Depreciation & Amortization

Presented By
Avneet Singh Bhatia
Sampat Bhansali
Vinay Joshi
Agenda

Depreciation as per Indian & US GAAP

 Depreciable assets
 Useful life
 Depreciable amount
 Factors affecting calculation of depreciation
Similarities between two GAAPs
Differences between two GAAPs
Amortization
 Amortization period
 Factors affecting useful life
 Amortization methods
 Residual value
Depreciation

“Depreciation” is a measure of the wearing out,

consumption or other loss of value of a depreciable asset
arising from use, effluxion of time or obsolescence through
technology and market changes. Depreciation is allocated
so as to charge a fair proportion of the depreciable amount
in each accounting period during the expected useful life of
the asset depreciation includes amortization of assets
whose useful life is predetermined.
- Indian GAAP (AS 6)
Depreciation

“Depreciation” is an annual charge to income that

results from a systematic and rational allocation of
cost over the life of a tangible asset.
- US GAAP
Depreciable assets

(i) are expected to be used during more than one

accounting period; and

(ii) have a limited useful life; and

(iii) 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.
Useful life

Either
(i) the period over which a depreciable asset is
expected to be used by the enterprise; or

(ii) the number of production or Similar units

expected to be obtained from the use of the asset by
the enterprise
Depreciable amount

Is the historical cost, or other amount substituted for

historical cost in the financial statements, less the
estimated residual value.
Factors affecting calculation of depreciation

(i) Historical cost or other amount substituted for

the historical cost of the depreciable asset when the
asset has been revalued;

(ii) Expected useful life of the depreciable asset; and

(iii) Estimated residual value of the depreciable asset

Similarities between two GAAPs
Applicability

Following assets are excluded:

Forests, Plantations
Wasting Assets, Minerals and Natural Gas.
Expenditure on research and development.
Goodwill
Live stock - Cattle, Animal Husbandry
Methods of calculation

 Indian GAAP
 Straight Line Method (SLM)
 Written Down Value Method (WDVM)

 US GAAP
 Straight Line
 Accelerated Method
• Declining balance
• Sum-of the-year digit (SYD) depreciation
 Present Value
• Sinking Fund
• Annuity Fund
Other depreciation methods

Partial year depreciation

Based on actual physical usage
Retirement method
Replacement method
Group (composite) method
Selection of appropriate method

Type of Asset

Nature of the use of such asset

Circumstances prevailing in the business

Changes in depreciation method

For compliance of statute

For compliance of GAAP

For more appropriate presentation of the financial

statement
Procedure – change in method

Depreciation should be recomputed applying the new

method from the date of its acquisition / installation till
the date of change of method.
Difference between the total depreciation under the new
method and accumulated depreciation under the old
method till the date of change may be surplus /
deficiency.
Such resultant surplus is credited to profit and loss
account under the head “Depreciation written back”.
Such resultant deficiency is charged to profit and loss
account.
Other changes

Change in estimated useful life

 Outstanding depreciable amount on the date of change in estimated
useful life of asset should be allocated over the revised remaining
useful life of assets.

Addition/ extension to an existing asset

 Addition / extension is an integral part of existing asset
 Addition / extension is not an integral part of existing asset

Asset is disposed of, discarded, demolished or destroyed

 Net surplus or deficiency is credited/ charge to profit and loss
account
Differences between two GAAPs
Revaluation
 Indian GAAP allows whereas US GAAP doesn’t

Periodic review of depreciation method

 Under Indian GAAP, periodic review of depreciation
method is not required but periodic review of useful life is
required whereas US GAAP require periodic review of the
depreciation method.
Subsequent Expenditure
AMORTIZATION
Amortization

Writing off an intangible asset investment over the

projected life of the assets
Amortization period

 There is a rebuttable presumption that the useful

life of an intangible asset will not exceed ten years
from the date when the asset is available for use.
Amortisation should commence when the asset is
available for use.
When there is a persuasive evidence that the useful
life of an intangible asset will be a specific period
longer than ten years, then the enterprise amortises
the intangible asset over the best estimate of its
useful life
Factors affecting useful life

The expected usage of the asset by the enterprise and

whether the asset could be efficiently managed by another
management team;
Typical product life cycles for the asset and public
information on estimates of useful lives of similar types of
assets that are used in a similar way;
Technical, technological or other types of obsolescence;
The stability of the industry in which the asset operates
and changes in the market demand for the products or
services output from the asset;
Expected actions by competitors or potential competitors;
Factors affecting useful life (contd…)

The level of maintenance expenditure required to

obtain the expected future economic benefits from
the asset and the company's ability and intent to
reach such a level;
The period of control over the asset and legal or
similar limits on the use of the asset, such as the
expiry dates of related leases; and
Whether the useful life of the asset is dependent on
the useful life of other assets of the enterprise
Amortization method

Straight Line Method

Written Down Value Method

Unit of Production Method

Residual Value

The residual value of an intangible asset should be

assumed to be zero unless:
There is a commitment by a third party to
purchase the asset at the end of its useful life; or
There is an active market for the asset and
 residual value can be determined by reference to that
market; and
 it is probable that such a market will exist at the end of the
asset's useful life
THANK YOU