Journey of Schedule II in 2014

Schedule II of the Companies Act, 2013 deals with provision related to “useful life to compute depreciation”. This is second schedule of this Act which was amended before it may come into force in its original form.

A Notification published in Official gazette on 31^st March 2014 amended the schedule with effect from 1^st April 2014. These amendments were:

1. In Part “A” Para 3 sub – paragraphs (i) to (iii) were substituted.
2. In Part “C” Para 5, in Item IV, in sub – item (i); clause (b) was substituted.
3. Under heading Notes appearing after Part “C”, Paragraph 5 was omitted.

Thereafter amended Schedule came into in force with effect from 1^st April 2014.

This Schedule saw another amendment on 29^th August 2014 which came into force on same date.

1. Part “A” in paragraph 3, sub – paragraph (i) substituted. Hence, earlier substitution of this paragraph lasted only for 5 months.
2. After Part “C” Paragraph 4 was substituted.

There is confusion among some readers about sub – paragraph (i) of Paragraph 3 in Part “A”. I will discuss here.

According to Part “A” Paragraph 1, “Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount of an asset is the cost of an asset or other amount substituted for cost, less its residual value. The useful life of an asset is the period over which an asset is expected to be available for use by an entity, or the number of production or similar units expected to be obtained from the asset by the entity.”

One most significant thing written in this definition is a punctuation mark “comma” placed before “less its residual value” making residual value most important consideration for depreciable amount. This residual value may be any value including zero and technically (or practically in some case) negative.

According to Part “A” Paragraph 2, the term depreciation includes amortisation.

Now Part “A” Paragraph 3:

Originally this paragraph read as under:

“(i) In case of such class of companies, as may be prescribed and whose financial statements comply with the accounting standards prescribed for such class of companies under section 133 the useful life of an asset shall not normally be different from the useful life and the residual value shall not be different from that as indicated in Part C, provided that if such a company uses a useful life or residual value which is different from the useful life or residual value indicated therein, it shall disclose the justification for the same.

(ii) In respect of other companies the useful life of an asset shall not be longer than the useful life and the residual value shall not be higher than that prescribed in Part C.

(iii) For intangible assets, the provisions of the Accounting Standards mentioned under sub-Para (i) or (ii), as applicable, shall apply.”

As discussed above, when this Paragraph 3 of Part ‘A’ came into force, this read as under:

“(i) The useful life of an asset shall not be longer than the useful life specified in Part ‘C’ and the residual value of an asset shall not be more than five percent of the original cost of the asset:

Provided that where a company uses a useful life of residual value of the asset which is different from above limits, justification for the difference shall be disclosed in its financial statement.

(ii) For intangible assets, the provisions of the accounting standards applicable for the time being in force shall apply, except in case of intangible assets (Toll Roads) created under ‘Built, Operate and Transfer’, ‘Build, Own, Operate and Transfer” or any other form of public private partnership route in case of road projects. Amortisation in such cases may be dine as follows… … …
where a company arrives at the amortisation in respect of the said intangible assets in accordance with any method as per applicable Accounting Standard, it shall disclose the same.”

In this Paragraph 3 in Part ‘A’, sub – paragraph (i) was further substituted as discussed above as following:

“(i) The useful life of an asset shall not ordinary be different from the useful life specified in Part C and the residual value of an assets not be more than five percent of the original cost of the assets:

Provided that where a company adopt a useful life different from what is specified in Part C or uses a residual value different form the limit specified above, the financial statements shall disclose such difference and provide justification in this behalf duly supported by technical advice.”

So finally, we have a mixed approach and a missed opportunity to give an ease of doing business. Company may have different useful life and residual value over what is prescribed subject to disclosure and technical advice. I suppose, technical advice shall be written certificate of a chartered engineer.

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