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Depreciation
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Depreciation and their Depreciation and their impact in fin.A/c, impact in fin.A/c,
fin.Mgt.,Income tax etc.fin.Mgt.,Income tax etc.
By Prof.Augustin Amaladas By Prof.Augustin Amaladas M.Com.,AICWA.,B.ED.,PGDFMM.Com.,AICWA.,B.ED.,PGDFM
MeaningMeaning
Reduction in the value of fixed assets due Reduction in the value of fixed assets due to wear and tear and due to effluction of to wear and tear and due to effluction of time.time.
All assets except land can be depreciated.All assets except land can be depreciated. The underlying principle of depreciation is The underlying principle of depreciation is
that cash flows generated by an asset over that cash flows generated by an asset over its life cannot be considered income until its life cannot be considered income until provision is made for asset’s replacement.provision is made for asset’s replacement.
It is an allocation of past cash flows.It is an allocation of past cash flows. Depreciation expense appears on the Depreciation expense appears on the
income statement, but has no impact on income statement, but has no impact on the statement of cash flows.the statement of cash flows.
Depreciation methodsDepreciation methods
Straight line methodStraight line method Written down value methodWritten down value method Sinking fund methodSinking fund method Machine Hour rate methodMachine Hour rate method Unit cost method Unit cost method Depletion asset methodDepletion asset method Depreciation Fund methodDepreciation Fund method Sum of digits methodSum of digits method Accelerated depreciation methodAccelerated depreciation method
Impact on booksImpact on books
Depreciation ExpenseDepreciation Expense Net incomeNet income AssetAsset EquityEquity Return on assetsReturn on assets Return on EquityReturn on Equity Turnover RatiosTurnover Ratios Cash flowCash flow NPVNPV IRRIRR Pay back Pay back
Impact of TaxImpact of Tax
Block asset methodBlock asset methodPurchase of AssetPurchase of AssetSale of AssetSale of AssetShort term/Long-term Capital assetShort term/Long-term Capital assetAsset used less than 180 days during Asset used less than 180 days during
the previous yearthe previous yearAsset purchased preceding previous Asset purchased preceding previous
year but put into use less than 180 year but put into use less than 180 days during the current previous yeardays during the current previous year
Impact of TaxImpact of Tax
Rate decided by whom?Rate decided by whom?
Inflation and Inflation and DepreciationDepreciation
If prices are rising, Incomes and If prices are rising, Incomes and taxes will be over stated / Under taxes will be over stated / Under statedstated
Replacement?Replacement?
Accounting StandardAccounting Standard
AS-06AS-06As-10As-10
Tax Tax planningplanning
U/S-32 of IT actU/S-32 of IT act When own funds used in plant and When own funds used in plant and
machinery -18.66% savingmachinery -18.66% saving When borrowed funds used –Tax savings When borrowed funds used –Tax savings
through depreciation-22.91%through depreciation-22.91% Depreciation on intangible assets can be Depreciation on intangible assets can be
provided at 25% rate. The eligible assets provided at 25% rate. The eligible assets are: Know how, patent right, copy right,are: Know how, patent right, copy right,
Trade mark, licenses, franchises, any other Trade mark, licenses, franchises, any other commercial rightscommercial rights
Carry forward and set of depreciation in Carry forward and set of depreciation in the subsequent periodsthe subsequent periods
Any number of years provided filed Any number of years provided filed returnsreturns
Amalgamation, absorption, Amalgamation, absorption, reconstruction and demergerreconstruction and demerger
CAN NEW CO. CARRY FORWAD AND SET OF LOSS CAN NEW CO. CARRY FORWAD AND SET OF LOSS AND DEPRECIATION?AND DEPRECIATION?
SEC 72 A TO BE FULFILLEDSEC 72 A TO BE FULFILLED1.1. ACCUMULATED LOSSES REMAIN UNABSORBED ACCUMULATED LOSSES REMAIN UNABSORBED
FOR 3 OR MORE YEARSFOR 3 OR MORE YEARS2.2. 75% OF BOOK VALUE TO BE HELD ATLEAST FOR 75% OF BOOK VALUE TO BE HELD ATLEAST FOR
2 YEARS BEFORE AMALGAMATION2 YEARS BEFORE AMALGAMATION3.3. THE AMALGAMATED CO. CONTINUES TO HOLD THE AMALGAMATED CO. CONTINUES TO HOLD
3/43/4THTH OF BOOK VALUE ATLEAST FOR 5 YEARS OF BOOK VALUE ATLEAST FOR 5 YEARS4.4. NEW CO. SHOULD CONTINUE FOR ANOTHER 5 NEW CO. SHOULD CONTINUE FOR ANOTHER 5
YEARSYEARS5.5. NEW CO. SHOULD ACHIEVE ATLEAST 50%OF NEW CO. SHOULD ACHIEVE ATLEAST 50%OF
INSTALLED CAPACITY BEFORE END OF 5 YEARS INSTALLED CAPACITY BEFORE END OF 5 YEARS AND SHOULD CONTINUE FOR 5 YEARSAND SHOULD CONTINUE FOR 5 YEARS
A LTD AMALGAMATES WITH B LTD AS ON 2007A LTD AMALGAMATES WITH B LTD AS ON 2007
PARTICULARSPARTICULARS DOES NOT DOES NOT SATISFY SEC SATISFY SEC 2(1B) & 72 A2(1B) & 72 A
SATISFIES SATISFIES 2(1B) BUT 2(1B) BUT DOES NOT DOES NOT SATISFY 72 ASATISFY 72 A
SATISFIES SATISFIES BOTH 2(1B) & BOTH 2(1B) & 72 A72 A
A MERGES A MERGES WITH B (A WITH B (A GOES OUT)GOES OUT)
NO BENEFIT NO BENEFIT TO A & B TO A & B
DOES NOT DOES NOT ATTRACT ATTRACT CAPITAL GAIN CAPITAL GAIN FOR A BUT NO FOR A BUT NO GAIN FOR BGAIN FOR B
NO CAPITAL NO CAPITAL GAIN TAX & GAIN TAX & ACCUMULATEACCUMULATED LOSSES & D LOSSES & UNABSORBED UNABSORBED DEPERICIATIODEPERICIATION CAN BE N CAN BE CARRIED CARRIED FORWARDFORWARD
OTHER TAX BENEFITSOTHER TAX BENEFITS
1.1. Expenditure on amalgamation or de-merger – Expenditure on amalgamation or de-merger – allowed under sec 35DD both revenue and allowed under sec 35DD both revenue and capital expenditure allowedcapital expenditure allowed
2.2. Expenditure on scientific research can be Expenditure on scientific research can be carried forwardcarried forward
3.3. Expenditure on acquisition of patent rights Expenditure on acquisition of patent rights copyrights – depreciation can be providedcopyrights – depreciation can be provided
4.4. Expenditure for obtaining license for tele-Expenditure for obtaining license for tele-communication service can be written offcommunication service can be written off
5.5. Preliminary expensesPreliminary expenses6.6. Capital expenditure on family planningCapital expenditure on family planning7.7. Bad debts are allowedBad debts are allowed