Corporate Affairs Ministry clears air on depreciation schedule for firms

The Corporate Affairs Ministry has made changes in the depreciation schedule under the new company law to avoid confusion among stakeholders and introduce consistency in its recent guidance,

As a result, now there will not be two classes of companies for depreciation purposes, as was indicated in the new company law schedule.

Second, the Ministry has restored revenue-based amortisation for toll roads built under public-private partnerships.

This depreciation method was given to users under the earlier company law and now finds a place in the new law as well (for amortisation of intangibles in the case of road projects)

Clearing the air, the Ministry has now specified that all companies need to follow the ‘useful life’ mentioned for various tangible assets in the depreciation schedule. Also, the residual value of an asset cannot exceed 5 per cent. Companies may deviate from these norms, but they will need to disclose the justification for it in their financial statement.

A“The new company law (prior to this amendment) provided that the norms on useful life under the depreciation schedule be generally followed. But now the language has changed and companies are required to necessarily follow the useful life specified by the Ministry. The tone has undergone a change and the justification for deviation, if any, has to be given,” Yogesh Sharma, Partner Assurance at Grant Thornton India LLP told Business Line .

Revenue-based amortisation would mean status quo for companies having toll road projects, Sai Venkateshwaran, Partner and Head of Accounting Advisory Services, KPMG in India, said.

This change reverts to the position under the erstwhile company law, he added.

The Ministry has clarified that amortisation of intangible assets will be in accordance with the applicable accounting standards. The only exception being intangible assets created for toll road projects.

“The inclusion of revenue-based method will not unnecessarily disrupt the already adopted practice for companies with toll road assets, especially considering that this was as such a very recent change (two years back),” Sharma said.

The Ministry has also changed the useful life of continuous process plants to 25 years from eight years specified in the depreciation schedule under the new law.

This may, to some extent, bolster the net profits of companies in industries, such as cement and chemicals, say industry observers.

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