USEFUL LIVES TO COMPUTE DEPRECIATION AS PER SCHEDULE II OF THE COMPANIES ACT, 2013

Useful Lives to Compute Depreciation as per Schedule II of the Companies Act, 2013

Depreciation is a crucial accounting concept that reflects the wear and tear of assets over time. In India, the computation of depreciation is governed by Schedule II of the Companies Act, 2013. This schedule lays down specific useful lives for different categories of assets, ensuring uniformity and accuracy in depreciation calculations across companies.

Key Points:

1. Schedule II of the Companies Act, 2013:

• The Companies Act, 2013, mandates companies to adhere to Schedule II for computing depreciation.
• It provides guidance on the useful lives of various assets for the purpose of depreciation calculation.

2. Classification of Assets:

• Assets are classified into two categories: tangible assets and intangible assets.
• Tangible assets include land, buildings, machinery, furniture, vehicles, etc.
• Intangible assets comprise patents, copyrights, trademarks, goodwill, etc.

3. Useful Lives of Tangible Assets:

• Schedule II provides specific useful lives for different tangible assets.
• For instance, buildings may have a useful life ranging from 30 to 60 years, while machinery may have a useful life of 10 to 15 years.
• The Act also considers the residual value of assets, which affects depreciation calculation.

4. Useful Lives of Intangible Assets:

• Intangible assets have predetermined useful lives based on their nature.
• For example, patents may have a useful life of 20 years, while copyrights may have a useful life of the author’s life plus 60 years.
• Intangible assets with indefinite useful lives are not amortized but are subject to impairment testing.

5. Revised Useful Lives:

• The Ministry of Corporate Affairs periodically revises the useful lives of assets based on technological advancements and industry practices.
• Companies must update their depreciation calculations in accordance with the revised useful lives to ensure compliance with the Companies Act.

6. Implications for Financial Reporting:

• Accurate computation of depreciation is essential for presenting true and fair financial statements.
• Deviation from the prescribed useful lives may lead to misrepresentation of financial performance and asset values.
• Auditors play a crucial role in verifying the adherence to Schedule II and ensuring compliance with accounting standards.

7. Impact on Taxation:

• Depreciation expense affects taxable income, thereby influencing tax liabilities.
• The Income Tax Act, 1961, provides its own set of rules for computing depreciation for tax purposes, which may differ from Schedule II of the Companies Act.
• Companies need to reconcile differences between accounting depreciation and tax depreciation to avoid discrepancies in financial reporting and tax filings.

Adhering to the prescribed useful lives under Schedule II of the Companies Act, 2013, is essential for accurate depreciation calculation and transparent financial reporting. Companies must stay updated with revisions to the useful lives and ensure compliance with both legal and accounting standards. Proper depreciation accounting not only facilitates fair presentation of financial statements but also aids in effective tax planning and management.