Statements of Accounting Standards

(AS 6) Revised
Depreciation Accounting

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.

Introduction

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 of minerals, 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

(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 similar units expected to be
obtained from the use of the asset by the enterprise.

3.4 Depreciable amount of a depreciable asset is its historical

cost, or other amount substituted for historical cost 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 charged in each accounting period
 by reference to the extent of the depreciable 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 term liability on account of
exchange fluctuations, price adjustments, changes in duties or
similar factors.

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 asset which 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 extension
which 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

difficult matter. If such value is considered as insignificant, it is
normally regarded as nil. On 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 statute governing an enterprise may provide 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 from period 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 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 is 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 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 depreciation methods 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.

ACCOUNTING STANDARD

(The Accounting Standard comprises paragraphs 20–29 of this

Statement. The Standard should be read in the context of
paragraphs 1–19 of this Statement and of the 'Preface to the
Statements of Accounting Standards'.)

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
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.