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Depreciation Policy of Mahindra and Mahindra

Mahindra and Mahindra (M&M) follows the straight line method of depreciation over estimated useful lives of assets at rates higher than prescribed. Depreciation expense has increased over the past 5 years from Rs. 184.05 crores to Rs. 291.51 crores. While depreciation lowers fixed assets and equity on the balance sheet initially, it generates economic surplus over the asset's life and has no impact on cash flow as the expense is added back. The document analyzes M&M's depreciation policy and impact of depreciation on financial statements.

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191 views

Depreciation Policy of Mahindra and Mahindra

Mahindra and Mahindra (M&M) follows the straight line method of depreciation over estimated useful lives of assets at rates higher than prescribed. Depreciation expense has increased over the past 5 years from Rs. 184.05 crores to Rs. 291.51 crores. While depreciation lowers fixed assets and equity on the balance sheet initially, it generates economic surplus over the asset's life and has no impact on cash flow as the expense is added back. The document analyzes M&M's depreciation policy and impact of depreciation on financial statements.

Uploaded by

nidhibhopal
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Depreciation Policy

Of
Mahindra and Mahindra

Submitted to: Submitted by:


Prof. A S Khalsa Harsha Chotrani(13)
Nidhi Singh (54)
Introduction
Mahindra and Mahindra is the market leader in
multi-utility vehicles in India & Mahindra is the only
Indian company among the top three tractor
manufacturers in the world.
The Group has a leading presence in key sectors
of the Indian economy, including the financial
services, trade and logistics, automotive
components, information technology,
infrastructure development.
With over 62 years of manufacturing experience,
the Mahindra Group has built a strong base in
technology, engineering, marketing and
distribution which are key to its evolution as a
customer-centric organization.
Depreciation Policy of M & M …
The financial statements of the Mahindra and
Mahindra Company are prepared under historical
Cost convention method which is in accordance
with the Generally Accepted Accounting Principles
(GAAP) and is with the provisions of the Indian
Companies Act, 1956.
Depreciation on fixed assets is computed on the
Straight Line Method,
Over their estimated useful lives at the rates which
are higher than the rates prescribed under
Schedule XIV of the Companies Act, 1956.
Individual assets acquired for less than Rs.5,000 are
entirely Depreciated in the period/year of
acquisition.

Fixed assets are stated at actual cost less


accumulated depreciation.
The actual cost capitalized includes material cost,
freight, Installation cost, duties and taxes, finance
charges and other incidental expenses incurred
during the construction/installation stage.
The cost and the accumulated depreciation of fixed
assets sold, retired or otherwise disposed off are
removed from the stated values
and the resulting gains and losses are included in
the profit and loss Account.
Costs of application software for internal use are
generally charged to revenue as incurred due to its
estimated useful lives being relatively short,
usually less than one year.

Now the depreciation charged for past 5 years in M


& M can be compared as:

Mar09 Mar08 Mar07 Mar06 Mar05


Depreciation  291.51 238.66 209.59 200.01 184.05

From the above we can state that the depreciation


charged for the year excludes:
(a) An amount of Rs. 0.39 crores (2007: Rs. 0.43
crores), representing Depreciation on the increase
due to revaluation of Land and Buildings
transferred from the Revaluation Reserve.
(b) An amount of Rs. 0.17 crores (2007: Rs. 0.03
crores), representing depreciation on assets used
for development work. This expenditure is
Transferred to Development Expenditure and is
appropriately amortized.
The depreciation has its effect on fixed assets and
also on Equity which can be compared with past 5
years as:

Fixed assets: Mar09 Mar08 Mar07 Mar06 Mar05

Gross block 4,893.89 3,552.64 3,180.57 2,859.25 2,676.51

Less :
revaluation 12.09 12.47 12.86 13.33 14.32
reserve

Less :
accumulated 2,326.29 1,841.68 1,639.12 1,510.27 1,335.56
depreciation

1,317.71 1,480.23 1,525.27 1,089.50 884.67


Gross profit

30.69 46.15 44.88 36.72 45.92


EPS (Rs)

i) Earnings per Share


The earnings considered in ascertaining the
Company’s Earnings per Share (EPS) comprises the
net profit after tax (and includes the post
Tax effect of any extra ordinary items). The
number of shares used in Computing Basic EPS is
the weighted average number of shares outstanding
during the period / year.
Analysis:

From the annual report of M & M it can be stated


that Depreciation is initially as an expense and
then at later stage it is profit as it generates
economic surplus. Method of depreciation is
determined by the company. Various methods are
used for depreciation.
M&M follows Straight-line method. Method of
depreciation is periodically reviewed by the
company.
Every balance sheet movement has both a negative
and positive impact on the cash flow statement
.For each account one of the movements (debit or
credit) generally make sense. For example, an
increase in fixed assets is a negative cash flow. This
makes sense because one has probably paid cash
for new assets. Now by default, the opposite (in
this case a credit) must have the opposite impact.
So a credit to fixed assets would have a negative
impact.
But In the case of depreciation, there is actually no
impact at all since depreciation expense is added
back to the cash flow.
As periods of useful lives decrease the amount of
annual depreciation increases.
The Main factors that affect the revaluation of
assets are:
- Inflation
- National currency exchange rate
- Drastic changes in market price

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