Depreciation & Audit Reporting under Companies Act, 2013

1. Depreciation & Reporting under
Companies Act, 2013
1
 Presented by : CA Harsh H. Dedhia
 Chaired by : CA Ketan D. Saiya
 Organized by : Dadar (E) CPE Study Circle of WIRC
August 4, 2015

2. Depreciation under Companies Act,
2013
2

3. 3
Key Terms
Depreciable assets are assets which;
• are expected to be used during more than one
accounting period; and
• have a limited useful life; and
• 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.

4. 4
Key Terms
Useful life is either
• the period over which a depreciable asset is expected
to be used by the enterprise; or
• the number of production or similar units expected
to be obtained from the use of the asset by the
enterprise.

5. 5
Key changes with regard to Depreciation
as per Schedule II
• Based on indicative useful life for tangible assets
• Residual value ordinarily not to be higher than 5% of original
cost
• Depreciation to be provided on cost or any other value
substituted for cost
• Amortisation of intangible assets as per AS-26
• Double shift and Triple shift to charge additional 50% and
100% respectively
• Units of Production method is allowed
• Assets worth less than Rs.5000 to be fully depreciated is done
away with
• Component accounting and useful life of significant part to be
identified and charged differently
• List of assets covered is more specific

6. 6
Two categories of companies to be classified:
Applicability of Schedule II
• Class of companies who have an option of
using different useful life (higher or lower)
and residual value (higher) then Schedule II
(disclosing justification for such different
useful life or higher residual value based on
technical evaluation)
Class I
• Class of companies or class of assets, whose
useful lives or residual values are prescribed by
any statutory authority (Electricity co.,
Insurance co., etc.)
Class II

7. 7
Applicability of Schedule II vis-à-vis AS 6
Scenario 1 Scenario 2 Scenario 3 Scenario 4
Life -Sch II 15 years 10 years 15 years 15 years
Life - AS 6 10 years 12 years 15 years 15 years
Residual Value - Sch II 5000 5000 5% 5%
Residual Value - AS 6 5000 5000Nil 7%
Option available Yes Yes No Yes
Disclosure Required Required Not Required Required

8. 8
Notes to Schedule II:
6. From the date this Schedule comes into effect, the carrying
amount of the asset as on that date—
(a) shall be depreciated over the remaining useful life of the
asset as per this Schedule;
(b) after retaining the residual value, may be recognised in the
opening balance of retained earnings where the remaining
useful life of an asset is nil.
Transitional Provisions
AS-28 – Impairment of Assets
Carrying amount is the amount at which an asset is recognised
in the balance sheet after deducting any accumulated
depreciation (amortisation) and accumulated impairment
losses thereon.

9. 9
Transitional Provisions (Illustration)
Sr. No. Particulars
Amount/ Rate/
Remarks
1 Original Cost 100,000
2 Useful life and rate as per old provision 20 years and13.91%
3 Useful life and rate as per new provision 15 years and 18.1%
4 Expired Life 16 years
5
Accumulated depreciation for the expired
life
90,896
6 Carrying amount ?????
Should residual value be taken into consideration?

10. 10
Significant changes in useful life
Nature of Assets Useful
life –
2013
Rate as per
Single shift
(SLM) – 1956
Rate
converted to
years – 1956
Difference
Buildings (other than factory
buildings) other than RCC
frame Structure
30 1.63% 61.35 (31.35)
Bridges, culverts, etc. 30 1.63% 61.35 (31.35)
General Plant and Machinery 15 4.75% 21.05 (6.05)
Continuous Process Plant 25 5.28% 18.94 6.06
General rate of Furniture and
Fittings
10 6.33% 15.8 (5.8)
Electricity operated vehicles 8 7% 14.28 (6.28)
Desktops, Laptops, etc. 3 16.21% 6.17 (3.17)

11. 11
Extra Shift Depreciation
Formula is prescribed in EAC Opinion
Depreciation
for S.S Working
(Depreciation
for D.S. /T.S.
Working
–
Depreciation
for S.S.
Working)
No. of Days
Worked in D.S.
/ T.S.
Normal
Working Days
during the year
+ X

12. 12
+ X
Sr. No. Particulars
Amount/ Rate/
Remarks
1 Cost of Plant & Machinery 100,00,000
2 Residual Value 500,000
3 Depreciable amount 95,00,000
4 Useful Life as per Schedule II 15 years
5 Normal Working Days 300 days
6 Working Days for Double Shift 60 days
7 Depreciation as per SLM ?????
Rs. 823,333
Extra Shift Depreciation (Illustration)

13. 13
Depreciation of Components
• Useful life of significant part of the asset differs from
the useful life of the asset
• AS-10 offers an option but not Schedule II
• Assessing whether a part is significant would require
proper cost allocation ratio and impact on depreciation
• Also applicable to continuous process plants
• Replacement costs – expensed or capitalised?
• Voluntary for FY commencing after 1st April, 2014 and
mandatory then onwards

14. 14
Depreciation of Components (Illustration)
The following are the assumptions for calculating Depreciation of a
Building held by a ABC Company Ltd. on SLM basis:
The company assumes the building to have a useful life of 30 years
based on past experience.
Sr.
No.
Particulars Useful Life
Cost
(Rs. In Cr.)
1 Structure 30 75
2 Electrical System 10 15
3 Elevators 7 20
4 Pipelines and Water System 15 30
Total 140

15. 15
Depreciation of Components (Illustration)
Building
Depreciable Amount
(Rs. In Cr.) {A}
Useful Life
{B}
Depreciation
Amount {A/B}
Structure 75 30 2.5
Electrical System 15 10 1.5
Elevators 20 8 2.5
Pipelines and
Water System
30 15 2
Total 8.5
Component wise depreciation as per Schedule II shall be as follows:

16. 16
Depreciation of Components
Scenario 1 Scenario 2
Useful life of principal asset 15 years 15 years
Useful life of signi. component 10 years 18 years
Depreciation of signi. component 10 years
There is an
option

17. 17
Depreciation on Revalued Assets
• Depreciation to be charged on revalued amount. No
stipulation as to the frequency of revaluation
• Is adjustment allowed to be routed through revaluation
reserve?
• Treatment of existing revaluation reserve created
before 1st April, 2014.
• AS 10 allows revaluation reserve to be transferred
directly to general reserve on retirement or disposal of
revalued assets

18. 18
FAQ
Whether it is necessary to review
useful life every year?
As per AS-6, the useful lives of major
depreciable assets or classes of assets
may be reviewed periodically but no
specific requirement.
As per Ind-AS 16, the residual value
and the useful life of an asset shall be
reviewed at least at each financial
year end.

19. 19
FAQ
Can an entity still have a policy to
fully depreciate 100% of cost of
asset below certain amount?
Companies Act, 1956 allowed 100%
depreciation of an asset having
individual value of Rs.5000 or lower.
Companies may have a policy to fully
depreciate assets upto certain
threshold limits considering
materiality aspect in the year of
acquisition.

20. 20
FAQ
Whether change of method from
WDV to SLM or vice versa w.e.f April
1, 2014 will be covered under
transitional provision as per Note
7?
No. Such cases will be covered as
change of accounting policy as per AS-
5 read with AS-6. It requires
retrospective calculation of
depreciation and adjustment of excess
or deficit in the period of change.

21. 21
FAQ
Since there being no transitional
provision for component
accounting, is it applicable
prospectively or even to the
components of existing assets?
Applicable retrospectively. It cannot be
restricted to only new assets acquired
after 1st April, 2014 or 1st April, 2015
as the case may be.

22. 22
FAQ
Whether Schedule II will be applicable to a
company whose financial year ends on
December 31, 2014?
Schedule II (as amended) is applicable with effect
from April 1, 2014 whereby the financial year
commencing on or after April 1, 2014 will have to
comply with Schedule II.
Hence, Schedule II will not be applicable to a
company whose financial year ends on December
31, 2014. Requirements of Schedule XIV of
Companies Act, 1956 will be applicable.

23. 23
Reporting under Companies Act,
2013

24. 24
CARO 2003 Vs. CARO 2015
Though there are several changes in CARO 2015 compared
to CARO 2003 the major changes are deleting the clauses
pertaining to:
• Loans taken by the Company from parties covered u/s
189 (earlier S. 301)
• Scope and Coverage of Internal audit
• Chit funds, Mutual benefit funds, Nidhi companies etc
• Preferential allotment to Parties covered u/s 189
(earlier S. 301)
• Securities in case of issue of Debenture
• Use of funds raised from public issue
Audit Report Format - CARO

25. 25
Audit Report Format (changes only)
Section 143(3) – AR to include views/comments on:
• (
(
Whether sought and obtained all information and explanations
necessary for audit
Whether co. has adequate IFC’s system and the operating
effectiveness of such controls (voluntary for FY commencing on
or after 1st April, 2014 and ending on or before 31st March, 2015)
The observations or comments of the auditors on financial
transactions or matters which have any adverse effect on the
functioning of the company
1
3
2

26. 26
Audit Report Format (changes only)
Additionally, as per Rule 11:
The impact of pending litigations on its financial position in its
financial statements
Provision for material foreseeable losses, as required under
law or AS , on long term contracts including derivative
contracts
Delay in depositing money into IEP Fund
1
2
3

27. 27
 Provisions of SA 600 to be considered while auditing CFS
 Materiality level for considering qualifications in subsidiary’s
CARO reports?
 Eg:- A very small subsidiary’s CARO report has a negative comment
w.r.t deposit of undisputed statutory dues o/s > 6m. – To be included
in CARO of CFS?
 Maintenance of Cost Record Clause 148(1) – applicability will
differ for every subsidiary/associate/JV
 Extent/Level of reporting of any disputed dues –
 Proportionate in case of JVs?
 Basis to be applied for Associates?
 To report on accumulated losses exceeding 50% of net worth
and cash loss, should individual FS’s be considered or CFS
 Basis for reporting on terms of guarantees given for loans taken
by others – Prejudicial at CFS level or individual SFS level ?
Audit Report Format – CARO for CFS

28. 28
FAQ
Whether additional matters specified
in section 143(3) applicable in case of
CFS?
Logically No. Section 129(4) uses the phrase
‘audit of the financial statements’. Auditor
has to express an opinion on financial
statement as specified only in section
143(2). But MCA/ICAI seem to think
otherwise.
There are many practical difficulties in
reporting under clauses of 143(3).

29. 29
FAQ
Whether CARO applies to audit report of
CFS? If yes, how to deal with entities
covered in CFS to whom CARO does not
apply? (e.g. overseas subsidiaries, firm or
LLP)
Yes, As per Section 129(4)….. audit of
financial statements of a holding company
shall, mutatis mutandis, apply to CFS.
But logical interpretation of mutatis mutandis
is ‘to the extent possible’.

30. 30
FAQ
For a company whose FY commenced before 31st
March 2014 but ends before 31st March 2015,
necessary documents, minutes, registers, etc. may
not be available for part of the FY that falls after 1st
April, 2014. How to express an opinion on such
matters?
Auditors should report on the relevant clauses only for
that part of the financial year upto which the provisions of
Companies Act, 1956 were in force (i.e. upto 31st March
2014) OR frame the report under 1956 Act.
Auditors should bring out this fact in the relevant portions
of the Audit Report.

31. 31
Internal Control & Fraud
Auditor  sufficient reason to believe  offence involving fraud, is
being or has been committed against the company by officers or
employees, report to CG immediately but not later than 60 days of his
knowledge & after following the procedure below prescribed by Rule
13 of Companies (Audit & Auditors) Rules, 2014:
(i) forward report to Board/AC, seeking their reply/observations,
within 45 days;
(ii) on receipt of such reply/observations, forward report and the
reply/observations of Board/AC along with comments (on such
reply or observations of Board/Audit Committee) to CG within 15
of such receipt
(iii) In case, auditor fails to get any reply / observations from the
Board / AC within 45 days, forward report to CG along with note
containing details of report that was forwarded to the Board / AC

32. 32
Fraud in relation to affairs of a company or any body corporate,
includes:
a) any act, omission, concealment of any fact or
b) abuse of position committed by any person or any other person
c) with the connivance in any manner,
d) with intent to deceive, to gain undue advantage from, or to injure
the interests of, the company or its shareholders or its creditors or
any other person,
e) whether or not there is any wrongful gain or wrongful loss
Internal Control & Fraud…cont’d
• Companies (Amendment) Act, 2015- “ Provided that in case of a fraud
involving lesser than the specified amount, the auditor shall report the
matter to the audit committee constituted under section 177 or to the Board
in other cases within such time and in such manner as may be prescribed”
– such frauds to be reported in the Board’s report in such manner as may be
prescribed.

33. 33
Consequential implications:
 Definition of fraud is very wide and will include corruption,
corrupt practices and bribery.
 AC to set up Vigil Mechanism for directors & employees to report
genuine concerns
 Intelligent and meaningful implementation of checklist under SA
240 (Auditor’s Responsibilities relating to fraud in audit of
financial statements) & SA 315 (Risks of Material Misstatement
through understanding the entity)
Internal Control & Fraud…cont’d

34. 34
Thank You