Page 251 - DMGT104_FINANCIAL_ACCOUNTING

Unit 10: Accounting and Depreciation for Fixed Assets

11. The quantum of depreciation to be provided in an accounting period involves the exercise Notes
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 straight-
line 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 along with 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.

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