In our previous blog we understood the first main heading of the asset schedule i.e. Gross block here in this post we would be focusing on the second subheading of the asset schedule i.e. Depreciation and Amortization.
Before going deep into this let us first understand what is the difference between Depreciation and Accumulated depreciation through numbers.
Assets are always reported on a net basis on the balance sheet i.e gross block - depreciation.
Imagine a company who has bought an asset worth Rs. 100 on 1st April 2015.
Company is depreciating that asset by 10% per annum so on 31st March 2016 the asset will be reflected on the Balance sheet at Rs 90 ( Gross Block - Depreciation for the year).
Now Company again used that asset for the second year. So now on 31st March 2017 this will happen
100 rs (Gross Block) - 10rs (dep for 1sy year) - 10 rs (dep for 2nd year) = Rs 80 Net Block
So rather than showing depreciation 2 times for each year separately accounting uses the concept called “Accumulated Depreciation” which means “Total depreciation on asset till date” in our example it is 20 (2 year depreciation 10 + 10).
Hence the representation for the same is done like “ Gross Block - Accumulated Depreciation = Net Block”.
Depreciation for the year = Total Value of the asset / Useful life of the asset whereas
Accumulated depreciation = Total value of asset / Useful life * Number of years that asset has been used.
Below is the snapshot of how the depreciation schedule is represented by the company under Asset Schedule.
In the above snapshot you’ll notice depreciation contains 3 sub heading under it:
1) 2 Opening balances of Accumulated Depreciation
As per Accounting standards the company has to provide opening accumulated depreciation of a carrying asset of the previous 2 year like shown in the above snapshot. For example in the above snapshot as the closing year is FY 19 the following two opening balances will be indirectly closing balances of FY 18 and FY 17.
But as an analyst our keen focus should be on Just current Years’ opening which will be nothing but closing balance of FY 18. In cera that is 6636.94 Lakh for Plant & Equipment.
2) Charge for the Year/For the Year Depreciation
For the year depreciation is calculated on the asset that has been used by the company during the year. Suppose if the company has 12 machines at the start of the year i.e. 1st April 2015 and during the year company has bought 2 machines and sold 2 machines on the given month:
Machines Sold: September 2015, and
New machines bought: December 2015.
So For the year depreciation for the company would be like:
10 Machines full year depreciation (2 were sold so we won’t be including that here) + 3 months depreciation on 2 new machinery. Note: We won’t include 6 month depreciation of sold machinery here!!
In the disposable section the company will include “Total Accumulated Depreciation for the asset sold during the year”.
Continuing from the above example where we sold 2 machinery in Sept-2015, the disposable amount for that year would be “Total opening Accumulated depreciation for that 2 assets which were sold + 6 month depreciation which we used during the year(April 2015 to September 2015).
Total of Disposal is removed from opening accumulated depreciation while calculating closing accumulated depreciation account. As that asset is no longer in gross block of the company hence its accumulated depreciation should also be not there on the books of the company.
Adjustments are done when any “Depreciation policy has changed”. For example:
Companies’ act 2013 had been introduced in 2013 and has been applicable with effect from FY 14-15 with retrospective effect. Till FY 13-14 the companies’ act 1956 was applicable.
Companies Act 1956 = Depreciation as per Schedule 14.
Companies Act 2013 = Depreciation as per Schedule 2.
Major difference in Schedule 14 (Companies act 1956) and Schedule 2 (Companies act 2013) was about useful lives of an asset.
In Schedule 2, there is a slight reduction in the useful lives of the assets. So there were many companies who had to depreciate assets too heavily to give retrospective effect.
For example: Company has an asset which they used for 5 years and the useful life of that asset as per schedule 14 was 15 years but during that time a new schedule was implemented and as per that schedule useful life of that asset has been changed to 10 years. Let us create a hypothetical example for the same and understand this with numbers.
Suppose a company has purchased a machine worth 150 Rs so their gross block would also be 150 Rs. Useful Life of that asset according to Schedule 14 was 15 years so depreciation for the year would be 10 Rs (150/15 (Asset/ Useful life)). Company has used that asset for 5 years meaning Net block would be of 100 Rs (150- 50 (Gross block - Accumulated Depreciation)).
Now imagine companies were told to follow schedule 2 and in which the useful life of the asset has been reduced from 15 years to 10 years so now let us see how the adjustments were to be made by the company.
According to new schedule the depreciation till 5 years should have been: 75 Rs (150/10*5 (Asset/ Useful life) * Number of years)
Actually it has been depreciated = 50 Rs (150/15*5 (Asset/ Useful life) * Number of years)
So the additional 25 Rs will reflect into the Adjustment column for every asset whose useful life has been changed.
So the during this period there was an additional column in depreciation segment of asset schedule as can be observed in FY 15 snapshot provided below of Cera.