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Former Member

Depreciation calculation based on WDV on remaining useful life

Dear Experts

I have a requirement of calculating depreciation on WDV method on remaining useful life. the scenario explains as below

The Company was original following Written Down Value Depreciation Method wherein Depreciation is calculated yearly on a pro-rata basis at a fixed percentage on the opening book value of the assets as illustrated below:

Particulars

2011-12

2012-13

2013-14

Opening Book Value of Assets

900

810

Add: Cost of Acquistion during the year

1,000

-

-

Less: Depreciation for the year @ 10%

100

90

81

Closing Book Value of Assets (WDV)

900

810

729

In short depreciation was calculated at every year on a fixed percentage basis on the written down value of the asset.

The Company had maintained separate depreciation keys in the system for each Asset Class (eg. Plant & Machinery, Building, Office Equipments etc.). Each Depreciation key specified the rate of depreciation to be charged.

However the New Companies Act 2013, the act has done away with the rates of depreciation. Instead the act specifies useful life of the assets class over which the asset has to be depreciated. (For example the act specifies that Non-Factory Building have to be depreciated over a period 60 years). Further in case of assets which have already been use as at 1st April 2014 will have to be depreciated over the remaining useful life of the assets. For example,

In case of an asset which purchase on 1st April 2011, as at 1st April 2014 the asset has already been in use for a period of 3 years. Now, if the useful life of the asset as specified by the new act is 5 years the remaining useful life of the asset as at  1st April 2014 works out to 2 years. Thus the asset will now have to be depreciated over a period 2 years starting from 1st April 2014.

However, since the new act does not specify the WDV rate at which the asset is to be depreciated, the implied rate of depreciation considering the remaining useful life will have to be calculated using the following Formula as attached file1

Where n =  Useful Life of the asset (Residual Value in case the asset is existing as  on 1st April 2014.

Book Value = Written Down Value as on 1st April 2014 or Cost of Acquisition in case of assets newly purchased during the year.

Therefore continuing our above example, suppose the useful life of asset acquired in 2011-12 specified under the new Companies Act is 15 years. Thus the remaining useful life of the asset as at 1st April 2014 will be 12 years and residual value will be calculated @ 5% on the original cost of the asset. Therefore the implied rate of depreciation under WDV Method with remaining useful life of 12 years will be computed as attached file, file2

Thus the implied rate of depreciation would be 20.01% and the depreciation for the year 2014-15 would be calculated as follows:

Particulars

2013-14

2014-15

Opening Book Value of Assets

810

729

Add: Cost of Acquistion during the year

-

Less: Depreciation for the year @ 20% for FY 2014-15

81

146

Closing Book Value of Assets (WDV)

729

583

Likewise, individual depreciation rates would have to be computed for all the assets outstanding on 1st April 2014.

This can be done either by manually calculating the depreciation rate for all assets and then create separate depreciation keys for all assets. However creating so many keys would be a cumbersome process.

Can you suggest An alternative to the above process so which would automatically calculate the depreciation rates based on the useful life entered on each assets?


Kindly revert at the earliest


Thanks


venu

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4 Answers

  • avatar image
    Former Member
    May 08, 2015 at 03:16 PM

    Hi Venugopal,


    As we all know companies bill is passed by both houses of
    parliaments and some of is section are applicable from 1-4-2014. i.e. out of
    470, 283 sections are applicable and section 123 and schedule II is one of them                          

    Before discussing the this, first of all let’s have a look
    on major changes in schedule II                 

    Companies act 1956 does not deal with the amortization of
    intangible Assets but New Schedule by companies’ act 2014 provide the method to
    amortize them.             

                                

    Instead of method and rates of Depreciation (whether WDV
    method or Straight line Method and Single shift or double shift or triple
    shift) new Act prescribed only assets’ useful life.               

                                    

    if a Company, being a class of company specifically
    prescribed by MCA, can adopt a different useful life longer than what is
    prescribed in Schedule II, however the same shall be disclosed, as Note on
    Accounts together with justification. For other companies, useful life cannot
    be longer than what is prescribed in Schedule II.               

    New act prescribed the residual value to be 5% of cost of
    asset, in older schedule there is no such prescription as but rates given by
    schedule are worked out by considering the 5% residual value.                


    New method for double shift and triple shift is
    prescribed under which addition depreciation of 50% or 100% will be allowed for
    double and triple shift respectively.                            

    The concept of 100% depreciation of assets whose cost is
    less than Rs. 5000/- is deleted hence under new act it will be depreciated as
    per other normal provisions of schedule II.                       


    Under act if any component of Asset have significant cost
    and has useful life other than the assets then is should be considered as
    separate asset for depreciation.              


    List of assets cover is more specific in new schedule.

    The Practical Implication:                           

                                     

    To apply the schedule II on the running companies schedule II has Note
    No. 7 which have 2 clauses we’ll discuss them sequentially                    

    Note no. 7(a) from the date this Schedule comes into effect, the
    carrying amount of the asset as on that date shall be depreciated over the
    remaining useful life of the asset as per this Schedule II.                

    Let’s understand with the help if an example:              

    We taking a general purpose plant and machinery on WDV basis:-

    Sr. No. Particulars Amount/Rate/
      Remarks 1 Original cost Rs. 1,00,000/- 2 Useful life and rate
      of depreciation as per old provisions 20 year and 13.91% 3 Useful life and rate
      of depreciation as per New provisions 15 years and 18.10% 4 Expired life 5 years 5 Accumulated
      depreciation for the expired life Rs. 52,711/-

    Now i am just pausing here to ask you some questions:-

    1. What should be the carrying amount?                            
    2. What should be the remaining useful life of Plant and machinery?                    
    3. What should be the rate of depreciation?                     

       4. What should be the amount for Depreciation?

    Ans.
    Schedule II does not elaborate the meaning of carrying amount so we have to
    refer AS 28 which defines it as “Carrying amount means the amount at which an
    asset is recognised in the Balance Sheet after
    deducting any accumulated Depreciation/amortization and accumulated impairment
    losses thereon”. This AS does not talk about residual value so we do not deduct
    any residual value i.e. 5% of original cost of asset to arrive at the carrying
    amount

    Therefore carrying amount is: original cost less depreciation for the expired life

    In given example Column 1 – column 5 i.e. 1,00,000-52,711= 47,289/-

    What should be the remaining useful life of Plant and machinery?                 

    The remaining useful life of the asset is: Revised life of assets
    as per schedule II less expired life of asset till 1.4.2014.

    In given example: Revised life of Plant and machinery as per schedule II is 15
    years and expired life is 5 years therefore remaining useful life is : 15-5=10years

    What should be the rate of depreciation?                       

    Is it on the basis of revised useful life i.e. 15 years as mentioned
    in schedule II, which comes out 18.10% or,                 

    On the basis of remaining useful life which is calculated in
    above i.e. 10 years and the rate comes out is 25.89%                  

    In first instant rate 18.10% seems to be the correct answer,
    because we are takings about plant and machinery and its rate of depreciation
    on basis of its revised useful life as mentioned in schedule II is comes out
    18.10%.                

    But as per note 7(a) the asset as on that date shall be depreciated
    over the remaining useful life of the asset as per this Schedule II.                     

                                     

    So we take the rate on the basis of remaining
    useful life which is 10 years in given example and corresponding rate is 25.89%

    What should be the amount for depreciation?                

                                     

    Answer: The carrying amount @ rate corresponding to the remaining
    useful life of asset as at 1st April, 2014                    

    Let's understand it:                      

    If we reduce the residual value from carrying amount then that means we have taken residual value twice for calculating the

    depreciation because rates that we have derived are already worked out by setting apart 5% residual value. So we do not reduce residual value from carrying amount

    Remaining useful life as at 1st April, 2014 as per new provisions 10 years

    Carrying amount  (1-5)  47,289/-

    Rate ofdepreciation on the basis of remaining useful life 25.89%

    The result of above is as under:-

    Carrying
      Amount            47,289 Rate of
      Depreciation 25.89% Year Asset's
      value at year Opening Depreciation Assets
      Value at year end 1            47,289                      12,243              35,046 2            35,046                         9,073              25,973 3            25,973                         6,724              19,249 4            19,248                         4,983              14,265 5            14,265                         3,693              10,572 6            10,572                         2,737                7,835 7               7,835                         2,028                5,807 8               5,806                         1,503                4,303 9               4,303                         1,114                3,189 10               3,189                            826                2,363


    Note 7 (b) From the date this Schedule comes into effect, the carrying amount of the
    asset as on that date After retaining the residual value, shall be recognised
    in the opening balance of retained earnings where the remaining useful life of
    an asset is nil

    Let's understand it with Example: Sr. No. Particulars Amount/Rate/ Remarks 1 Original cost Rs. 1,00,000/- 2 Useful life and rate
      of depreciation as per old provisions 20 year and 13.91% 3 Useful life and rate
      of depreciation as per New provisions 15 years and 18.10% 4 Expired life 16 years 5 Accumulated
      depreciation for the expired life Rs. 90,896/- 6 Carrying amount Rs. 9,104/-

    Here clarification is needed for residual value that have to be retained, is on the basis of “carrying amount” which comes out as 9104*5%=455 or on the basis of “cost of asset” which is 100000*5%= 5000

    Retained earnings a/c Dr: 4104                 

    To Asset a/c: 4104

    This is the short-fall of Depreciation consequent upon change in the useful Life of
    Asset provided for after retaining Residual value of 5% and charged against the
    Opening balance Retained Earnings          


    Thanks

    Vivekananda



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  • avatar image
    Former Member
    May 08, 2015 at 06:17 AM

    Hi,

    You can create new Depreciation Key, for Useful Life and assign the same to All assets system will automatically post the difference Depreciation in the current open Period.

    we have successfully implemented the changes.

    Regards

    Nitin Chaurasia

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    • Former Member

      Hi

      The depreciation key should be based on remaining life of asset. if u checked the formula, which i have uploaded (the way it should derive the depreciation %), its dynamic in nature.

      Is there any way in sap to derive the % automatically based on remaining life ( as rule demands)

      thanks

      venu

  • avatar image
    Former Member
    May 08, 2015 at 03:21 PM

    Hi Venugopal,

    In continuation of the above repl

    Create new Depreciation Key, for Useful Life and assign the same to all assets system will automatically post the difference depreciation in the current open Period.

    Read the act and then do the changes accordingly

    Thanks

    Vivekananda

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  • avatar image
    Former Member
    May 18, 2015 at 04:50 AM

    Please use following Dep Key (please make a new one):

    Dep Key

    Dep Key: Assignment of Calcuation Methods:

    Base Method:

    Period: As already followed within your Company

    In my case we followed 01/01/02/02

    Yours can be different. Won't cause an issue.

    Multilevel Method

    Multilevel: Levels

    Additional Notes:

    1. During assignment of New Dep Key, Useful Life, also please assign 5% Scrap Value in Asset Master- Depreciation Area Tab (to leave 5% residual value at end of useful life).

    Please use "add interval" in Dep Areas to add Dep Key- Valid from 01.04.2014. This shall retain the old Dep Key & leave prior calculations intact.

    2. If this doesn't calculated Dep as per WDV please check if following notes have been applied:

    Notes 2052506, 2066260 and 2069378


    3. The system will do calculation every year based on Remaining Useful Life (unlike the formula used in India for 1 time calculation of Dep Rate based on Useful Life). Also the formula will calculate period in days instead of year/ part thereof- will take 366 days in leap year. The minor difference in % rate is because of rounding rule applied in SAP.


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