or

• When there is change in method of depreciation, depreciation should be recalculated in accordance with the new method from the date of the assets coming into use. (i.e RETROSPECTIVELY)

The deficiency or surplus arising from such recomputation should be adjusted in the year of change through profit and loss account.

Such change should be treated as a change in accounting policy and its effect should be quantified and disclosed.

The useful lives of major depreciable assets may be reviewed periodically. Where there is a revision of the estimated useful life, the unamortised depreciable amount should be charged over the revised remaining useful life. (i.e. PROSPECTIVELY)

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 may also be applied 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 estimate of its own useful life.

Where the historical cost of a depreciable asset has undergone a change due to increase or decrease in the 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.

This accounting standard is not applied on the following items.
• Forests and plantations
• Wasting assets
• Research and development expenditure
• Goodwill
• Live stock

Disclosure requirements

1] the historical cost
2] total depreciation for each class charged during the period
3] the related accumulated depreciation
4] depreciation method used ( Accounting policy)
5] depreciation rates if they are different from those prescribed by the statute governing the enterprise.