The ministry of corporate affairs (MCA) has reduced the ambiguity in calculating depreciation of tangible assets in the accounting norms for companies.
Schedule 2 of the Companies Act, 2013, prescribes the years for counting the useful life of an asset, and the cap on its remaining or residual value. Companies may go by these norms or use their own method to calculate useful lives and residual values. If the latter, they must justify this in their financial statements. However, the term "justification" is subjective and considered ambiguous by experts. “It (the earlier norm) was also seen as opening the floodgates to allow a company’s management to determine the life of assets without adequate checks and balances,” said Sai Venkateshwaran, head of accounting advisory services, KPMG in India.
Now, MCA has changed the rules and asked the companies to give a justification backed by technical advice in the financial statements. “It is not been clarified as to who will give the technical advice but audit committees will prefer an external agency, to give the accounting estimate more credibility,” said Ashish Gupta, partner in Walker Chandiok & Co LLP.
Companies are still trying to accustom to the specific prescription of useful lives and residual values in the new Companies Act. The earlier one did not go into such specifications. In a relief to them, the government has deferred compulsory adoption of component accounting to the next financial year, from the earlier requirement of doing so from 2014-15. This accounting basically caters to the fact that a tangible asset might have different components whose useful lives may differ, requiring varied depreciation values for each of those components.
“Under this doctrine, when an item of fixed asset comprises significant individual components, each of which has different useful lives, then each such component is depreciated separately,” said Venkateshwaran.
As Indian companies are still trying to get accustomed to this provision, the government was asked to defer its applicability for some time.
